-----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, K8oRs8aiQt4WJN43bOiYV7RfYrgfKUqDcL4LP5GKhTt8ghykg56u7MyS0lfAlbGm /rC4YB8iCf2kYN8DtjkfpQ== 0000906287-96-000141.txt : 19961031 0000906287-96-000141.hdr.sgml : 19961031 ACCESSION NUMBER: 0000906287-96-000141 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19961030 EFFECTIVENESS DATE: 19961030 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYDEX SERIES TRUST CENTRAL INDEX KEY: 0000899148 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 521820225 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-59692 FILM NUMBER: 96650107 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-07584 FILM NUMBER: 96650108 BUSINESS ADDRESS: STREET 1: 6116 EXECUTIVE BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20852 BUSINESS PHONE: 301-486-85 MAIL ADDRESS: STREET 1: 6116 EXECUTIVE BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20852 485BPOS 1 PAGE As Filed With The Securities And Exchange Commission On October 30, 1996. File Nos. 33-59692 and 811-7584 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X) Pre-Effective Amendment No. ( ) Post-Effective Amendment No. 27 (X) and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X) Amendment No. 28 (X) RYDEX SERIES TRUST (Exact Name of Registrant as Specified in Charter) 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (Address of Principal Executive Offices) (Zip Code) (301) 468-8520 (Registrant's Telephone Number, Including Area Code) Albert P. Viragh, Jr. 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 (Name and Address of Agent for Service of Process) Copies to: James F. Jorden, Esq. W. Randolph Thompson, Esq. James Bernstein, Esq. Jorden Burt Berenson & Johnson LLP 1025 Thomas Jefferson Street, N.W. Suite 400 East Washington, D. C. 20007 Approximate Date of Commencement of the Proposed Public Offering of the Securities: PAGE It is proposed that this filing will become effective (check appropriate box): X immediately upon filing pursuant to paragraph (b) of rule 485 on (date) pursuant to paragraph (b)(1)(v) of rule 485 60 days after filing pursuant to paragraph (a)(1) of rule 485 on (date) pursuant to paragraph (a)(1) of rule 485 75 days after filing pursuant to paragraph (a)(2) of rule 485 on (date) pursuant to paragraph (a)(2) of rule 485 If appropriate, check the following box: This post-effective amendment designates a new effective date for a previously-filed post-effective amendment. T h e Registrant has previously filed a declaration of indefinite registration of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the Registrant's fiscal year ended June 30, 1996 was filed on August 28, 1996. PAGE RYDEX SERIES TRUST REGISTRATION STATEMENT ON FORM N-1A CROSS REFERENCE SHEET This Post-Effective Amendment No. 27 under the Securities Act of 1933, and Amendment No. 28 under the Investment Company Act of 1940, to the Registrant's Registration Statement on Form N- 1A shall not supersede or effect this Registration Statement as this Registration Statement applies to The Rydex High Yield Fund. N-1A Location in Item No. Registration Statement Part A: Information Required In Prospectus 1. Cover Page Outside Front Cover Page of Prospectus 2. Synopsis Prospectus Summary; Fees and Expenses of the Funds; Tax-Sheltered Retirement Plans; Transaction Charges 3. Condensed Financial Financial Highlights of the Information Funds 4. General Description of The Rydex Funds; Investment Registrant Objectives and Policies; Special Risk Considerations; Investment Techniques and Other Investment Policies; General Information About the Trust; Appendix A 5. Management of the Fund Management of the Trust 5A. Management s Discussion Annual Report of the Trust; of Fund Performance Performance Information 6. Capital Stock and Other Dividends and Securities Distributions; Taxes; General Information About the Trust PAGE 7. Purchase of Securities How to Invest in the Funds; Being Offered Exchanges; Determination of Net Asset Value; Distribution Plan 8. Redemption or Repurchase Redeeming an Investment (Withdrawals); Procedures for Redemptions and Exchanges 9. Legal Proceedings Not Applicable PAGE N-1A Location in Item No. Registration Statement Part B: Information Required In Statement of Additional Information 10. Cover Page Outside Front Cover Page of Statement of Additional Information 11. Table of Contents Table of Contents 12. General Information The Rydex Funds and History 13. Investment Objectives Investment Policies and and Policies Techniques; Investment Restrictions 14. Management of the Registrant Management of the Trust 15. Control Persons and Management of the Trust; Principal Holders of Principal Holder of Securities Securities 16. Investment Advisory and Management of the Trust; Other Services Distribution Plan; Auditors and Custodian 17. Brokerage Allocation Investment Policies and Techniques; Portfolio Transactions and Brokerage 18. Capital Stock and Other Not Applicable Securities 19. Purchase, Redemption, and Not Applicable Pricing of Securities Being Offered 20. Tax Status Dividends, Distributions, and Taxes 21. Underwriters Management of the Trust; Distribution Plan 22. Calculation of Performance Performance Information; Data Calculation of Return Quotations; Information on Computation of Yield PAGE 23. Financial Statements Financial Statements PAGE N-1A Location in Item No. Registration Statement Part C: Other Information 24. Financial Statements Financial Statements and and Exhibits Exhibits 25. Persons Controlled By Persons Controlled By or or Under Common Control Under Common Control 26. Number of Holders of Number of Holders of Shares Securities of Beneficial Interest 27. Indemnification Indemnification 28. Business and Other Business and Other Connections of Investment Connections of Investment Adviser Adviser 29. Principal Underwriters Principal Underwriter 30. Location of Accounts and Location of Accounts and Records Records 31. Management Services Management Services 32. Undertakings Undertakings 33. Signatures Signatures PAGE PART A PAGE Combined Prospectus of The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, and The Rydex U.S. Government Money Market Fund [LOGO] RYDEX SERIES TRUST PROSPECTUS 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (800) 820-0888 (301) 468-8520 Rydex Series Trust (the "Trust") is a no-load mutual fund complex with nine separate investment portfolios (the "Funds" or "Rydex Funds"), seven of which Funds are described in this P r o s pectus. The Funds are principally designed for professional money managers and investors who intend to invest in the Funds as part of an asset-allocation or market-timing investment strategy. Sales are made, without sales charge, at each Fund s per share net asset value. Except for the Rydex U.S. Government Money Market Fund, each Fund is intended to provide investment exposure with respect to a particular segment of the securities markets. Each of these Funds seeks investment results that correspond over time to a specified benchmark. The Funds may be used independently or in combination with each other as part of an overall investment strategy. Additional Funds may be created from time to time. The following are the Funds and their benchmarks: FUND BENCHMARK The Nova Fund 150% of the performance of the S&P 500 Composite Stock Price IndexTM The Ursa Fund Inverse (opposite) of the S&P 500 Composite Stock Price IndexTM Rydex OTC Fund NASDAQ 100 IndexTM (NDX) Rydex Precious Philadelphia Stock Exchange Gold/Silver Metals Fund IndexTM (XAU) PAGE Rydex U.S. 120% of the price movement of current Long Government Bond Treasury Bond Fund The Juno Fund Inverse (opposite) of the price movement of the current Long Treasury Bond The Trust also offers The Rydex U.S. Government Money Market Fund. This Fund seeks to provide security of principal, high current income, and liquidity by investing primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities. The securities of the Rydex U.S. Government Money Market Fund are not deposits or obligations of any bank, and are not endorsed or guaranteed by any bank, and an investment in this Fund is neither insured nor guaranteed by the United States Government. The Rydex U.S. Government Money Market Fund seeks to maintain a constant $1.00 net asset value per share, although this cannot be assured. The Funds (other than the Rydex U.S. Government Money Market Fund) may engage in certain aggressive investment techniques, which include engaging in short sales and transactions in options and futures contracts. The Nova Fund and the Rydex U.S. Government Bond Fund may use the speculative technique known as leverage to increase funds available for investment (see "Other Investment Policies"). Investors in the Nova Fund may experience substantial losses during sustained periods of falling equity prices. Investors in the Ursa Fund and the Juno Fund may experience substantial losses during sustained periods of rising equity prices and rising bond prices, r e s pectively. Because of the inherent risks in any investment, there can be no assurance that any Fund s investment objective will be achieved. None of the Funds alone constitutes a balanced investment plan, and certain of the Funds involve special risks not traditionally associated with investment companies. The nature of the Funds generally will result in significant portfolio turnover which would likely cause higher expenses and additional costs and increase the risk that a Fund will not qualify as a regulated investment company under the Federal tax laws. The Trust is not intended for investors whose principal objective is current income or preservation of capital and may not be a suitable investment for persons who intend to follow an "invest and hold" strategy. See "Special Risk Considerations." ADDITIONAL INFORMATION - 2 - The Trust also offers the Rydex Institutional Money Market Fund and, beginning on or about December 1, 1996 (subject to obtaining all necessary regulatory approvals), also will offer the Rydex High Yield Fund, each of which series of the Trust is described in a separate prospectus. Investors should read this Prospectus and retain it for future reference. This Prospectus is designed to set forth concisely the information an investor should know about the Trust before investing. A Statement of Additional Information, dated November 1, 1996, containing additional information about the Trust has been filed with the Securities and Exchange Commission and is incorporated herein by reference. A copy of this Statement of Additional Information is available, without charge, upon request to the Trust at the address above or by telephoning the Trust at the telephone numbers above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is November 1, 1996. - 3 - TABLE OF CONTENTS Page PROSPECTUS SUMMARY FEES AND EXPENSES OF THE FUNDS FINANCIAL HIGHLIGHTS OF THE FUNDS INVESTMENT OBJECTIVES AND POLICIES SPECIAL RISK CONSIDERATIONS INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES PORTFOLIO TRANSACTIONS AND BROKERAGE HOW TO INVEST IN THE FUNDS REDEEMING AN INVESTMENT (WITHDRAWALS) EXCHANGES PROCEDURES FOR REDEMPTIONS AND EXCHANGES DETERMINATION OF NET ASSET VALUE TAX-SHELTERED RETIREMENT PLANS TRANSACTION CHARGES DIVIDENDS AND DISTRIBUTIONS TAXES MANAGEMENT OF THE TRUST PERFORMANCE INFORMATION GENERAL INFORMATION ABOUT THE TRUST PROSPECTUS SUMMARY THE RYDEX FUNDS Each Fund has its own distinct investment objective. There is, of course, no guarantee that any Fund will achieve its investment objective. The investment objectives of the Funds are as follows: - 4 - The Nova Fund. The Nova Fund s investment objective is to provide investment returns that correspond to 150% of the performance of the Standard & Poor s 500 Composite Stock Price IndexTM (the "S&P500 Index"). In attempting to achieve its objective, the Nova Fund expects that a substantial portion of its assets usually will be devoted to investment techniques i n c luding certain transactions in stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. In contrast to returns on a mutual fund that seeks to approximate the return of the S&P500 Index, the Nova Fund should increase gains during periods when the prices of the securities in the S&P500 Index are rising and increase losses to investors during periods when such prices are declining. Investors in the Nova Fund could experience substantial losses during sustained periods of falling equity prices. The Ursa Fund. The Ursa Fund s investment objective is to provide investment results that will inversely correlate to the performance of the S&P500 Index. The Ursa Fund seeks to achieve this inverse correlation result on each trading day. If the Ursa Fund is successful in meeting this objective, the net asset value on Ursa Fund shares will increase for each day in direct proportion to any decreases in the level of the S&P500 Index. Conversely, the net asset value on Ursa Fund shares will decrease for each day in direct proportion to any increases in the level of the S&P500 Index. In seeking to achieve its objective, the Ursa Fund primarily engages in short sales and certain transactions in stock index futures contracts, options on stock index futures contracts, and option on securities and stock indexes. The Ursa Fund involves special risks not traditionally associated with investment companies. Investors in the Ursa Fund may experience substantial losses during sustained periods of rising equity prices. The Rydex OTC Fund. The investment objective of the Rydex OTC Fund (the "OTC Fund") is to provide investment results t h a t correspond to a benchmark for over-the-counter securities. The OTC Fund s current benchmark is the NASDAQ 100 IndexTM. The OTC Fund does not aim to hold all of the 100 securities included on the NASDAQ 100 IndexTM. Instead, the OTC Fund intends to hold representative securities included in the NASDAQ 100 IndexTM or other instruments which are expected to provide returns that correspond to those of the NASDAQ 100 IndexTM. The OTC Fund may engage in transactions on stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. - 5 - The Rydex Precious Metals Fund. The investment objective of the Rydex Precious Metals Fund (the "Metals Fund") is to provide investment results that correspond to a benchmark primarily for metals-related securities. The Metals Fund s c u r r ent benchmark is the Philadelphia Stock Exchange Gold/Silver IndexTM (the "XAU Index"). To achieve its objective, the Metals Fund invests in securities included in the XAU Index. In addition, the Metals Fund may invest in other securities that are expected to perform in a manner that will assist the Metals Fund s performance to track closely the XAU Index. The Metals Fund may invest in securities of foreign issuers. These securities present certain risks not present in domestic investments and expose the investor to general market conditions which differ significantly from those in the United States. The Rydex U.S. Government Bond Fund. The investment objective of the Rydex U.S. Government Bond Fund (the "Bond Fund") is to provide investment results that correspond to a benchmark for U.S. Government securities. The Bond Fund s current benchmark is 120% of the price movement of the Current Long Treasury Bond (the "Long Bond"), without consideration of interest paid. In attempting to achieve its objective, the Bond Fund invests primarily in obligations of the U.S. Treasury or obligations either issued or guaranteed, as to principal and interest, by agencies or instrumentalities of the U.S. Government ("U.S. Government Securities"). The Bond Fund may engage in transactions in futures contracts and options on futures contracts on U.S. Treasury bonds. The Bond Fund also may invest in U.S. Treasury zero coupon bonds. The Juno Fund. The Juno Fund s investment objective is to provide total return before expenses and costs that will inversely correlate to the price movements of a benchmark for U.S. Treasury debt instruments or futures contract on a specified debt instrument. The Juno Fund seeks to achieve this inverse correlation result on each trading day. The Long Bond is the Juno Fund s current benchmark. In seeking its objective, the Juno Fund will employ certain investment techniques including engaging in short sales and transactions in futures contracts and options thereon. If the Juno Fund is successful in meeting its objective, the total return on its shares before expenses and costs will increase for each day proportionally to any decreases in the price of the Long Bond. Conversely, the total return on its shares before expenses and cost will decrease for each day proportionally to any increases in the price of the Long Bond. Investors in the Juno Fund may experience substantial losses during periods of falling interest rates/rising bond prices. - 6 - The Rydex U.S. Government Money Market Fund. The investment objective of the Rydex U.S. Government Money Market Fund (the "Money Market Fund") is to provide security of principal, high current income, and liquidity. To achieve its objective, the M o n e y Market Fund invests primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or i n strumentalities, as well as in repurchase agreements collateralized fully by U.S. Government Securities. A discussion of each Fund s investment objective(s) and policies is provided below under "Investment Objectives and Policies" and "Investment Techniques and Other Investment Policies." The Trust also offers shares in the Rydex High Yield Fund and the Rydex Institutional Money Market Fund, each of which series of the Trust is described in a separate prospectus. SPECIAL RISK CONSIDERATIONS The Trust expects that a substantial portion of the assets of the Funds will be derived from professional money managers and investors who intend to invest in the Funds as part of an asset-allocation or market-timing investment strategy. These investors are likely to redeem or exchange their Fund shares frequently to take advantage of anticipated changes in market conditions. The strategies employed by investors in the Funds may result in considerable assets moving in and out of the Funds. Consequently, the Trust expects that the Funds will generally experience significant portfolio turnover, which will likely cause higher expenses and additional costs and increase the risk that the Fund will not qualify as a "regulated investment company" under the Federal tax laws and may also adversely affect the ability of the Fund to meet its investment objective. For further information concerning the portfolio turnover of the Funds and the Federal tax treatment of the Funds, see "Investment Objectives and Policies" and "Taxes" in this Prospectus and "Investment Policies and Techniques" and "Dividends, Distributions, and Taxes" in the Statement of Additional Information. While the Funds do not expect that the returns over a year w i l l deviate adversely from their respective current benchmarks by more than ten percent, certain factors may affect their ability to achieve this correlation. See "Special Risk Considerations" for a discussion of these factors. The Funds (other than the Money Market Fund) may engage in certain aggressive investment techniques, which may include engaging in short sales and transactions in futures contracts a n d options on securities, stock indexes, and futures - 7 - c o ntracts. As discussed more fully under "Investment Objectives and Policies" and "Investment Techniques and Other Investment Policies," these techniques are specialized and involve risks that are not traditionally associated with investment companies. PURCHASES, REDEMPTIONS, AND EXCHANGES OF TRUST SHARES The shares of each Fund may be purchased and redeemed, without any respective sales or redemption charge, at the net asset value per share of the Fund next determined. Shares of any available Fund described in this Prospectus may be exchanged at any time for shares of any other available Fund, without any charge, on the basis of the relative net asset values next computed. Because of the administrative expense of handling small accounts, the Trust reserves the right to redeem involuntarily an investor's account, including a retirement account, which falls below the applicable minimum investment in total value in the Trust due to redemptions. In addition, both a request for a partial redemption by an investor whose account balance is below the minimum investment and a request for a partial redemption by an investor that would bring the account balance below the minimum investment will be treated as a request by the investor for a complete redemption of that account. The Trust reserves the right to modify its minimum investment requirements and the corresponding amounts below which involuntary redemptions may be effected. See "How To Invest In the Fund," "Redeeming An Investment (Withdrawals)," and "Exchanges." DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income and any distributions of net realized capital gains from each of the Funds will be distributed as described under "Dividends and Distributions." All such distributions of a Fund automatically will be reinvested without charge in additional shares of the same Fund unless otherwise specified by a shareholder. INVESTMENT ADVISER AND SERVICER The investment adviser of each Fund is PADCO Advisors, Inc. (the "Advisor"). PADCO Service Company, Inc. (the "Servicer") provides the Funds with general administrative, shareholder, and registrar services. Both the Advisor and the Servicer are located in Rockville, Maryland. See "Management of the Trust." TRANSFER AGENT AND CUSTODIAN - 8 - The Servicer also serves as the Trust s transfer and dividend disbursement agent. Star Bank, N.A. serves as the custodian of each Fund s securities and cash. See "Management of the Trust." - 9 - FEES AND EXPENSES OF THE FUNDS The following table illustrates all expenses and fees that a shareholder of each Fund will incur:
The Rydex Precious The Nova The Ursa The Rydex Metals Fund Fund OTC Fund Fund Shareholder Transaction Expenses Sales Load Imposed on None None None None Purchases Sales Load Imposed on None None None None Reinvested Dividends Deferred Sales Load None None None None Redemption Fees None None None None Exchange Fees None None None None Annual Fund Operating Expenses Management Fees 0.75% 0.90% 0.75% 0.75% 12b-1 Fees None None None None Other Expenses Administrative Fees 0.25% 0.25% 0.20% 0.20% Additional Expenses 0.31% 0.24% 0.38% 0.38% Total Other Expenses 0.56% 0.49% 0.56% 0.58% Total Fund Operating 1.31% 1.39% 1.33% 1.33% Expenses* The Rydex The Rydex U.S. U.S. Government Government The Juno Money Bond Fund Fund Market Fund - 10 - Shareholder Transaction Expenses Sales Load Imposed on None None None Purchases Sales Load Imposed on None None None Reinvested Dividends Deferred Sales Load None None None Redemption Fees None None None Exchange Fees None None None Annual Fund Operating Expenses Management Fees 0.50% 0.90% 0.50% 12b-1 Fees None None None Other Expenses Administrative Fees 0.20% 0.25% 0.20% Additional Expenses 0.56% 0.49% 0.29% Total Other Expenses 0.76% 0.74% 0.49% Total Fund Operating 1.26% 1.64% 0.99% Expenses*
* Retirement plans are charged an annual $15.00 maintenance fee. See "Tax-Sheltered Retirement Plans." - 11 - EXAMPLE Assuming hypothetical investments of $1,000 in each of the Funds, a five-percent annual return, and redemption at the end of each time period, an investor in each of the Funds would pay transaction and operating expenses at the end of each year as follows:
1 Year 3 Years 5 Years 10 years The Nova Fund $13.34 $41.52 $71.82 $157.90 The Ursa Fund $14.15 $44.00 $76.05 $169.86 Rydex OTC Fund $13.54 $42.14 $72.88 $160.14 Rydex Precious $13.54 $42.14 $72.88 $160.14 Metals Fund Rydex U.S. Government $12.84 $39.96 $69.16 $152.56 Bond Fund The Juno Fund $16.68 $51.73 $89.17 $194.37 Rydex U.S. Government Money $10.10 $31.53 $54.71 $121.30 Market Fund
T h e same level of expenses would be incurred if the investments were held throughout the period indicated. The preceding table of fees and expenses is provided to assist investors in understanding the various costs and expenses which may be borne directly or indirectly by an investor in each of the Funds. The percentages shown above are based on actual expenses incurred by the Funds for the fiscal year ended June 30, 1996. The five-percent assumed annual return is for comparison purposes only. The actual return for a particular Fund in future periods may be more or less depending on market conditions, and the actual expenses an investor incurs in future periods may be more or less than those shown above and will depend on the amount invested and on the actual growth rate of the particular Fund. For a more complete discussion of the fees connected with an investment in the Funds and the services provided to the Funds, see "Management of the Trust" in this Prospectus and in the Statement of Additional Information. - 12 - FINANCIAL HIGHLIGHTS OF THE FUNDS (For a Share Outstanding Throughout Each Period) The following financial highlights relating to the Funds, for the periods identified, have been audited by Deloitte & Touche LLP, independent certified public accountants, whose report t h ereon appears in the Trust's 1996 Annual Report to Shareholders and is incorporated by reference in the Statement of Additional Information. This information should be read in conjunction with the financial statements and related notes thereto included in the Statement of Additional Information. A copy of the Trust's 1996 Annual Report to Shareholders may be obtained, without charge, by contacting the Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the Trust at 800-820-0888 or 301-468-8520.
The Nova Fund For the For the For the Year Year Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 11.81 $ 9.77 $ 10.01 Net Investment Income (Loss) 0.56 0.28 0.01 Net Realized and Unrealized Gains (Losses) on Securities 3.31 2.88 (0.25) Net Increase (Decrease) in Net Asset Value Resulting from Operations 3.87 3.16 (0.24) Dividends to Shareholders 0.00 (0.29) 0.00 Distributions to Shareholders From Net Realized Capital Gain 0.00 (0.83) 0.00 Net Increase (Decrease) in Net Asset Value 3.87 2.04 (0.24) Net Asset Value -- End of Period $ 15.68 $ 11.81 $ 9.77 Total Investment Return 32.77% 32.65% (2.47)% - 13 - Ratios to Average Net Assets Expenses 1.31% 1.43% 1.73%** Net Investment Income 3.14% 2.62% 1.05%** Supplementary Data: Portfolio Turnover Rate*** 0.00% 0.00% 0.00% Net Assets, End of Period $ 224,541 $ 62,916 $ 77,914 (000's omitted)
The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: July 12, 1993. ** Annualized for the period ending June 30, 1994 *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova Fund typically holds most of its investments in options and futures contracts which are deemed short-term securities. - 14 -
The Ursa Fund For the For the For the Year Year Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 8.79 $ 10.54 $ 10.00 Net Investment Income (Loss) 0.30 0.35 0.01 Net Realized and Unrealized Gains (Losses) on Securities (1.54) (1.78) 0.53 Net Increase (Decrease) in Net Asset Value Resulting from Operations (1.24) (1.43) 0.54 Dividends to Shareholders 0.00 (0.32) 0.00 Distributions to Shareholders From Net Realized Capital Gain 0.00 0.00 0.00 Net Increase (Decrease) in Net Asset Value (1.24) (1.75) 0.54 Net Asset Value -- End of Period $ 7.55 $ 8.79 $ 10.54 Total Investment Return (14.11)% (14.08)% 10.89% Ratios to Average Net Assets Expenses 1.39% 1.39% 1.67%** Net Investment Income 3.38% 3.50% 1.43%** Supplementary Data: Portfolio Turnover Rate*** 0.00% 0.00% 0.00% Net Assets, End of Period $192,553 $127,629 $110,899 (000's omitted)
The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: January 7, 1994. ** Annualized for the period ending June 30, 1994 *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Ursa Fund typically holds most of its investments in options and futures contracts which are deemed short-term securities. - 15 -
The Rydex OTC Fund For the For the year Year For the Ended Ended Period Ended June 30, June 30, June 30, 1996 1995 1994* Per Share Operating Performance: $ 12.22 $ 8.76 $ 10.00 Net Asset Value -- Beginning of Period Net Investment Income (Loss) 0.06 0.14 0.01 Net Realized and Unrealized Gains (Losses) on Securities 3.24 4.17 (1.25) Net Increase (Decrease) in Net Asset Value Resulting from Operations 3.30 4.31 (1.24) Dividends to Shareholders 0.00 (0.12) 0.00 Distributions to Shareholders From Net Realized Capital Gain (0.36) 0.00 (0.73) Net Increase (Decrease) in Net Asset Value 2.94 (1.24) 3.46 Net Asset Value -- End of Period $ 15.16 $ 12.22 $ 8.76 Total Investment Return 26.44% 49.00% (30.17)% Ratios to Average Net Assets Expenses 1.33% 1.41% 1.97%** Net Investment Income 0.44% 1.34% 1.69%** Supplementary Data: Portfolio Turnover Rate*** 2,578.56% 2,241.00% 1,171.00% Net Assets, End of Period $ 48,716 $ 61,948 $ 30,695 (000's omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: February 14, 1994. ** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. - 16 -
The Rydex Precious Metals Fund For the For the Year Period For the Year Ended Ended Ended June 30, June 30, June 30,1996 1995 1994* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 8.73 $ 8.29 $ 10.00 Net Investment Income (Loss) 0.00 0.10 0.01 Net Realized and Unrealized Gains (Losses) on Securities 0.32 0.43 (1.72) Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.32 0.53 (1.71) Dividends to Shareholders 0.00 (0.09) 0.00 Distributions to Shareholders From Net Realized Capital Gain 0.00 0.00 0.00 Net Increase (Decrease) in Net Asset Value 0.32 0.44 (1.71) Net Asset Value -- End of Period $ 9.05 $ 8.73 $ 8.29 Total Investment Return 3.67% 6.21% (29.27)% Ratios to Average Net Assets Expenses 1.33% 1.38% 2.06%** Net Investment Income (0.01)% 1.15% 1.23%** Supplementary Data: Portfolio Turnover Rate*** 1,036.37% 1,765.00% 2,728.00% Average Commission Rate 1.51% -- -- Paid**** $ 36,574 $ 40,861 $ 1,526 Net Assets, End of Period (000's omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: December 1, 1993. ** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. **** For fiscal years beginning on or after September 1, 1995, the Fund is required to disclose its average commission rate per share for purchases and sales on equity securities. - 17 -
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The Rydex U.S. Government Bond Fund For the For the For the Year Year Period Ended Ended Ended June June 30, June 30, 30,1996 1995 1994* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 9.55 $ 8.24 $ 10.00 Net Investment Income (Loss) 0.46 0.39 0.02 Net Realized and Unrealized Gains (Losses) on Securities (0.45) 1.17 (1.76) Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.01 1.56 (1.74) Dividends to Shareholders (0.46) (0.25) (0.02) Distributions to Shareholders From Net Realized Capital Gain (0.13) 0.00 0.00 Net Increase (Decrease) in Net Asset Value (0.58) 1.31 (1.76) Net Asset Value -- End of Period $ 8.97 $ 9.55 $ 8.24 Total Investment Return (1.48)% 18.97% (32.63)% Ratios to Average Net Assets Expenses 1.26% 2.26% 3.05%** Net Investment Income 4.73% 4.64% 3.39%** Supplementary Data: Portfolio Turnover Rate*** 780.30% 3,452.59% 1,290.00% Net Assets, End of Period $ 18,331 $ 2,592 $ 1,564 (000's omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: January 3, 1994. ** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. - 19 -
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The Juno Fund For the Period For the Year Ended Ended June 30, June 30,1996 1995* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 9.08 $ 10.00 Net Investment Income (Loss) 0.34 0.14 Net Realized and Unrealized Gains (Losses) on Securities 0.05 (1.06) Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.39 (0.92) Dividends to Shareholders 0.00 0.00 Distributions to Shareholders From Net Realized Capital Gain 0.00 0.00 Net Increase (Decrease) in Net Asset Value 0.39 (0.92) Net Asset Value -- End of Period $ 9.47 $ 9.08 Total Investment Return 4.30% (9.20)% Ratios to Average Net Assets Expenses 1.64% 1.50%** Net Investment Income 3.63% 1.32%** Supplementary Data: Portfolio Turnover Rate*** 0.00% 0.00% Net Assets, End of Period (000's $ 18,860 $ 4,301 omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: March 3, 1995. ** Annualized for the period ended June 30, 1995. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Juno Fund typically holds most of its investments in options and futures contracts which are deemed short-term securities.
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The Rydex U.S. Government Money Market Fund For the For the For the Year Year Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 1.00 $ 1.00 $ 1.00 Net Investment Income (Loss) 0.04 0.04 0.01 Net Realized and Unrealized Gains(Losses) on Securities 0.00 0.00 0.00 Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.04 0.04 0.01 Dividends to Shareholders (0.04) (0.04) (0.01) Distributions to Shareholders From Net Realized Capital Gain 0.00 0.00 0.00 Net Increase (Decrease) in Net Asset Value 0.00 0.00 0.00 Net Asset Value End of Period $ 1.00 $ 1.00 $ 1.00 Total Investment Return 4.60% 4.43% 2.47% Ratios to Average Net Assets 0.99% 0.89% 1.16%** Expenses 4.18% 4.23% 2.34%** Net Investment Income Supplementary Data: Portfolio Turnover Rate*** 0.00% 0.00% 0.00% Net Assets, End of Period $ 153,925 $ 284,198 $ 88,107 (000's omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: December 3, 1993. ** Annualized for the period ended June 30, 1994. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year.
- 22 - - 23 - INVESTMENT OBJECTIVES AND POLICIES General The Funds are principally designed for professional money managers and investors who intend to follow an asset- allocation or market-timing investment strategy. Except for the Money Market Fund, each Fund is intended to provide investment exposure with respect to a particular segment of the securities markets. These Funds seek investment results that correspond over time to a specified benchmark. The Funds may be used independently or in combination with each other as part of an overall investment strategy. Additional Funds may be created from time to time. Fundamental securities analysis is not generally used by the A d v i sor in seeking to correlate with the respective benchmarks. Rather, the Advisor primarily uses statistical and quantitative analysis to determine the investments the Fund makes and techniques it employs. While the Advisor attempts to minimize any "tracking error" (that statistical measure of the difference between the investment results of a Fund and the performance of its benchmark), certain factors will tend to cause the Fund's investment results to vary from a perfect correlation to its benchmark. The Funds, however, do not expect that their total returns will vary adversely from their respective current benchmarks by more than ten percent over a year. See "Special Risk Considerations." It is the policy of these Funds to pursue their investment objectives regardless of market conditions, to remain nearly fully invested and not to take defensive positions. The investment objectives (including the benchmarks of the Nova and Ursa Funds) and certain investment restrictions of the Funds are fundamental policies and may not be changed without the affirmative vote of at least the majority of the outstanding shares of that Fund, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). All other investment policies of the Funds not specified as fundamental (including the benchmarks of the Funds other than Nova and Ursa Funds) may be changed by the trustees of the Trust (the Trustees ) without the approval of shareholders. The Trustees may consider changing a Fund s benchmark (to the extent permitted) if, for example, the current benchmark b e c omes unavailable; the Trustees believe the current benchmark no longer serves the investment needs of a majority of shareholders or another benchmark better serves their needs; or the financial or economic environment makes it difficult for the Fund s investment results to correspond s u f f iciently to its current benchmark. If believed - 24 - appropriate, the Trustees may specify a benchmark for a Fund that is "leveraged" or proprietary. Of course, there can be no assurance that a Fund will achieve its objective. The Nova Fund The investment objective of the Nova Fund is to provide investment returns that correspond to 150% of the performance of the S&P500 Index. In attempting to achieve its objective, the Nova Fund expects that a substantial portion of its assets usually will be devoted to employing certain investment techniques. These techniques include engaging in certain transactions in stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. Under the techniques in which the Nova Fund engages, the Nova Fund will generally incur a loss if the price of the underlying security or index decreases between the date of the employment of the technique and the date on which the Nova Fund terminates the position. The amount of any gain or loss on an investment technique may be affected by any premium or amounts in lieu of dividends or interest income the Nova Fund pays or receives as the result of the transaction. The Nova Fund may also invest in shares of individual securities which are expected to track the Nova Fund s benchmark. In contrast to returns on a mutual fund that seeks to approximate the return of the S&P500 Index, the Nova Fund should increase gains to investors during periods when the prices of the securities in the S&P500 Index are rising and increase losses to investors during periods when they are declining. Investors in the Nova Fund could experience substantial losses during sustained periods of falling equity prices. The Ursa Fund The Ursa Fund is designed to allow shareholders to hedge an existing portfolio of securities or mutual fund shares or to speculate on anticipated decreases in the S&P500 Index. The Ursa Fund's investment objective is to provide investment results that will inversely correlate to the performance of the S&P500 Index. The Ursa Fund seeks to achieve this inverse correlation result on each trading day. While a close correlation can be achieved on any single trading day, over time the cumulative percentage increase or decrease in the net asset value of the shares of the Ursa Fund may diverge significantly from the cumulative percentage decrease or increase in the S&P500 Index due to a compounding effect. - 25 - If the Ursa Fund achieved a perfect inverse correlation for any single trading day, the net asset value of the shares of the Ursa Fund would increase for that day in direct proportion to any decrease in the level of the S&P500 Index. Conversely, the net asset value of the shares of the Ursa Fund would decrease for that day in direct proportion to any increase in the level of the S&P500 Index for that day. For example, if the S&P500 Index were to decrease by 1% by the close of business on a particular trading day, investors in the Ursa F u n d would experience a gain in net asset value of approximately 1% for that day. Conversely, if the S&P500 Index were to increase by 1% by the close of business on a particular trading day, investors in the Ursa Fund would experience a loss in net asset value of approximately 1% for that day. Even if there is a perfect inverse correlation between the Ursa Fund and the S&P500 Index on a daily basis, however, the symmetry between the changes in the S&P500 Index and the changes in the value of shares in the Ursa Fund can be significantly altered over time by a compounding effect. Thus, if the Ursa Fund achieved a perfect inverse correlation with the S&P500 Index on every trading day over an extended period, and if there were a significant decrease in the level of the S&P500 Index during that period, there would be a compounding effect with the result that the net asset value of the shares of the Ursa Fund for that period should generally increase by a percentage that is somewhat greater than the percentage of decrease in the level of the S&P500 Index. Conversely, if a perfect inverse correlation were maintained over an extended period and if there were a significant increase in the level of the S&P500 Index over that period, then there would be a compounding effect with the result that the net asset value of the shares of the Ursa Fund for that period should generally decrease by a percentage that is somewhat less than the percentage increase in the level of the S&P500 Index for that period. The Ursa Fund intends to pursue its investment objective regardless of market conditions and does not intend to take defensive positions in anticipation of rising equity prices. Consequently, investors in the Ursa Fund may experience substantial losses during sustained periods of rising equity prices. In pursuing its investment objective, the Ursa Fund generally does not invest in traditional securities, such as common stock of operating companies. Rather, the Ursa Fund employs certain investment techniques, including engaging in short sales and in certain transactions in stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. Under these - 26 - techniques, the Ursa Fund will generally incur a loss if the price of the underlying security or index increases between the date of the employment of the technique and the date on which the Ursa Fund terminates the position. The Ursa Fund will generally realize a gain if the underlying security or index declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The amount of any gain or loss on an investment technique may be affected by any premium or amounts in lieu of dividends or interest that the Ursa Fund pays or receives as the result of the transaction. The Rydex OTC Fund The investment objective of the OTC Fund is to provide investment results that correspond to a benchmark for over- the-counter securities. The OTC Fund's current benchmark is the NASDAQ 100 Index. The OTC Fund does not aim to hold all of the 100 securities included in the NASDAQ 100 Index. Instead, the OTC Fund intends to hold representative securities included in the NASDAQ 100 Index or other instruments which the Advisor believes will provide returns that correspond to those of the NASDAQ 100 IndexTM. The OTC Fund may engage in transactions on stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes. Companies whose securities are traded on the over-the-counter ("OTC") markets generally are smaller market-capitalization or newer companies than those listed on the New York Stock Exchange (the "NYSE") or the American Stock Exchange (the "AMEX"). OTC companies often have limited product lines, or relatively new products or services, and may lack established m a rkets, depth of experienced management, or financial resources and the ability to generate funds. The securities of these companies may have limited marketability and may be more volatile in price than securities of larger-capitalized or more well-known companies. Among the reasons for the greater price volatility of securities of certain smaller OTC companies are the less certain growth prospects of comparably smaller firms, the lower degree of liquidity in the OTC markets for such securities, and the greater sensitivity of smaller-capitalized companies to changing economic conditions than larger-capitalized, exchange-traded securities. Conversely, because many of these OTC securities may be overlooked by investors and undervalued in the marketplace, there is potential for significant capital appreciation. The Rydex Precious Metals Fund - 27 - The investment objective of the Metals Fund is to provide investment results that correspond to a benchmark primarily for metals-related securities. The Metals Fund s current benchmark is the XAU Index. Metals-related investments are considered speculative and are influenced by a host of world-wide economic, financial, and political factors. Historically, the prices of gold and precious metals have been subject to wide price movements caused by political as well as economic factors, and, accordingly, prices of equity securities of companies involved in the precious metals-related industry have been volatile. Such fluctuation and volatility may be due to changes in inflation or in expectations regarding inflation in various countries, the availability of supplies of such precious metals and minerals, changes in industrial and commercial demand, metal and mineral sales by governments, central banks, or international agencies, investment speculation, monetary and other economic policies of various governments, and governmental restrictions on the private ownership of certain precious metals and minerals. Such price volatility in precious metals prices will have a similar effect on the Metals Fund's share prices. The Fund may invest in other securities that are expected to perform in a manner that will assist the Metals Fund s performance to closely track the XAU Index. The Metals Fund may invest in securities of foreign issuers. These securities present certain risks not present in domestic i n vestments and expose the investor to general market conditions which differ significantly from those in the United States. Securities of foreign issuers may be affected by the strength of foreign currencies relative to the U.S. dollar or by political or economic developments in foreign countries. Foreign companies may not be subject to accounting standards or governmental regulations comparable to those that affect United States companies, and there may be less public i n formation about the operations of foreign companies. Foreign securities also may be subject to foreign government taxes that could reduce the yield on such securities. The Rydex U.S. Government Bond Fund The investment objective of the Bond Fund is to provide investment results that correspond to a benchmark for U.S. Government Securities. The Bond Fund s current benchmark is 120% of the price movement of the Long Bond, without consideration of interest paid. In attempting to achieve this objective, the Bond Fund invests primarily in U.S. Government Securities. U.S. Government Securities are obligations of the U.S. Treasury or obligations - 28 - either issued or guaranteed, as to principal and interest, by agencies or instrumentalities of the U.S. Government. The Bond Fund may engage in transactions in futures contracts and options on futures contracts on U.S. Treasury bonds. The Bond Fund also may invest in U.S. Treasury zero coupon bonds. While U.S. Government Securities provide substantial protection against credit risk, investment in those securities do not protect investors against price changes due to changing interest rate levels and, as such, the share price of the Bond F u nd is not guaranteed and will fluctuate over time. Accordingly, the return of the Bond Fund should move inversely with movements in prevailing interest rates on the Long Bond. The Fund intends to adjust its portfolio each time the Long Bond is issued (currently twice yearly) in an attempt to track the price movement of the newly-issued Long Bond. See "The Benchmarks." The Juno Fund The Juno Fund is designed to allow investors to hedge an existing portfolio of securities or mutual fund shares against general increases in interest rates or to speculate on anticipated decreases in the price of the Long Bond. The Juno Fund s investment objective is to provide total return before expenses and costs that will inversely correlate to the price movements of a benchmark debt instrument or futures contract on a specified debt instrument. The Long Bond has been designated as the Juno Fund s current benchmark. In attempting to achieve its objective, the Fund intends to devote its assets primarily to employing certain investment techniques. The investment techniques that may be employed by the Fund include engaging in short sales on U.S. Treasury bonds and engaging in transactions in futures contracts on U.S. Treasury bonds and options on such contracts to produce synthetic short positions. These techniques are highly specialized and involve certain risks not traditionally associated with investment companies. Under these techniques, the Fund will generally incur a loss if the price of the underlying security or futures contract increases between the date of the employment of the technique and the date on which the Fund terminates the position. The Fund will generally realize a gain if the underlying security or futures contract declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long position in a security. The Juno Fund seeks to achieve this inverse correlation result on each trading day. While a close correlation can be achieved on any single trading day, over time the cumulative percentage increase or decrease in the Juno Fund's total return before expenses and costs may diverge significantly - 29 - from the cumulative percentage decrease or increase in the price of the Long Bond due to a compounding effect. If the Juno Fund achieved a perfect inverse correlation for any single trading day, the Juno Fund's total return before expenses and costs would increase for that day in direct proportion to any decrease in the price of the Long Bond. Conversely, the Juno Fund's total return before expenses and costs would decrease for that day in direct proportion to any increase in the price of the Long Bond for that day. For example, if the price of the Long Bond were to decrease by 1% by the close of business on a particular trading day, investors in the Juno Fund would experience a gain in total return before expenses and costs of approximately 1% for that day. Conversely, if the price of the Long Bond were to increase by 1% by the close of business on a particular trading day, investors in the Juno Fund would experience a l o s s in total return before expenses and costs of approximately 1% for that day. Even if there is a perfect inverse correlation between the Juno Fund's total return before expenses and costs and the price of the Long Bond on a daily basis, however, the symmetry between the changes in the price of the Long Bond and the changes in the Juno Fund's total return can be significantly altered over time by a compounding effect. Thus, if the Juno Fund achieved a perfect inverse correlation with the price of the Long Bond on every trading day over an extended period, and if there were a significant decrease in the price of the Long Bond during that period, there would be a compounding effect with the result that the Juno Fund's total return before expenses and costs for that period should generally increase by a percentage that is somewhat greater than the percentage of decrease in the price of the Long Bond. Conversely, if a perfect inverse correlation were maintained over an extended period and if there were a significant increase in the price of the Long Bond over that period, then there would be a compounding effect with the result that the Juno Fund's total return before expenses and costs for that period should generally decrease by a percentage that is somewhat less than the percentage increase in the price of the Long Bond for that period. For purposes of determining the Juno Fund's total return before expenses and costs, costs include the Juno Fund s "carrying cost" in maintaining short positions. When entering an actual or synthetic short position on the Long Bond, the Juno Fund must effectively pay interest equal to interest accrued on the underlying U.S. Treasury bond. The difference, if any, between the interest effectively paid by the Juno Fund on its short positions and any interest earned by the Juno Fund on its assets is the Juno Fund s carrying cost. - 30 - The interest rate on a U.S. Treasury bond is set at the time the particular bond is issued and does not change for the maturity of the bond so that the interest paid on the bond is constant throughout the life of the bond. The price at which a previously-issued U.S. Treasury bond can be bought and sold in the open market, however, does change. The market value of U.S. Treasury bonds rises when interest rates in general decrease and falls when interest rates in general increase. Accordingly, if the Juno Fund is successful in meeting its investment objective, the Fund s total return should rise with increases in interest rates and fall with decreases in interest rates. The Rydex U.S. Government Money Market Fund The investment objectives of the Money Market Fund are security of principal, high current income, and liquidity. The Money Market Fund seeks to achieve its objectives by investing in U.S. Government Securities, including money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities, as well as in repurchase agreements collateralized fully by U.S. Government Securities. An investment in the Money Market Fund is neither insured nor guaranteed by the U.S. Government. The Money Market Fund seeks to maintain a constant $1.00 net asset value per share, although this cannot be assured. The Money Market Fund may invest in securities that take the form of participation interests in, and may be evidenced by deposit or safekeeping receipts for, any of the foregoing securities. Participation interests are pro rata interests in U.S. Government Securities; and instruments evidencing deposit or safekeeping are documentary receipts for such original securities held in custody by others. The Benchmarks The S&P500 Index (SPX). Standard & Poor's Corporation ("S&P") chooses the 500 stocks comprising the S&P500 Index on the basis of market values and industry diversification. Most of the stocks in the S&P500 Index are issued by the 500 largest companies, in terms of the aggregate market value of their outstanding stock, and such companies are generally listed on the NYSE. Additional stocks that are not among the 500 largest market value stocks are included in the S&P500 Index for diversification purposes. S&P will not be a sponsor of, or in any other way affiliated with, the Funds. The NASDAQ 100 IndexTM (NDX). The NASDAQ 100 IndexTM is a capitalization-weighted index composed of 100 of the largest - 31 - non-financial securities listed on the NASDAQ Stock Market. The index was created in 1985. The XAU Index. The XAU Index is a capitalization-weighted index featuring eleven widely-held securities in the gold and silver mining and production industry or companies investing in such mining and production companies. The XAU Index was set to an initial value of 100 in January 1979. The following issuers are currently included in the XAU Index: ASA Limited; Barrick Gold Corp.; Battle Mountain Gold Co.; Echo Bay Mines Limited; Hecla Mining Co.; Homestake Mining Co.; Newmont Mining Corp.; Placer Dome Inc.; Pegasus Gold, Inc.; TVX Gold, Inc.; and Santa Fe Pacific Gold Corp. While the majority of these companies are based in North America, they generally have operations in countries based outside North America. The Long Bond. The Long Bond is the U.S. Treasury bond with the longest maturity. Currently, the longest maturity of a U.S. Treasury bond is 30 years. At this time, the 30-year U.S. Treasury bond is issued twice yearly. In the future, the U.S. Treasury may change the number of times each year that the Long Bond is issued. SPECIAL RISK CONSIDERATIONS Shareholders should consider the special factors discussed below that are associated with the investment policies of the Funds in determining the appropriateness of investing in the Funds. Portfolio Turnover The Trust anticipates that investors in the Funds, as part of an asset-allocation or market-timing investment strategy, will frequently redeem shares of a particular Fund, as well as exchange their shares of a particular Fund for shares in other Funds pursuant to the exchange policy of the Trust (see "Exchanges"), which would cause that Fund to experience high portfolio turnover. Because each Fund's portfolio turnover r a te to a great extent will depend on the purchase, redemption, and exchange activity of the Fund's investors, it is very difficult to estimate what the Fund's actual turnover rate generally will be. Pursuant to the formula prescribed by the Securities and Exchange Commission (the "Commission"), the portfolio turnover rate for each Fund is calculated without regard to securities, including options and futures contracts, having a maturity of less than one year. The Nova Fund, the Ursa Fund, and the Juno Fund typically hold most of their investments in short-term options and futures contracts, - 32 - which, therefore, are excluded for purposes of computing portfolio turnover. Significant portfolio turnover will tend to increase the realization by a Fund of gains (or losses) on securities that have been held by the Fund for less than three months. Any such realized gains on securities that have been held by a Fund for less than three months, and other factors related to large cash flows into and out of the Fund, will increase the risk that, in any given year, the Fund may fail to qualify as a regulated investment company under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended (the "Code") (see "Taxes"). If a Fund should so fail to qualify under the Code, the Fund's net investment income and net capital gain would become subject to Federal income tax at corporate rates. The imposition of such taxes would directly reduce the return to an investor from an investment in the Fund. In addition, a h i g her portfolio turnover rate would likely involve c o rrespondingly greater brokerage commissions and other expenses which would be borne by the Fund. Furthermore, a Fund's portfolio turnover level may adversely affect the ability of the Fund to achieve its investment objective. Tracking Error While the Funds do not expect that the returns over a year will deviate adversely from their respective benchmarks by more than ten percent, several factors may affect their ability to achieve this correlation. Among these factors are: (1) Fund expenses, including brokerage (which may be increased by high portfolio turnover); (2) less than all of the securities in the benchmark being held by a Fund and securities not included in the benchmark being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts and options, and the performance of the underlying securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) a Fund holds instruments traded in a market that has become illiquid or disrupted; (6) Fund share prices being rounded to the nearest cent; (7) changes to the benchmark index that are not disseminated in advance; or (8) the need to conform a Fund s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements. Aggressive Investment Techniques Each of the Funds (other than the Money Market Fund) may engage in certain aggressive investment techniques which may include engaging in short sales and transactions in futures contracts and options on securities, securities indexes, and futures contracts. The Trust expects that the Nova Fund, the - 33 - Ursa Fund, and the Juno Fund will primarily use these techniques in seeking to achieve their objectives and that a significant portion (up to 100%) of the assets of these Funds will be held in high-grade liquid debt in a segregated account by these Funds as "cover" for these investment techniques. Participation in the options or futures markets by a Fund involves distinct investment risks and transaction costs. Risks inherent in the use of options, futures contracts, and options on futures contracts include: (1) adverse changes in the value of such instruments; (2) imperfect correlation between the price of options and futures contracts and options t h ereon and movements in the price of the underlying securities, index, or futures contracts; (3) the fact that the skills needed to use these strategies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; and (5) the possible need to defer c l o s i ng out certain positions to avoid adverse tax c o nsequences. For further information regarding these investment techniques, see "Investment Techniques and Other Investment Policies." Early NASDAQ Closings The normal close of trading of securities listed on the National Association of Securities Dealers Automated Quotations (the "NASDAQ"), which is operated by the National Association of Securities Dealers, Inc. (the "NASD"), is 4:00 P.M. While an infrequent occurrence, the NASD has closed trading on the NASDAQ as much as 15 minutes prior to the normal close because of computer systems failures. Early closing of the NASDAQ may result in a Fund being unable to sell (or buy) OTC securities traded on the NASDAQ on that day. If the NASDAQ closes prior to the close of business on a day when one or more of the Funds needs to execute a high volume of trades late in a trading day, a Fund, in particular the OTC Fund, might incur substantial trading losses. INVESTMENT TECHNIQUES AND OTHER INVESTMENT POLICIES Futures Contracts and Options Thereupon The Nova Fund and the OTC Fund may purchase stock index futures contracts as a substitute for a comparable market position in the underlying securities. The Ursa Fund may sell stock index futures contracts. The Bond Fund may purchase f u t ures contracts on U.S. Government Securities as a substitute for a comparable market position in the cash market. The Juno Fund may sell futures contracts on U.S. Government Securities. The principal trading markets for - 34 - S&P500 index futures contracts and U.S. Treasury bond futures contracts are the Chicago Mercantile Exchange (the "CME") and the Chicago Board of Trade (the "CBOT"), respectively. A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified commodity on the expiration date of the contract. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. The Nova Fund and the OTC Fund may purchase call options and write (sell) put options, and the Ursa Fund may purchase put options and write call options, on stock index futures contracts. The Bond Fund may purchase call options and write put options on U.S. Government Securities futures contracts and the Juno Fund may write call options and purchase put options on futures contracts on U.S. Government Securities. When a Fund purchases a put or call option on a futures contract, the Fund pays a premium for the right to sell or purchase the underlying futures contract for a specified price upon exercise at any time during the option period. By writing (selling) a put or call option on a futures contract, a Fund receives a premium in return for granting to the purchaser of the option the right to sell to or buy from the Fund the underlying futures contract for a specified price upon exercise at any time during the option period. Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying commodity. The extent of the Fund s loss from an unhedged short position in futures contracts or from writing (selling) call options on futures contracts is potentially unlimited. The Funds may engage in related closing transactions with respect to options on futures contracts. The Funds will only engage in transactions in futures contracts and options thereupon that are traded on a United States exchange or board of trade. In addition to the uses set forth hereunder, each Fund may also engage in futures and futures options transactions in order to hedge or limit the exposure of its position, to create a synthetic money market position, and for certain other tax- related purposes. See "Taxes." The Funds may purchase and sell futures contracts, index futures contracts, and options thereon only to the extent that such activities would be consistent with the requirements of Section 4.5 of the regulations under the Commodity Exchange Act promulgated by the Commodity Futures Trading Commission - 35 - (the "CFTC Regulations"), under which each of these Funds would be excluded from the definition of a "commodity pool operator." Under Section 4.5 of the CFTC Regulations, a Fund may engage in futures transactions, either for "bona fide hedging" purposes, as this term is defined in the CFTC Regulations, or for non-hedging purposes to the extent that the aggregate initial margins and option premiums required to establish such non-hedging positions do not exceed 5% of the liquidation value of the Fund s portfolio. In the case of an option on futures contracts that is "in-the-money" at the time of purchase (i.e., the amount by which the exercise price of the put option exceeds the current market value of the underlying security or the amount by which the current market value of the underlying security exceeds the exercise price of the call option), the in-the-money amount may be excluded in calculating this 5% limitation. When a Fund purchases or sells a stock index futures contract, or sells an option thereon, the Fund "covers" its position. To cover its position, a Fund may maintain with its custodian bank (and mark-to-market on a daily basis) a segregated account consisting of cash or high-quality liquid debt instruments, including U.S. Government Securities or repurchase agreements secured by U.S. Government Securities, that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position. If the Fund continues to engage in the described securities t r a ding practices and properly segregates assets, the segregated account will function as a practical limit on the amount of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund s o u t s tanding portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the obligations of the Fund arising from such investment activities. A Fund may cover its long position in a futures contract by purchasing a put option on the same futures contract with a strike price (i.e., an exercise price) as high or higher than the price of the futures contract, or, if the strike price of the put is less than the price of the futures contract, the Fund will maintain in a segregated account cash or high-grade liquid debt securities equal in value to the difference between the strike price of the put and the price of the future. A Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in i n struments the prices of which are expected to move relatively consistently with the futures contract. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures - 36 - contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the futures contract. A Fund may cover its sale of a call option on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike price of the call option, or, if the long position in the underlying futures contract is established at a price greater than the strike price of the written (sold) call, the Fund will maintain in a segregated account cash or high-grade liquid debt securities equal in value to the difference between the strike price of the call and the price of the future. A Fund may also cover its sale of a call option by taking positions in instruments the prices of which are expected to move relatively consistently with the call option. A Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying futures contract is established at a price less than the strike price of the written put, the Fund will maintain in a segregated account cash or high-grade liquid debt securities equal in value to the difference between the strike price of the put and the price of the future. A Fund may also cover its sale of a put option by taking positions in instruments the prices of which are expected to move relatively consistently with the put option. Although the Funds intend to sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby p r eventing prompt liquidation of futures positions and potentially subjecting a Fund to substantial losses. If trading is not possible, or a Fund determines not to close a futures position in anticipation of adverse price movements, the Fund will be required to make daily cash payments of variation margin. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national exchange with an active and liquid secondary market. Index Options Transactions - 37 - The Nova Fund, the OTC Fund, and the Metals Fund may purchase call options and write (sell) put options, and the Ursa Fund may purchase put options and write call options, on stock indexes. All of the Funds may write and purchase put and call options on stock indexes in order to hedge or limit the exposure of their positions, to create synthetic money market positions, and for certain other tax-related purposes. See "Taxes." A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indexes give the holder the right to receive an amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than (in the case of a call) or less than (in the case of a put) the exercise price of the option. The amount of cash received, if any, will be the difference between the closing price of the index and the exercise price of the option, multiplied by a specified dollar multiple. The writer (seller) of the option is obligated, in return for the premiums received from the purchaser of the option, to make delivery of this amount to the purchaser. U n like the options on securities discussed below, all settlements of index options transactions are in cash. Some stock index options are based on a broad market index such as the S&P 500 Index, the NYSE Composite Index, or the AMEX Major Market Index, or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index. Options currently are traded on the Chicago Board Options Exchange (the "CBOE"), the AMEX, and other exchanges ("Exchanges"). Purchased over-the-counter options and the cover for written over-the-counter options will be subject to the respective Fund s 15% limitation on investment in illiquid securities. See "Illiquid Securities." Each of the Exchanges has established limitations governing the maximum number of call or put options on the same index which may be bought or written (sold) by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different Exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by the same investment adviser are combined for purposes of these limits. Pursuant to these limitations, an Exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options which a Fund may buy or sell; however, the Advisor intends to comply with all limitations. - 38 - Index options are subject to substantial risks, including the risk of imperfect correlation between the option price and the value of the underlying securities comprising the stock index selected and the risk that there might not be a liquid secondary market for the option. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether a Fund will realize a gain or loss from the purchase or writing (sale) of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indexes, in an industry or market segment, rather than upon movements in the price of a particular stock. Whether a Fund will realize a profit or loss by the use of options on stock indexes will depend on movements in the direction of the stock market generally or of a particular industry or market segment. This requires different skills and techniques than are required for predicting changes in the price of individual stocks. A Fund will not enter into an option position that exposes the Fund to an obligation to another party, unless the Fund either (i) owns an offsetting position in securities or other options and/or (ii) maintains with the Fund s custodian bank (and marks-to-market on a daily b a s is) a segregated account consisting of cash, U.S. G o vernment Securities, or other liquid high-grade debt securities that, when added to the premiums deposited with respect to the option, are equal to the market value of the underlying stock index not otherwise covered. Options on Securities The Nova Fund, the OTC Fund, and Metals Fund may buy call options and write (sell) put options on securities, and the Ursa Fund may buy put options and write call options on securities. By buying a call option, a Fund has the right, in return for a premium paid during the term of the option, to buy the securities underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to deliver the securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for a premium paid during the term of the option, to sell the securities underlying the option at the exercise price. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price. Options on securities written (sold) by the Funds will be conducted on recognized securities exchanges. When writing (selling) call options on securities, a Fund may cover its position by owning the underlying security on which the option is written. Alternatively, the Fund may cover its position by owning a call option on the underlying security, - 39 - on a share for share basis, which is deliverable under the option contract at a price no higher than the exercise price of the call option written by the Fund or, if higher, by owning such call option and depositing and maintaining in a segregated account cash or liquid high-grade debt securities equal in value to the difference between the two exercise prices. In addition, a Fund may cover its position by depositing and maintaining in a segregated account cash or liquid high-grade debt securities equal in value to the exercise price of the call option written by the Fund. When a Fund writes (sells) a put option, the Fund will have and maintain on deposit with its custodian bank cash or liquid high-grade debt securities having a value equal to the exercise value of the option. The principal reason for a Fund to write (sell) call options on stocks held by the Fund is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. If a Fund that writes (sells) an option wishes to terminate the Fund s obligation, the Fund may effect a "closing purchase transaction." The Fund accomplishes this by buying an option of the same series as the option previously written by the Fund. The effect of the purchase is that the writer s position will be canceled by the Options Clearing Corporation. However, a writer (seller) may not effect a closing purchase transaction after the writer has been notified of the exercise of an option. Likewise, a Fund which is the holder of an option may liquidate its position by effecting a "closing sale transaction." The Fund accomplishes this by selling an option of the same series as the option previously purchased by the Fund. There is no guarantee that either a closing purchase or a closing sale transaction can be effected. If any call or put option is not exercised or sold, the option will become worthless on its expiration date. A Fund will realize a gain (or a loss) on a closing purchase transaction with respect to a call or a put option previously written (sold) by the Fund if the premium, plus commission costs, paid by the Fund to purchase the call or put option to close the transaction is less (or greater) than the premium, less commission costs, received by the Fund on the sale of the call or the put option. The Fund also will realize a gain if a call or put option which the Fund has written lapses unexercised, because the Fund would retain the premium. A Fund will realize a gain (or a loss) on a closing sale transaction with respect to a call or a put option previously purchased by the Fund if the premium, less commission costs, received by the Fund on the sale of the call or the put option to close the transaction is greater (or less) than the premium, plus commission costs, paid by the Fund to purchase - 40 - the call or the put option. If a put or a call option which the Fund has purchased expires out-of-the-money, the option will become worthless on the expiration date, and the Fund will realize a loss in the amount of the premium paid, plus commission costs. Although certain securities exchanges attempt to provide continuously liquid markets in which holders and writers of options can close out their positions at any time prior to the expiration of the option, no assurance can be given that a market will exist at all times for all outstanding options purchased or sold by a Fund. If an options market were to become unavailable, the Fund would be unable to realize its profits or limit its losses until the Fund could exercise options it holds, and the Fund would remain obligated until options it wrote were exercised or expired. Because option premiums paid or received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in common stocks. Short Sales The Ursa Fund and the Juno Fund also may engage in short sales transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividends or interest which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. Until the Ursa Fund or Juno Fund closes its short position or replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid high grade debt securities at such a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the security sold short and (ii) the amount deposited in the segregated account plus the amount deposited with the broker as collateral will not be less than the market value of the security at the time the security was sold short; or (b) otherwise cover the Fund s short position. - 41 - The Nova Fund, the OTC Fund, and the Metals Fund each may engage in short sales if, at the time of the short sale, the Fund owns or has the right to acquire an equal amount of the security being sold at no additional cost ("selling against the box"). These Funds may make a short sale when the Fund wants to sell the security the Fund owns at a current attractive price, but also wishes to defer recognition of a gain or loss for Federal income tax purposes and for purposes of satisfying certain tests applicable to regulated investment companies under the Internal Revenue Code. U.S. Government Securities The Bond Fund and the Money Market Fund may invest in U.S. G o v e rnment Securities in pursuit of their investment objectives. The Funds, except for the Money Market Fund, may invest in U.S. Government Securities as "cover" for the investment techniques these Funds employ as part of a cash reserve or for liquidity purposes. Yields on short-, intermediate-, and long-term U.S. Government Securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. Government Securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of a Fund s portfolio investments in U.S. Government Securities, while a decline in interest rates would generally increase the market value of a Fund s portfolio investments in these securities. S o m e obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government are backed by the full faith and credit of the U.S. Treasury. Such agencies and instrumentalities may borrow funds from the U.S. Treasury. However, no assurances can be given that the U.S. Government will provide such financial support to the obligations of the other U.S. Government agencies or instrumentalities in which a Fund invests, since the U.S. Government is not obligated to do so. These other agencies and instrumentalities are supported by either the issuer s right to borrow, under certain circumstances, an amount limited to a specific line of credit from the U.S. Treasury, the discretionary authority of the U.S. Government to purchase certain obligations of an agency o r i nstrumentality, or the credit of the agency or instrumentality itself. - 42 - U.S. Government Securities may be purchased at a discount. Such securities, when held to maturity or retired, may include an element of capital gain. Capital losses may be realized when such securities purchased at a premium are held to maturity or are called or redeemed at a price lower than their purchase price. Capital gains or losses also may be realized upon the sale of securities. Repurchase Agreements U.S. Government Securities include repurchase agreements secured by U.S. Government Securities. Under a repurchase agreement, a Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. A Fund will enter into repurchase agreements only with member banks of the Federal R e s erve System or primary dealers of U.S. Government Securities. The Advisor will monitor the creditworthiness of each of the firms which is a party to a repurchase agreement with any of the Funds. In the event of a default or bankruptcy by the seller, the Fund will liquidate those securities (whose market value, including accrued interest, must be at least equal to 100% of the dollar amount invested by the Fund in each repurchase agreement) held under the applicable repurchase agreement, which securities constitute collateral for the seller s obligation to pay. However, liquidation could involve costs or delays and, to the extent proceeds from the sales of these securities were less than the agreed-upon repurchase price, the Fund would suffer a loss. A Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Funds to treat repurchase agreements that do not mature within seven days as illiquid for the purposes of their investment policies. Illiquid Securities While none of the Funds anticipates doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ( restricted securities ) under the Securities Act of 1933, as - 43 - amended (the 1933 Act ), but which can be offered and sold to qualified institutional buyers under Rule 144A under the 1933 Act. A Fund will not invest more than 15% (10% with respect to the Money Market Fund) of the Fund s net assets in illiquid securities. Each Fund will adhere to a more restrictive limitation on the Fund s investment in illiquid securities as required by the securities laws of those jurisdictions where shares of the Fund are registered for sale. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the Commission staff, illiquid securities also are considered to include, among other securities, purchased over-the-counter options, certain cover for over-the-counter options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities laws. The Fund may not be able to sell illiquid securities when the Advisor considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investment in illiquid securities may have an adverse impact on net asset value. Cash Reserve As a cash reserve or for liquidity purposes, each Fund may temporarily invest all or part of the Fund s assets in cash or cash equivalents, which include, but are not limited to, short-term money market instruments, U.S. Government Securities, certificates of deposit, banker s acceptances, or repurchase agreements secured by U.S. Government Securities. Other Investment Policies The Funds also may engage in certain other investment practices described below, however none of the Funds presently intends to invest more than 5% of the Fund's net assets in any of these practices. Each of the Funds may purchase securities on a when-issued or delayed-delivery basis, and also may lend portfolio securities to brokers, dealers, and financial institutions. Each Fund may borrow money, and the Nova and Bond Funds also may borrow money for investment purposes. Each of the Funds (other than the Bond and Money Market Funds) also may invest in the securities of other investment companies to the extent that such an investment would be - 44 - consistent with the requirements of Section 12(d)(1) of the 1940 Act. In addition, the Bond and Juno Funds also may invest in U.S. Treasury zero coupon securities, while each of the Ursa, Juno, and Money Market Funds also may use reverse repurchase agreements as part of that Fund's investment strategies. A more-detailed explanation of these investment practices, including the risks associated with each practice, is included in the Statement of Additional Information. PORTFOLIO TRANSACTIONS AND BROKERAGE The Advisor determines which securities to purchase and sell for each Fund, selects brokers and dealers to effect the transactions, and negotiates commissions. The Advisor expects t h at the Funds may execute brokerage or other agency t r a n sactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities E x change Act of 1934, as amended, and the rules and regulations thereunder. In placing orders for portfolio transactions, the Advisor s policy is to obtain the most favorable price and efficient execution available. Brokerage commissions are normally paid on exchange-traded securities transactions and on options and futures transactions, as well as on common stock transactions. In order to obtain the brokerage and research services described below, a higher commission may sometimes be paid. The ability to receive research services, however, may be a factor in the selection of one dealer acting as a principal over another. W h en selecting broker-dealers to execute portfolio transactions, the Advisor considers many factors including the rate of commission or size of the broker-dealer s "spread," the size and difficulty of the order, the nature of the market for the security, the willingness of the broker-dealer to p o sition, the reliability, financial condition, general execution and operational capabilities of the broker-dealer, and the research, statistical and economic data furnished by the broker-dealer to the Advisor. The Advisor uses these services in connection with all of the Advisor s investment activities, including other investment accounts the Advisor advises. Conversely, brokers or dealers which supply research may be selected for execution of transactions for such other accounts, while the data may be used by the Advisor in providing investment advisory services to the Funds. HOW TO INVEST IN THE FUNDS For shareholders who have engaged a registered investment adviser with discretionary authority over the shareholder s account, the minimum initial investment in the Trust is $15,000. For all other shareholder accounts ("Self-Directed - 45 - Accounts"), the minimum initial investment in the Trust is $25,000. These minimums also apply to retirement plan accounts. The Trust, at its discretion, may accept lesser amounts in certain circumstances. The shares of each Fund are offered at the daily public offering price, which is the net asset value per share (see "Determination of Net Asset Value") next computed after receipt of the investor s order. No sales charges are imposed on initial or subsequent investments in a Fund. The Trust reserves the right to reject or refuse, at the Trust s discretion, any order for the purchase of a Fund s shares in whole or in part. There is no minimum amount for subsequent investments in a Fund. Investments in the Funds may be made (i) through securities dealers who have the responsibility to transmit orders promptly and who may charge a processing fee or (ii) directly with the Trust by mail or by bank wire transfer as follows: By Mail: Fill out an application and make out a check payable to "Rydex Series Trust." Mail the check along with the application to: Rydex Series Trust 6116 Executive Boulevard, Suite 400 Rockville, Maryland 20852 By Bank Wire Transfer: Request a wire transfer to: Star Bank, N.A. Routing Number: 0420-00013 For Account of Rydex Series Trust Account Number: 48038-9030 Your Name Your Account Number or, if a new account, Federal Tax I.D. Number (e.g., Social Security Number) After instructing your bank to transfer money by wire, please call the Trust and inform the Trust as to the amount you have transferred and the name of the bank sending the transfer. Your bank may charge a fee for such services. If the purchase is canceled because your wire transfer is not received, you may be liable for any loss that the Trust may incur. I n the interest of economy and convenience, physical certificates representing a Fund s shares are not issued. Shares of each Fund are recorded on a register by the Trust s transfer agent. REDEEMING AN INVESTMENT (WITHDRAWALS) - 46 - General An investor may withdraw all or any portion of his investment by redeeming Fund shares at the next-determined net asset value per share after receipt of the order. Redemptions may be made by letter or by telephone subject to the procedures set forth below. The privilege to initiate redemption transactions by telephone will be made available to Fund shareholders automatically. Telephone redemptions will be sent only to the address of record of the redeeming investor or to bank accounts specified by the redeeming investor in his account application. The Trust charges $15 for each wire transfer of redemption proceeds; this charge may be waived at the discretion of the Trust. If any investor purchases shares of a Fund by check, the purchaser may not wire out any proceeds of a redemption of such shares for the 30 calendar days following the purchase. The proceeds of non-telephone redemptions will be sent directly to the investor s address of record. If the investor requests payment of redemptions to a third party or to a location other than the investor s address of record or a bank account specified in the investor s account application, this request must be in writing and the investor s signature must be guaranteed by a commercial bank; a broker, dealer, municipal securities dealer, municipal securities broker, government securities dealer, or government securities broker; a credit union; a national securities exchange, registered securities association, or clearing agency; or a savings association. Each Fund will redeem its shares at a redemption price equal to the net asset value of the shares as next computed following the receipt of a request for redemption. There is no redemption charge. Payment for the redemption price will be made within seven days after the Trust s receipt of the request for redemption. For investments that have been made by check, payment on withdrawal requests may be delayed until the Trust s transfer agent is reasonably satisfied that the purchase payment has been collected by the Trust (which may require up to 10 business days). An investor may avoid a delay in receiving redemption proceeds by purchasing shares with a certified check. With respect to each Fund, the right of redemption may be suspended, or the date of payment postponed: (i) for any period during which the NYSE, the Federal Reserve Bank of New York (the New York Fed ), the NASDAQ, the CME, or the CBOT, as appropriate, is closed (other than customary weekend or holiday closings) or trading on the NYSE, the NASDAQ, the CME, or the CBOT, as appropriate, is restricted; (ii) for any period during which an emergency exists so that disposal of - 47 - the Fund s investments or the determination of its net asset value is not reasonably practicable; or (iii) for such other periods as the Commission, by order, may permit for protection of the Fund s investors. Because of the administrative expense of handling small accounts, the Trust reserves the right to redeem involuntarily an investor s account, including a retirement account, which falls below the applicable minimum investment in total value in the Trust due to redemptions. The involuntary redemption of a retirement account may have an adverse tax effect. In addition, both a request for a partial redemption by an investor whose account balance is below the minimum investment and a request for a partial redemption by an investor that would bring the account balance below the minimum investment will be treated as a request by the investor for a complete redemption of that account. The Trust reserves the right to modify its minimum investment requirements and the corresponding amounts below which involuntary redemptions may be effected. Draft Checks With respect to shares of the Money Market Fund, investors may elect to redeem such shares by draft check (minimum check - $500) made payable to the order of any person or institution. Upon the Trust s receipt of a completed signature card, investors will be supplied with draft checks which are drawn on the Money Market Fund s account and are paid through the Money Market Fund s custodian, Star Bank, N.A. The Trust reserves the right to change or suspend this checking service. There is a $25 charge for each stop payment request on the draft checks. Investors are subject to the same rules and regulations that the banks apply to checking accounts. An investors Money Market Fund account may not be closed by draft check. EXCHANGES Shares of any Rydex Fund may be exchanged, without any charge, for shares of any other Rydex Fund on the basis of the respective net asset values of the shares involved. Exchanges with respect to Self-Directed Accounts must be for at least the lesser of $1,000 or 100% of the account value for the Fund from which the transfer is made. The Trust currently is composed of nine separate Rydex Funds, seven of which Funds, The Nova Fund, The Ursa Fund, The Rydex OTC Fund (the OTC Fund ), The Rydex Precious Metals Fund (the Metals Fund ), The Rydex U.S. Government Bond Fund, The Juno Fund, and The Rydex U.S. Government Money Market Fund (the Money Market Fund ), are described in this Prospectus. The eighth and ninth series of the Trust, The Rydex High Yield Fund (the - 48 - High Yield Fund ) and The Rydex Institutional Money Market Fund (the "Institutional Fund"), are each described in a separate prospectus; other separate Rydex Funds may be added in the future. The minimum initial investment in the Institutional Fund for all shareholder accounts, including retirement plan accounts, is $2,000,000, and an exchange into the Institutional Fund is permitted only if the Institutional F u nd s minimum investment of $2,000,000 is satisfied. Exchanges may be made by letter or by telephone subject to the procedures set forth below. To implement an exchange, shareholders should provide the following information: account name, account number, taxpayer identification number, number of or percentage of shares or dollar value of shares to be exchanged, and the names of the Rydex Funds involved in the exchange transaction. Exchanges may be made only if such exchanges are between identically registered accounts. Shareholders contemplating such an exchange for shares of a Rydex Fund not described in this Prospectus should obtain and review the prospectus of the Rydex Fund to which the investment is to be transferred. The exchange privilege is available only in states where the e x change legally may be made and may be modified or discontinued at any time. Shares of the Money Market Fund received in an exchange for shares of the OTC Fund or the Metals Fund are issued on the third business day following the day on which the Rydex Fund receives the exchange request. PROCEDURES FOR REDEMPTIONS AND EXCHANGES Written requests for redemptions and exchanges should be sent to the Rydex Series Trust, 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, and should be signed by the record owner or owners. Telephone redemption and exchange requests with respect to the Rydex Funds may be made by calling (800) 820-0888 or (301) 468-8520, on any day the Trust is open for business. Such requests may be made only between 8:30 A.M., Eastern Time, and the times indicated below (all times are Eastern Time). For exchanges, the earlier of the times indicated below for the Funds whose shares are being exchanged applies. The Nova, Ursa, and Rydex OTC Funds . . . . 3:45 P.M. The Rydex Precious Metals Fund . . . . . . . 3:30 P.M. The Rydex U.S. Government Bond and Juno Funds 2:45 P.M. The Rydex High Yield Fund 2:15 P.M. - 49 - Telephone redemption and exchange orders will be accepted only during the period indicated above. If the primary exchange or market on which a Fund transacts business closes early, the above cut-off time will be approximately fifteen minutes (thirty minutes, in the case of the Precious Metals Fund, and forty-five minutes in the case of the High Yield Fund) prior to the close of such exchange or market. Telephone redemption and exchange privileges may be terminated or modified by the Trust at any time. When acting on instructions believed to be genuine, the Trust will not be liable for any loss resulting from a fraudulent telephone transaction request and the investor would bear the risk of any such loss. The Trust will employ reasonable procedures to confirm that telephone instructions are genuine; and if the Trust does not employ such procedures, then the Trust may be liable for any losses due to unauthorized or f r a u dulent instructions. The Trust follows specific procedures for transactions initiated by telephone, including, among others, requiring some form of personal identification prior to acting upon instructions received by telephone, providing written confirmation not later than five business days after such transactions, and/or tape recording of telephone instructions. Investors also should be aware that telephone redemptions or exchanges may be difficult to implement in a timely manner during periods of drastic economic or market changes. If such conditions occur, redemption or exchange orders can be made by mail. DETERMINATION OF NET ASSET VALUE The net asset value of the shares of the Nova Fund, the Ursa Fund, the Metals Fund, and the OTC Fund is determined each day on which the NYSE is open for business as of the close of normal trading on the NYSE (currently 4:00 P.M., Eastern Time). The net asset value of the shares of the High Yield Fund, the Money Market Fund, and the Institutional Fund is determined each day on which both the NYSE and the New York Fed are open for business. Currently, the NYSE and the New York Fed are closed on weekends, and the following holiday closings have been scheduled for 1996: (i) New Year's Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any of those holidays falls on a Saturday or the subsequent Monday when any of these holidays falls on a Sunday. The High Yield Fund determines its net asset value at 3:00 P.M., Eastern Time, and the Money Market Fund and the Institutional Fund each determines its net asset value at 1:00 P.M., Eastern Time, on such days. The net asset value of the shares of the Bond Fund and the Juno Fund is determined each day on which the CBOT is open for trading futures contracts on - 50 - U.S. Treasury bonds as of the close of normal trading on the CBOT (normally 3:00 P.M., Eastern Time). Currently, the CBOT is closed on weekends and on the following holidays: (i) New Year s Day, Martin Luther King, Jr. Day, President s Day, Memorial Day, July Fourth, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any one of those holidays falls on a Saturday or the subsequent Monday when any one of those holidays falls on a Sunday. To the extent that portfolio securities of a Fund are traded in other markets on days when the Fund s principal trading market(s) is closed, the Fund s net asset value may be affected on days when investors do not have access to the Fund to purchase or redeem shares. Although the Trust expects the same holiday schedules to be observed in the future, the NYSE, the CBOT, and the New York Fed each may modify its holiday schedule at any time. The net asset value of a Fund serves as the basis for the purchase and redemption price of that Fund s shares. The net asset value per share of a Fund is calculated by dividing the market value of the Fund s securities plus the values of its o t her assets, less all liabilities, by the number of outstanding shares of the Fund. If market quotations are not readily available, a security will be valued at fair value by the Board of Trustees or by the Advisor using methods established or ratified by the Board of Trustees. The Money Market Fund will utilize the amortized cost method in valuing that Fund s portfolio securities, which method involves valuing a security at its cost adjusted by a constant a m o rtization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share for the Money Market Fund of $1.00. However, there is no assurance that the $1.00 net asset value will be maintained. For further information regarding the amortized cost method for valuing the Money Market Fund s portfolio securities, see "Determination of Net Asset Value" in the Statement of Additional Information. For purposes of determining net asset value per share of a Fund, options and futures contracts will be valued 15 minutes after the 4:00 P.M., Eastern Time, close of trading on the NYSE, except that U.S. Treasury bond options and futures contracts traded on the CBOT will be valued at 3:00 P.M., Eastern Time, the close of trading of that exchange. Options on securities and indices purchased by a Fund generally are valued at their last bid price in the case of exchange-traded options or, in the case of options traded in the OTC market, the average of the last bid price as obtained from two or more dealers unless there is only one dealer, in which case that - 51 - dealer s price is used. The value of a futures contract equals the unrealized gain or loss on the contract that is determined by marking the contract to the current settlement price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the current settlement price for a like option acquired on the day on which the option is being valued. A settlement price may not be used for the foregoing purposes if the market makes a limit move with respect to a particular commodity. OTC securities held by a Fund shall be valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges or foreign stock exchanges are taken at the last sales price of such securities on such exchange; if no sales price is reported, the mean of the last bid and asked price is used. For valuation purposes, all assets and liabilities initially expressed in foreign currency values will be converted into U.S. dollar values at the mean between the bid and the offered quotations of such currencies against U.S. dollars as last quoted by any recognized dealer. If such quotations are not available, the rate of exchange will be determined in good faith by the Trustees. Dividend income and other distributions are recorded on the ex-dividend date, except for certain dividends from foreign securities which are recorded as soon as the Trust is informed after the ex-dividend date. lliquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of certain responsibilities regarding valuation to the Advisor or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determination. The Trustees, from time to time, will review these methods of valuation and will recommend changes which may be necessary to assure that the investments of the Funds are valued at fair value. TAX-SHELTERED RETIREMENT PLANS Tax-sheltered retirement plans of the following types will be available to investors: Individual Retirement Accounts (IRAs) Keogh Accounts - Defined Contribution Plans (Profit-Sharing Plans) - 52 - Keogh Accounts - Money Purchase Plans Pension Plans) Internal Revenue Code Section 403(b) Plans Retirement plans are charged an annual $15.00 maintenance fee. Additional information regarding these accounts, including the annual maintenance fee, may be obtained by contacting the Trust. TRANSACTION CHARGES In addition to charges described elsewhere in this Prospectus, the Trust also may make a charge of $25 for items returned for insufficient or uncollectible funds. DIVIDENDS AND DISTRIBUTIONS General All income dividends and capital gains distributions of each Fund automatically will be reinvested in additional shares of the Fund at the net asset value calculated on the ex-dividend date, unless an investor has requested otherwise from the Trust in writing. Dividends and distributions of a Fund are taxable to the shareholders of the Fund, as discussed below under "Taxes," whether such dividends and distributions are reinvested in additional shares of the Fund or are received in cash. Statements of account will be sent to the Fund shareholders at least quarterly. The Nova Fund; The Ursa Fund; The Rydex OTC Fund; The Rydex Precious Metals Fund; The Juno Fund The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, and the Juno Fund each intend to distribute annually any net i n v e stment income and net realized capital gains to shareholders. The Trustees, however, may declare a special distribution for any of these Funds if the Trustees believe that such a distribution would be in the best interests of the shareholders of that Fund. The Rydex U.S. Government Bond Fund The Bond Fund intends (i) to declare dividends of ordinary income for shares of the Bond Fund on a daily basis, and to distribute such dividends to shareholders of the Bond Fund on a monthly basis, and (ii) to distribute annually any long-term capital gains to the shareholders of the Bond Fund. The Rydex U.S. Government Money Market Fund - 53 - The Money Market Fund ordinarily (i) declares dividends of net investment income (and net short-term capital gains, if any) for shares of the Money Market Fund on a daily basis and (ii) distributes such dividends to shareholders of the Money Market Fund on a monthly basis. The Trustees, however, may revise this dividend and distribution policy of the Money Market Fund, postpone the payment of dividends thereunder, or take any other action necessary with respect thereto in order to facilitate, to the extent possible, the maintenance by the Money Market Fund of a constant net asset value per share of $1.00. TAXES The Internal Revenue Code provides that each investment portfolio of a series investment company is to be treated as a separate corporation. Accordingly, each of the Funds will seek to qualify for treatment as a regulated investment company (a "RIC") under Subchapter M of the Code. Because of the nature of the investment strategies and the expected turnover of the portfolios of the Funds, there can be no assurance that a Fund will qualify for such treatment. If a Fund qualifies as a RIC and satisfies the distribution requirements under the Code for any taxable year, the Fund itself will not be subject to income tax on the ordinary i n c o me and capital gains it has distributed to its shareholders for that year. To qualify as a RIC under the Code, a Fund must satisfy certain requirements, including the requirements that the Fund receive at least 90% of the Fund s gross income each year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to the Fund s investments in stock, securities, and foreign currencies (the "90% Test"), and that the Fund derive less than 30% of the Fund s gross income from the sale or other disposition of any of the following instruments which have been held for less than three months (the "30% Test"): (i) stock or securities; (ii) certain options, futures, or forward contracts; or (iii) foreign currencies (or certain options, futures, or forward contracts on such foreign currencies). Provided that a Fund (i) is a RIC and (ii) distributes at least 90% of the Fund s net investment income (including, for this purpose, net realized short-term capital gains), the Fund itself will not be subject to Federal income taxes to the extent the Fund s net investment income and the Fund s net realized long- and short-term capital gains, if any, are distributed to the shareholders of that Fund. To avoid an excise tax on its undistributed income, each Fund generally must distribute at least 98% of its income, including its net long-term capital gains. - 54 - Satisfaction of the 90% Test will impose limitations on the investment strategies that may be pursued by any of the Funds, and in particular by the Metals Fund. Income from investments in precious metals and minerals will not be qualifying income for purposes of the 90% Test. Therefore, the Metals Fund will seek to limit its investment transactions in precious metals and minerals so as to avoid a violation of the 90% Test. I n addition, because of the anticipated frequency of redemptions and exchanges of the shares of the Funds, each of the Funds, other than the Money Market Fund, will have greater difficulty than other mutual funds in satisfying the 30% Test. The Trust expects that investors in the Funds, as part of their market-timing investment strategy, are likely to redeem or exchange their shares in the Funds frequently to take advantage of anticipated changes in market conditions. Such redemptions or exchanges are likely to require a Fund to sell securities to meet the Fund s payment obligations. The larger the volume of such redemptions or exchanges, the more difficult it will be for the Fund to satisfy the 30% Test. To minimize the risk of failing the 30% Test, each of the Funds intends to satisfy obligations in connection with redemptions and exchanges first by using available cash or borrowing facilities and by selling securities that have been held for at least three months or as to which there will be a loss or the smallest gain. If a Fund also must sell securities that have been held for less than three months, then, to the extent possible, the Fund will seek to conduct such sales in a manner that will allow such sales to qualify for a special provision in the Code that excludes from the 30% Test any gains r e s u lting from sales made as a result of "abnormal redemptions." To the reduce the risk of failing the 30% Test, the Funds (other than the Money Market Fund) also may engage i n other investment techniques, including engaging in transactions in futures contracts and options on futures contracts and indexes on an unrestricted basis (subject to the investment policies of the Funds and Commission regulations). Notwithstanding these actions, there can be no assurance that a Fund will be able to satisfy the 30% Test. For additional information concerning this special Code provision, see "Dividends, Distributions, and Taxes" in the Statement of Additional Information. If the Trust determines that a Fund will not qualify as a RIC under Subchapter M of the Internal Revenue Code, the Trust will establish procedures for that Fund to reflect the anticipated tax liability in the Fund s net asset value. To the extent that management of a Fund determines that Federal income taxes will more likely than not be payable by the Fund with respect to the Fund s current tax year, the Fund intends to make a good-faith estimate of the potential tax liability - 55 - of the Fund and to make an accrual for tax expenses. Thereafter, the Fund would make a daily determination whether it is appropriate for the Fund to continue to accrue for a tax expense and, if so, to make a good-faith estimate of the Fund s potential tax liability. Any amount by which the accrual is reduced, or the entire amount of the accrual if the Fund determines that the accrual is no longer appropriate, will be reclassified as income to the Fund. Under current law, dividends derived from interest and dividends received by a Fund, together with distributions of any short-term capital gains, if any, are taxable to the shareholders of the Fund, as ordinary income at Federal income tax rates of up to 39.6%, whether or not such dividends and distributions are reinvested in shares of such Fund or are received in cash. Under current law, distributions of net long-term gains, if any, realized by a Fund and designated as capital gains distributions will be taxed to the shareholders of that Fund as long-term capital gains regardless of the length of time the shares of that Fund have been held. Currently, long-term capital gains of individual investors are taxed at rates of up to 28%. Statements as to the Federal tax status of shareholders dividends and distributions will be mailed annually. Shareholders should consult their tax advisors concerning the tax status of the Funds dividends in their own states and localities. Ordinary dividends paid to corporate or individual residents o f foreign countries generally are subject to a 30% withholding tax. The rate of withholding tax may be reduced if the United States has an income tax treaty with the foreign c o u n try where the recipient resides. Capital gains distributions received by foreign investors should, in most cases, be exempt from U.S. tax. A foreign investor will be required to provide the Fund with supporting documentation in order for the Fund to apply a reduced rate or exemption from U.S. withholding tax. Shareholders are required by law to certify that their tax identification number is correct and that they are not subject to back-up withholding. In the absence of this certification, the Trust is required to withhold taxes at the rate of 31% on dividends, capital gains distributions, and redemptions. Shareholders who are non-resident aliens may be subject to a withholding tax on dividends earned. - 56 - MANAGEMENT OF THE TRUST Investment Adviser The Trust is provided investment advice and management services by PADCO Advisors, Inc., a Maryland corporation with offices at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The Advisor was incorporated in the State of Maryland on February 5, 1993. Albert P. Viragh, Jr., the Chairman of the Board and the President of the Advisor, owns a controlling interest in the Advisor. From 1985 until the incorporation of the Advisor, Mr. Viragh was a Vice President of Money Management Associates ("MMA"), a Maryland-based registered investment adviser. From 1992 to June 1993, Mr. Viragh was the portfolio manager of The Rushmore Nova Portfolio, a series of The Rushmore Fund, Inc., an investment company managed by MMA. From 1989 to 1992, Mr. Viragh was the Vice President of Sales and Marketing for The Rushmore Fund, Inc. Mr. Viragh received his bachelor s degree in Business Administration from Spring Hill College, of Mobile, Alabama, in 1964. The portfolio manager for the Nova Fund and the Juno Fund is Thomas Michael, who joined the Advisor in March 1994. From 1992 to February 1994, Mr. Michael was a financial markets analyst at Cedar Street Investment Management Co., of Chicago, Illinois, an institutional consulting firm specializing in developing hedging and speculative strategies in stock index futures contracts and U.S. Treasury bond futures contracts. From 1989 to 1991, Mr. Michael was the Director of Research for Chronometrics, Inc., of Chicago, Illinois, a registered commodity trading advisor and was responsible for managing the firm s proprietary, on-line trading model for twelve financial futures contracts. Mr. Michael received his bachelor of arts degree in Geology from Colgate University, of Hamilton, New York, in 1974. The portfolio manager for the OTC Fund and the Bond Fund is Terry Apple, who joined the Advisor in January 1994. From 1992 to December 1993, Mr. Apple was employed by MMA and was the Director of Investments for The Rushmore Funds, Inc. From 1985 to 1991, Mr. Apple was a Vice President and the Director of Technical Research for Cale Futures, Inc. ("Cale"), of Hilton Head, South Carolina, a registered commodity trading advisor, and managed Multitech Partners, a commodity pool advised by Cale. Mr. Apple received his bachelor s degree in Business Administration from Baylor University, of Waco, Texas, in 1964. The portfolio manager of the Ursa Fund, the Metals Fund, and the Money Market Fund is Michael P. Byrum. Prior to joining the PADCO Advisors, Inc. organization in July 1993, Mr. Byrum - 57 - worked for one year as an investor representative with MMA. Mr. Byrum s responsibilities at MMA included brokerage solicitation and investor relations. Mr. Byrum received his bachelor s degree in Business Administration from Miami University, of Oxford, Ohio, in 1992. Under an investment advisory agreement between the Trust and the Advisor, dated May 14, 1993, and as most recently amended on September 25, 1996, the Funds each pay the Advisor a fee at an annualized rate, based on the average daily net assets for each respective Fund, of 0.75% for the Nova Fund, the OTC Fund, and the Metals Fund, 0.90% for the Ursa Fund and the Juno Fund, and 0.50% for the Bond Fund and the Money Market Fund. The Advisor manages the investment and the reinvestment of the assets of each of the Funds, in accordance with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Trustees and the officers of the Trust. The Advisor bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated persons of the Advisor. The Advisor, from its own resources, including profits from advisory fees received from the Funds, provided such fees are legitimate and not excessive, also may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of Fund shares, and otherwise currently pays all distribution costs for Fund shares. Servicer General administrative, shareholder, dividend disbursement, transfer agent, and registrar services are provided to the Trust and the Funds by PADCO Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Servicer"), subject to the general supervision and control of the Trustees and the officers of the Trust, pursuant to a service agreement between the Trust and the Servicer, dated S e p tember 19, 1995, and as most recently amended on September 25, 1996. Under this service agreement, the Funds each pay the Servicer a fee at an annualized rate, based on the average daily net assets for each respective Fund, of 0.25% for the Nova Fund, Ursa Fund, and the Juno Fund and 0.20% for the other Funds. The Servicer provides the Trust and the Funds with all required general administrative services, including, without limitation, office space, equipment, and personnel; clerical and general back office services; bookkeeping, internal accounting, and secretarial services; the determination of net asset values; and the preparation and filing of all reports, - 58 - registration statements, proxy statements, and all other materials required to be filed or furnished by the Trust and the Funds under Federal and state securities laws. The Servicer also maintains the shareholder account records for t h e T rust and the Funds, distributes dividends and distributions payable by the Funds, and produces statements with respect to account activity for the Funds and their shareholders. The Servicer pays all fees and expenses that are directly related to the services provided by the Servicer to the Trust; each Fund reimburses the Servicer for all fees and expenses incurred by the Servicer which are not directly related to the services the Servicer provides to the Fund under the service agreement. Costs and Expenses Each Fund bears all expenses of its operations other than those assumed by the Advisor or the Servicer. Fund expenses include: the management fee; the servicing fee (including administrative, transfer agent, and shareholder servicing fees); custodian and accounting fees and expenses; legal and auditing fees; securities valuation expenses; fidelity bonds and other insurance premiums; expenses of preparing and printing prospectuses, confirmations, proxy statements, and s h areholder reports and notices; registration fees and expenses; proxy and annual meeting expenses, if any; all F e d e r al, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); organizational costs; and non-interested Trustees fees and expenses. For the period from July 1, 1995 through June 30, 1996, the total expenses paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund were approximately 1.31%, 1.39%, 1.33%, 1.33%, 1.26%, 1.64%, and 0.99% of the respective Fund s average net assets. PERFORMANCE INFORMATION Total Return Calculations From time to time, each of the Funds (other than the Money Market Fund) may advertise the total return of the Fund for prior periods. Any such advertisement would include at least average annual total return quotations for one, five, and ten- year periods, or for the life of the Fund. Other total return quotations, aggregate or average, over other time periods for the Fund also may be included. The total return of a Fund for a particular period represents the increase (or decrease) in the value of a hypothetical investment in the Fund from the beginning to the end of the period. Total return is calculated by subtracting the value - 59 - of the initial investment from the ending value and showing the difference as a percentage of the initial investment; this calculation assumes that the initial investment is made at the current net asset value and that all income dividends or capital gains distributions during the period are reinvested in shares of the Fund at net asset value. Total return is based on historical earnings and asset value fluctuations and i s not intended to indicate future performance. No adjustments are made to reflect any income taxes payable by shareholders on dividends and distributions paid by the Fund. Average annual total return quotations for periods of two or more years are computed by finding the average annual compounded rate of return over the period that would equal the initial amount invested to the ending redeemable value. A more-detailed description of the method by which the total return of a Fund is calculated is contained in the Statement o f Additional Information under "Calculation of Return Quotations." Yield Calculations In addition to total return information, the Bond Fund may also advertise its current "yield." Yield figures are based on historical earnings and are not intended to indicate future performance. Yield is determined by analyzing the Bond Fund s net income per share for a thirty-day (or one-month) period (which period will be stated in the advertisement), and dividing by the maximum offering price per share on the last day of the period. A "bond equivalent" annualization method is used to reflect a semi-annual compounding. For purposes of calculating yield quotations, net income is determined by a standard formula prescribed by the Commission t o facilitate comparison with yields quoted by other investment companies. Net income computed for this formula differs from net income reported by the Bond Fund in accordance with generally accepted accounting principles and from net income computed for Federal income tax reporting purposes. Thus, the yield computed for a period may be greater or lesser than the Bond Fund s then-current dividend rate. The Bond Fund s yield is not fixed and will fluctuate in response to prevailing interest rates and the market value of portfolio securities, and as a function of the type of securities owned by the Bond Fund, portfolio maturity, and the Bond Fund s expenses. Yield quotations should be considered relative to changes in the net asset value of the Bond Fund s shares, the Bond Fund s investment policies, and the risks of investing in shares of - 60 - the Bond Fund. The investment return and principal value of an investment in the Bond Fund will fluctuate so that an investor s shares, when redeemed, may be worth more or less than the original cost of such shares. From time to time, the Money Market Fund advertises its "yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Money Market Fund refers to the income generated by an investment in the Money Market Fund over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The " e f f ective yield" is calculated similarly, but, when annualized, the income earned by an investment in the Money Market Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the c o m p ounding effect of this assumed reinvestment. A description of the respective methods by which the yield of the Bond Fund and the current and effective yields of the Money Market Fund are calculated is contained in the Statement of Additional Information under "Information on Computation of Yield." Since yield fluctuates, yield data cannot necessarily be used to compare an investment in the Bond Fund s or the Money Market Fund s shares with bank deposits, savings accounts, and similar investment alternatives which often provide an agreed or guaranteed fixed yield for a stated period of time. Shareholders of the Bond Fund and the Money Market Fund should remember that yield generally is a function of the kind and quality of the instrument held in portfolio, portfolio maturity, operating expenses, and market conditions. Comparisons of Investment Performance In conjunction with performance reports, promotional literature, and/or analyses of shareholder service for a Fund, comparisons of the performance information of the Fund for a given period to the performance of recognized, unmanaged indexes for the same period may be made. Such indexes include, but are not limited to, ones provided by Dow Jones & Company, Standard & Poor s Corporation, Lipper Analytical Services, Inc., Shearson Lehman Brothers, National Association of Securities Dealers, Inc., The Frank Russell Company, Value Line Investment Survey, the American Stock Exchange, the Philadelphia Stock Exchange, Morgan Stanley Capital International, Wilshire Associates, the Financial Times-Stock E x c h ange, and the Nikkei Stock Average and Deutcher Aktienindex, all of which are unmanaged market indicators. - 61 - Such comparisons can be a useful measure of the quality of a Fund s investment performance. In particular, performance information for the Nova Fund and the Ursa Fund may be compared to various unmanaged indexes, including, but not limited to, the S&P500 Index or the Dow Jones Industrial Average; performance information for the OTC Fund may be compared to various unmanaged indexes, including, but not limited to its current benchmark, the NASDAQ 100 IndexTM; performance information for the Metals Fund may be compared to various unmanaged indexes, including, but not limited to its current benchmark, the XAU Index; and performance information for the Bond Fund and the Juno Fund may be compared to various unmanaged indexes, including, but not limited to, the Shearson Lehman Government (LT) Index. In addition, rankings, ratings, and comparisons of investment performance and/or assessments of the quality of shareholder service appearing in publications such as Money, Forbes, Kiplinger s Magazine, Personal Investor, Morningstar, Inc., a n d similar sources which utilize information compiled (i) internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by other recognized analytical services, may be used in sales literature. The total return of each Fund (other than the Money Market Fund) also may be compared to the performances of broad groups of comparable mutual funds with similar investment goals, as such performance is tracked and published by such independent organizations as Lipper and CDA Investment Technologies, Inc., among others. The Lipper ranking and comparison, which may be used by the Trust in p e r formance reports, will be drawn from the "Capital Appreciation Funds" grouping for each of the Nova Fund and the Ursa Fund, from the "Small Company Growth Funds" grouping for the OTC Fund, from the "Precious Metals Funds" grouping for the Metals Fund, and from the "Bond Funds" grouping for the Bond Fund and the Juno Fund. In addition, the broad-based Lipper groupings may be used for comparison to any of the Funds. Additional information concerning the comparison of the investment performances of the Funds is contained in the S t a tement of Additional Information under "Performance Information." Further information about the performance of the Funds will be contained in the Trust s annual reports to shareholders, which may be obtained without charge by writing to the Trust at the address or telephoning the Trust at telephone number set forth on the cover page of this Prospectus. - 62 - GENERAL INFORMATION ABOUT THE TRUST Organization and Description of Shares of Beneficial Interest The Trust is a registered open-end investment company under the 1940 Act. The Trust was organized as a Delaware business trust on February 10, 1993, and has present authorized capital of unlimited shares of beneficial interest of no par value which may be issued in more than one class. Currently, the Trust has issued shares of nine separate classes: The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield Fund, The Rydex U.S. Government Money Market Fund, and The Rydex Institutional Money Market Fund. Other separate classes may be added in the future. All shares of the Funds are freely transferable. The Fund shares do not have preemptive rights or cumulative voting rights, and none of the shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Fund shares have equal voting rights, except that, in a matter affecting a particular series in the Trust, only shares of that series may be entitled to vote on the matter. Shareholder inquiries can be made by telephone (at 800-820-0888 or 301-468-8520) or by mail (to 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852). Under the Delaware General Corporation Law, a registered i n vestment company is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees of the Trust from office by votes cast at a meeting of Trust s h areholders or by written consent. If requested by shareholders of at least 10% of the outstanding shares of the Trust, the Trust will call a meeting of Trust shareholders for the purpose of voting upon the question of removal of a T r ustee or Trustees of the Trust and will assist in communications with other Trust shareholders. Unlike the stockholder of a corporation, shareholders of a business trust such as the Trust could be held personally liable, under certain circumstances, for the obligations of the business trust. The Trust s Declaration of Trust, however, disclaims liability of the shareholders of the Trust, the Trustees, or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Declaration of Trust provides for indemnification out of Trust property for all loss and expense of any Trust shareholder held personally liable for - 63 - the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would not be able to meet the Trust s obligations and this risk, thus, should be considered remote. Classification of the Funds Each of the Funds (other than the Money Market Fund) is a "non-diversified" series of the Trust. A Fund is considered "non-diversified" because a relatively-high percentage of the Fund s assets may be invested in the securities of a limited number of issuers, primarily within the same industry or economic sector. That Fund s portfolio securities, therefore, may be more susceptible to any single economic, political, or regulatory occurrence than the portfolio securities of a diversified investment company. A Fund s classification as a "non-diversified" investment company means that the proportion of the Fund s assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. Each Fund, however, intends to seek to qualify as a "regulated investment company" for purposes of the Internal Revenue Code, which requires that, at the end of each quarter of the taxable year, (i) at least 50% of the market value of the Fund s total assets (a diversified investment company would be so limited with respect to 75% of such market value) be invested in cash, U.S. Government Securities, the securities of other regulated investment companies, and other securities, with such securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of Fund s total assets and 10% of the outstanding voting securities of any one issuer, and (ii) not more than 25% of the value of the Fund s total assets be invested in the securities of any one issuer (other than U.S. Government Securities or the securities of other regulated investment companies). Trustees and Officers The Trust has a Board of Trustees which is responsible for the general supervision of the Trust s business. The day-to-day operations of the Trust are the responsibility of the Trust s officers. Auditors Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are the auditors of and the independent public accountants for the Trust and each of the Funds. Custodian - 64 - Pursuant to a separate custody agreement entered into by the Trust, Star Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, serves as custodian for the Trust and the Funds. Under the terms of this custody agreement, the Custodian holds the portfolio securities of each Fund and keeps all necessary related accounts and records. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR P R ESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. - 65 - Prospectus of The Rydex Institutional Money Market Fund PAGE [Logo] RYDEX SERIES TRUST PROSPECTUS RYDEX INSTITUTIONAL MONEY MARKET FUND 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (800) 820-0888 (301) 468-8520 INVESTMENT OBJECTIVE AND POLICIES The Rydex Institutional Money Market Fund (the "Fund") is a diversified series of the Rydex Series Trust, an open-end management investment company (the "Trust"). The investment objectives of the Fund are security of principal, high current income, and liquidity consistent with preservation of capital. In attempting to achieve its objectives, the Fund will invest primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities, as well as in repurchase agreements secured by such securities and in bank money market instruments and commercial paper. The Fund is part of the Rydex Group of Funds, which is designed for professional money managers and knowledgeable investors who intend to invest in the Rydex Group of Funds as part of an asset-allocation or market-timing investment strategy. The securities of the Fund are not deposits or obligations of any bank, and are not endorsed or guaranteed by any bank, and an investment in the Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. Government. The Fund seeks to maintain a constant $1.00 net asset value per share, although this cannot be assured. PAGE ADDITIONAL INFORMATION Investors should read this Prospectus and retain it for future reference. This Prospectus is designed to set forth concisely the information an investor should know before investing in the Fund. A Statement of Additional Information, dated November 1, 1996, containing additional information about the Fund and the Trust has been filed with the Securities and Exchange Commission and is incorporated herein by reference. A copy of this Statement of Additional Information is available, without charge, upon request to the Trust at the address above or by telephoning the Trust at the telephone numbers above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is November 1, 1996. 2 TABLE OF CONTENTS Page FEES AND EXPENSES OF THE FUND FINANCIAL HIGHLIGHTS OF THE FUND THE RYDEX FUNDS INVESTMENT OBJECTIVES AND POLICIES HOW TO INVEST IN THE FUND REDEEMING AN INVESTMENT (WITHDRAWALS) EXCHANGES PROCEDURES FOR REDEMPTIONS AND EXCHANGES DETERMINATION OF NET ASSET VALUE TAX-SHELTERED RETIREMENT PLANS DIVIDENDS AND DISTRIBUTIONS TAXES MANAGEMENT OF THE TRUST DISTRIBUTION PLAN PERFORMANCE INFORMATION GENERAL INFORMATION ABOUT THE TRUST APPENDIX A 3 FEES AND EXPENSES OF THE FUND The following table illustrates all expenses and fees that a shareholder of the Fund will incur:
Shareholder Transaction Expenses Sales Load Imposed on Purchases None Sales Load Imposed on Reinvested None Dividends Deferred Sales Load None Redemption Fees None Exchange Fees None Annual Fund Operating Expenses (as a percentage of average net assets) Management Fees 0.55% 12b-1 Fees 0.25% Other Expenses: Administrative Fees 0.20% Additional Expenses 0.15%* Total Fund Operating Expenses** 1.15% * Additional expenses are based on estimated amounts for the current fiscal year. ** The Fund s investment adviser has guaranteed that the ratio of expenses, including investment management fees, to average net assets shall not exceed 1.20%. Any expenses in excess of this amount will be absorbed by the adviser.
Example 4 Assuming a hypothetical investment of $1,000, a five-percent annual return, and redemption at the end of each time period, an investor in the Fund would pay transaction and operating expenses at the end of each year as follows: 1 YEAR 3 YEARS $11 $33 The same level of expenses would be incurred if the investment were held throughout the period indicated. The preceding table is provided to assist the investor in understanding the various costs and expenses which may be borne directly or indirectly by an investor in the Fund. The percentages shown above are based on the estimate by the Fund's investment adviser of the expenses to be incurred by the Fund during the Fund's current fiscal year. The five- percent assumed annual return is for comparison purposes only. The actual return for the Fund in future periods may be more or less depending on market conditions, and the actual expenses an investor incurs in future periods may be more or less than those shown above and will depend on the amount invested and on the actual growth rate of the Fund. For a more complete discussion of the fees connected with an investment in the Fund, including any fees that may be charged by securities dealers, banks, and other financial institutions in connection with wire transfers, and the services to be provided to the Fund, see "How to Invest in the Fund," "Management of the Fund," and "Distribution Plan" in this Prospectus. 5 FINANCIAL HIGHLIGHTS OF THE FUND (For a Share Outstanding Throughout Each Period) The following financial highlights relating to the Fund for the period July 11, 1996 to September 30, 1996 are unaudited.
For the Period Ended September 30, 1996* (Unaudited) Per Share Operating Performance: Net Asset Value -- Beginning of Period $ 1.00 Net Investment Income (Loss) 0.01 Net Realized and Unrealized Gains (Losses) on Securities 0.00 Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.00 Dividends to Shareholders (0.01) Distributions to Shareholders From Net Realized Capital Gain 0.00 Net Increase (Decrease) in Net Asset Value 0.00 Net Asset Value End of Period $ 1.00 Total Investment Return 4.28%** Ratios to Average Net Assets Expenses 1.24%** Net Investment Income 4.22%** Supplementary Data: Portfolio Turnover Rate*** 0.00% Net Assets, End of Period (000's $30,781 omitted) The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the period. * Commencement of Operations: July 11, 1996. ** Annualized for the period ended September 30, 1996. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year.
6 7 THE RYDEX FUNDS The Trust is an open-end management investment company, and currently is composed of nine separate series, including the Fund, The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money Market Fund, and, beginning on or about December 1, 1996 (subject to obtaining all necessary regulatory approvals), the Rydex High Yield Fund (collectively, the "Rydex Funds"); other separate Rydex Funds may be added in the future. The Rydex Funds are principally designed for professional money managers and investors who intend to follow an asset-allocation or market- timing investment strategy. Except for the Fund and the Rydex U.S. Government Money Market Fund, each Rydex Fund is intended to provide investment exposure with respect to a particular segment of the securities markets. These Rydex Funds seek investment results that correspond over time to a specified benchmark. The Rydex Funds may be used independently or in combination with each other as part of an overall investment strategy. Shares of any Rydex Fund may be exchanged, without any charge, for shares of any other Rydex Fund on the basis of the respective net asset values of the shares involved; provided, that, in connection with exchanges for shares of a Fund, certain minimum investment levels are maintained. The Trust r e s e rves the right to modify its minimum investment requirements (see "Exchanges"). Copies of the separate Prospectuses and Statements of Additional Information for the Rydex Funds other than the Fund are available, without charge, upon request to the Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the Trust at (800) 820-0888 or (301) 468-8520. INVESTMENT OBJECTIVES AND POLICIES General The investment objectives of the Fund are security of principal, high current income, and liquidity consistent with preservation of capital. Although there is no assurance that the Fund's objectives will be achieved, the Fund will seek to achieve its objectives by investing primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities ("U.S. Government Securities"), as well as in repurchase agreements secured by U.S. Government Securities and in bank money market instruments and commercial paper. An investment in the Fund is neither insured nor guaranteed by the U.S. Government. The Fund seeks to maintain a constant 8 $1.00 net asset value per share, although this cannot be assured. The Fund will invest in short-term U.S. Government Securities, including U.S. Treasury bills, U.S. Treasury notes, and U.S. Treasury bonds that mature within one year. All securities purchased by the Fund are held by the Trust's custodian bank. U.S. Treasury securities are backed by the full faith and credit of the U.S. Government. Repurchase agreements invested in the Fund are fully collateralized by U.S. Government Securities, but the value of the underlying collateral may be affected by sharp fluctuations in short-term interest rates. The investment objectives of the Fund are fundamental and may not be changed without the approval of at least a majority of the shareholders, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). All other investment policies of the Fund not specified as fundamental may be changed without the approval of shareholders. The Fund will maintain a dollar-weighted average portfolio maturity of 90 days or less. All securities in which the Fund invests will have remaining maturities of 397 days or less on the date of purchase, will be denominated in U.S. dollars, and will have been determined to be of high quality by nationally- recognized statistical rating organizations ("NSROs") or determined to be of comparable quality if not so rated. U.S. Government Securities Securities issued or guaranteed by the U.S. Government include a variety of U.S. Treasury securities, which differ only in their interest rates, maturities, and dates of issuance. U.S. Treasury bills have initial maturities of one year or less. U.S. Treasury notes have initial maturities of one to ten y e ars, and U.S. Treasury bonds generally have initial maturities of greater than ten years at the date of issuance. U.S. Treasury securities are backed by the full faith and credit of the United States. Yields on short-, intermediate-, and long-term U.S. Government Securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. Government Securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of the Fund s portfolio investments in U.S. Government Securities, while a decline in 9 interest rates would generally increase the market value of the Fund s portfolio investments in these securities. Certain U.S. Government Securities are issued or guaranteed by a g e n cies or instrumentalities of the U.S. Government including, but not limited to, obligations of U.S. Government agencies or instrumentalities such as the Federal National M o r tgage Association, the Government National Mortgage Association, the Small Business Administration, the Export- Import Bank, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, and the National Credit Union Administration. S o m e obligations issued or guaranteed by agencies or instrumentalities of the U.S. Government are backed by the full faith and credit of the U.S. Treasury. Such agencies and instrumentalities may borrow funds from the U.S. Treasury. However, no assurances can be given that the U.S. Government will provide such financial support to the obligations of the other U.S. Government agencies or instrumentalities in which the Fund invests, since the U.S. Government is not obligated to do so. These other agencies and instrumentalities are supported by either the issuer s right to borrow, under certain circumstances, an amount limited to a specific line of credit from the U.S. Treasury, the discretionary authority of the U.S. Government to purchase certain obligations of an agency or instrumentality, or the credit of the agency or instrumentality itself. The Fund may also invest in securities which are not backed by the full faith and credit of the United States. In these instances, such obligations may be supported by the right of the issuer to borrow from the U.S. Treasury, while still others are supported only by the credit of the instrumentality. Securities not backed by the full faith and credit of the United States may be backed, in part, by a line of credit with the U.S. Treasury (such as securities of the Federal National Mortgage Association), or the Fund must look to the agency issuing or guaranteeing the obligation for ultimate repayment (such as securities of the Federal Farm Credit System), in which case the Fund may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. U.S. Government Securities may be purchased at a discount. Such securities, when held to maturity or retired, may include an element of capital gain. Capital losses may be realized 10 when such securities purchased at a premium are held to maturity or are called or redeemed at a price lower than their purchase price. Capital gains or losses also may be realized upon the sale of securities. The Fund also may invest in securities that take the form of participation interests in, and may be evidenced by deposit or safekeeping receipts for, any of the foregoing securities. Participation interests are pro rata interests in U.S. Government Securities such as interests in pools of mortgages s o l d by the Government National Mortgage Association; instruments evidencing deposit or safekeeping are documentary receipts for such original securities held in custody by others. Repurchase Agreements The Fund may also invest in repurchase agreements secured by U.S. Government Securities. Under a repurchase agreement, the Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price (thereby determining the yield during the purchaser's holding period) and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser s holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Fund will enter into repurchase agreements only with member banks of the Federal R e s erve System or primary dealers of U.S. Government Securities. The Fund's investment adviser will monitor the creditworthiness of each of the firms which is a party to a repurchase agreement with the Fund. In the event of a default or bankruptcy by the seller, the Fund will liquidate those securities (whose market value, including accrued interest, must be at least equal to 100% of the dollar amount invested by the Fund in each repurchase agreement) held under the applicable repurchase agreement, which securities constitute collateral for the seller s obligation to pay. However, liquidation could involve costs or delays and, to the extent proceeds from the sales of these securities were less than the agreed-upon repurchase price, the Fund would suffer a loss. The Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Fund to treat repurchase agreements that do not mature within seven days as illiquid for the purposes of the Fund's investment policies. 11 The Fund will not enter into repurchase agreements of more than seven days duration if more than 10% of the market value of the Fund's net assets would be so invested together with any other investment the Fund may hold for which market quotations are not readily available. Other Investment Policies and Risk Considerations Bank Money Market Instruments. The Fund also may purchase bank money market instruments, including certificates of deposit, time deposits, bankers' acceptances, and other short- term obligations issued by U.S. banks which are members of the F e d eral Reserve System. Certificates of deposit are negotiable certificates evidencing the obligation of a bank to repay funds deposited with the bank for a specified period of time. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time (in no event longer than seven days) at a stated interest rate. Time deposits which may be held by the Fund will not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by the Federal Deposit Insurance Corporation. Investments in time deposits and certificates of deposits are limited to domestic banks that have total assets in excess of one billion dollars. Bankers' acceptances are credit instruments evidencing the obligation of a bank to a draft drawn on the bank by a customer of the bank. These credit instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Other short-term bank obligations in which the Fund may invest include uninsured, direct obligations of a bank that bear fixed, floating, or variable interest rates. Commercial Paper. The Fund also may invest in commercial paper, including corporate notes. These instruments are short-term obligations issued by banks and corporations that have maturities ranging from two to 270 days. Each commercial paper instrument may be backed only by the credit of the issuer or may be backed by some form of credit enhancement, typically in the form of a guarantee by a commercial bank. I n v e stments in commercial paper and other short-term promissory notes issued by corporations (including variable and floating rate instruments) must be rated at the time of purchase "A-2" or better by Standard & Poor's Ratings Group ("S&P"), "Prime-2" or better by Moody's Investors Service, Inc. ("Moody's"), "F-2" or better by Fitch Investors Service, Inc. ("Fitch"), "Duff 2" or better by Duff & Phelps Credit Rating Co. ("Duff"), or "A2" or better by IBCA, Inc., or, if not rated by S&P, Moody's, Fitch, Duff, or IBCA, Inc., must be determined by PADCO Advisors, Inc. (the "Advisor"), the Trust's investment adviser, to be of comparable quality pursuant to guidelines approved by the trustees of the Trust 12 (the Trustees ). Please refer to Appendix A to this Prospectus for more detailed information concerning commercial paper ratings. The Fund also may make limited investments in guaranteed i n v estment contracts ("GICs") issued by United States insurance companies. The Fund will purchase a GIC only when the Advisor has determined, under guidelines established by the Trustees of the Trust, that the GIC presents minimal credit risks to the Fund and is of comparable quality to i n s truments that are rated "high quality" by certain nationally-recognized statistical rating organizations. When-Issued and Delayed Delivery Securities. The Fund may purchase securities on a when-issued or delayed delivery basis (i.e., delivery and payment can take place a month or more after the date of the transaction). These securities are subject to market fluctuation and no interest accrues to the purchaser during this period. At the time the Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, the Fund will record the transaction and thereafter reflect the value, each day, of such security in determining its net asset value. The Fund will not purchase securities on a when-issued or delayed delivery basis if, as a result, more than 10% of the Fund's net assets would be so invested. The Fund will maintain, in a segregated account, cash or liquid securities having a value equal to or greater than the Fund's purchase commitments. Portfolio Transactions W h en selecting broker-dealers to execute portfolio transactions, the Advisor considers many factors, including the size of the broker-dealer s "spread," the size and difficulty of the order, the nature of the market for the security, the willingness of the broker-dealer to position, and the reliability, financial condition, general execution and operational capabilities of the broker-dealer. HOW TO INVEST IN THE FUND The minimum initial investment in the Fund for all shareholder accounts, including retirement plan accounts, is $2,000,000. The Trust, at its discretion, may accept lesser amounts than these minimum initial investments in certain circumstances. There is no minimum amount for subsequent investments. The shares of the Fund are offered at the daily public offering price, which is the net asset value per share (see "Determination of Net Asset Value") next computed after receipt of the investor s order. No sales charges are imposed on initial or subsequent investments. The Trust reserves the 13 right to reject or refuse, at the Trust s discretion, any order for the purchase of the Fund s shares in whole or in part. There is no minimum amount for subsequent investments. Investments in the Fund may be made (i) through securities dealers who have the responsibility to transmit orders promptly and who may charge a processing fee or (ii) directly with the Trust by bank wire transfer as follows: By Bank Wire Transfer: Request a wire transfer to: Star Bank, N.A. Routing Number: 0420-00013 For Account of Rydex Series Trust Account Number: 48038-9030 Your Name Your Account Number or, if a new account, Federal Tax I.D. Number (e.g., Social Security Number) After instructing your bank to transfer money by wire, please call the Trust and inform the Trust as to the amount you have transferred and the name of the bank sending the transfer. Your bank may charge a fee for such services. If the purchase is canceled because your wire transfer is not received, you may be liable for any loss that the Trust may incur. Shares of the Fund are sold at a price based on the net asset value next calculated after receipt of a purchase order in good form, as described below. If a purchase order is received by the Fund at or prior to 1:00 P.M., Eastern Time, on any business day, the purchase of Fund shares is executed at the offering price determined as of 1:00 P.M., Eastern Time, that day. If the purchase order is received after 1:00 P.M., Eastern Time, the purchase of Fund shares will be effected on the next business day. (See "Procedures for Redemptions and Exchanges.") I n the interest of economy and convenience, physical certificates representing the Fund s shares are not issued. Shares of the Fund are recorded on a register by the Trust s transfer agent. REDEEMING AN INVESTMENT (WITHDRAWALS) An investor may withdraw all or any portion of his investment by redeeming Fund shares at the next-determined net asset value per share after receipt of the order. Redemptions may be made by letter or by telephone subject to the procedures set forth below. The privilege to initiate redemption transactions by telephone will be made available to Fund 14 shareholders automatically. Telephone redemptions will be sent only to the address of record of the redeeming investor or to bank accounts specified by the redeeming investor in his account application. The proceeds of non-telephone redemptions will be sent directly to the investor s address of record. If the investor requests payment of redemptions to a third party or to a location other than the investor s address of record or a bank account specified in the investor s account application, this request must be in writing and the investor s signature must be guaranteed by a commercial bank; a broker, dealer, municipal securities dealer, municipal securities broker, government securities dealer, or government securities broker; a credit union; a national securities exchange, registered securities association, or clearing agency; or a savings association. The Fund will redeem its shares at a redemption price equal to the net asset value of the shares as next computed following the receipt of a request for redemption. There is no redemption charge. Payment for the redemption price will be made within seven days after the Trust s receipt of the request for redemption. With respect to the Fund, the right of redemption may be suspended, or the date of payment postponed: (i) for any period during which the Federal Reserve Bank of New York (the "New York Fed") or the New York Stock Exchange (the "NYSE") is closed (other than customary weekend or holiday closings) or trading on the NYSE is restricted; (ii) for any period during which an emergency exists so that disposal of the Fund s investments or the determination of its net asset value is not reasonably practicable; or (iii) for such other periods as the Securities and Exchange Commission (the "Commission"), by order, may permit for protection of the Fund s investors. On any day that the New York Fed or the NYSE closes early, the principal government securities markets close early (such as o n days in advance of holidays generally observed by participants in such markets), or as permitted by the Commission, the right is reserved to advance the time on that day by which purchase and redemption orders must be received. (See "Determination of Net Asset Value.") EXCHANGES Shares of any Rydex Fund may be exchanged, without any charge, for shares of any other Rydex Fund on the basis of the respective net asset values next determined of the shares involved; provided that, in connection with exchanges for shares of a Rydex Fund, certain minimum investment levels are maintained. An exchange of other Rydex Fund shares for shares 15 of the Fund is permitted only if the $2,000,000 minimum investment in the Fund is satisfied. The Trust reserves the right to modify its minimum investment requirements. The Trust currently is composed of nine separate series, The Nova Fund, The Ursa Fund, The Rydex OTC Fund (the "OTC Fund"), The Rydex Precious Metals Fund (the "Metals Fund"), The Rydex U.S. Government Bond Fund (the "Bond Fund"), The Juno Fund, The Rydex High Yield Fund (the High Yield Fund ), The Rydex U.S. Government Money Market Fund (the "Money Market Fund"), and t h e Rydex Institutional Money Market Fund (the series described in this Prospectus); other separate Rydex Funds may be added in the future. Exchanges may be made by letter or by telephone subject to the procedures set forth below. To implement an exchange, shareholders should provide the following information: account name, account number, taxpayer identification number, number of or percentage of shares or dollar value of shares to be exchanged, and the names of the Rydex Funds involved in the exchange transaction. Exchanges may be made only if such exchanges are between identically registered accounts. Shareholders contemplating such an exchange for shares of a Rydex Fund not described in this Prospectus should obtain and review the prospectus of the Rydex Fund to which the investment is to be transferred. The exchange privilege is available only in states where the e x change legally may be made and may be modified or discontinued at any time. Shares of the Money Market Fund received in an exchange for shares of the OTC Fund or the Metals Fund are issued on the third business day following the day on which the Rydex Fund receives the exchange request. PROCEDURES FOR REDEMPTIONS AND EXCHANGES Written requests for redemptions and exchanges should be sent to Rydex Series Trust, 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, and should be signed by the record owner or owners. Telephone redemption and exchange requests with respect to the Rydex Funds may be made by calling (800) 820-0888 or (301) 468-8520, on any day the Trust is open for business. Such requests may be made only between 8:30 A.M., Eastern Time, and the times indicated below (all times are Eastern Time). For exchanges, the earlier of the times indicated below for the Rydex Funds whose shares are being exchanged applies. The Nova, Ursa, and Rydex OTC Funds 3:45 P.M. The Rydex Precious Metals Fund 3:30 P.M. The Rydex U.S. Government Bond and Juno Funds 2:45 P.M. The Rydex High Yield Fund 2:15 P.M. 16 Telephone redemption and exchange orders will be accepted only during the period indicated above. If the primary exchange or market on which the Rydex Fund transacts business closes early, the above cut-off time will be approximately fifteen minutes (thirty minutes, in the case of the Metals Fund, and forty-five minutes in the case of the High Yield Fund) prior to the close of such exchange or market. Telephone redemption and exchange privileges may be terminated or modified by the Trust at any time. When acting on instructions believed to be genuine, the Trust will not be liable for any loss resulting from a fraudulent telephone transaction request and the investor would bear the risk of any such loss. The Trust will employ reasonable procedures to confirm that telephone instructions are genuine; and if the Trust does not employ such procedures, then the Trust may be liable for any losses due to unauthorized or f r a u dulent instructions. The Trust follows specific procedures for transactions initiated by telephone, including, among others, requiring some form of personal identification prior to acting upon instructions received by telephone, providing written confirmation not later than five business days after such transactions, and/or tape recording of telephone instructions. Investors also should be aware that telephone redemptions or exchanges may be difficult to implement in a timely manner during periods of drastic economic or market changes. If such conditions occur, redemption or exchange orders can be made by mail. DETERMINATION OF NET ASSET VALUE The net asset value of the Fund's shares is determined each day on which both the NYSE and the New York Fed are open for business at 1:00 P.M., Eastern Time. Currently, the NYSE and the New York Fed are closed on weekends, and the following holiday closings have been scheduled for 1996: (i) New Year's Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any of those holidays falls on a Saturday or the subsequent Monday when any one of those holidays falls on a Sunday. To the extent that portfolio securities of the Fund are traded in other markets on days when the New York Fed or the NYSE is closed, the Fund's net asset value may be affected on days when investors do not have access to the Fund to purchase or redeem shares. Although the Trust expects the same holiday schedule to be observed in the future, the New York Fed and the NYSE each may modify its holiday schedule at any time. The net asset value of the Fund serves as the basis for the purchase and redemption price of the Fund's shares. 17 The Fund will utilize the amortized cost method in valuing its portfolio securities, which method involves valuing a security at its cost adjusted by a constant amortization to maturity of a n y discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share for the Fund of $1.00. However, there is no assurance that the $1.00 net asset value will be maintained. For further information regarding the amortized cost method for valuing the Fund s portfolio securities, see "Determination of Net Asset Value" in the Statement of Additional Information. TAX-SHELTERED RETIREMENT PLANS Tax-sheltered retirement plans of the following types will be available to investors: Individual Retirement Accounts (IRAs) Keogh Accounts - Defined Contribution Plans (Profit-Sharing Plans) Keogh Accounts - Money Purchase Plans Pension Plans) Internal Revenue Code Section 403(b) Plans A d ditional information regarding these accounts may be obtained by contacting the Trust. DIVIDENDS AND DISTRIBUTIONS All income dividends and capital gains distributions of the Fund automatically will be reinvested in additional shares of the Fund at the net asset value calculated on the ex-dividend date, unless an investor has requested otherwise from the Trust in writing. Dividends and distributions of the Fund are taxable to the shareholders of the Fund, as discussed below under "Taxes," whether such dividends and distributions are reinvested in additional shares of the Fund or are received in cash. Statements of account will be sent to the Fund shareholders at least quarterly. The Fund ordinarily (i) declares dividends of net investment income (and net short-term capital gains, if any) for shares of the Fund on a daily basis and (ii) distributes such dividends to shareholders of the Fund on a monthly basis. The Trustees, however, may revise this dividend and distribution policy of the Fund, postpone the payment of dividends thereunder, or take any other action necessary with respect thereto in order to facilitate, to the extent possible, the 18 maintenance by the Fund of a constant net asset value per share of $1.00. TAXES The U.S. Internal Revenue Code of 1986, as amended (the "Code"), provides that each investment portfolio of a series investment company is to be treated as a separate corporation. Accordingly, the Fund will seek to qualify for treatment as a regulated investment company (a "RIC") under Subchapter M of the Code. So long as the Fund qualifies as a RIC and satisfies the distribution requirements under the Code for any taxable year, the Fund itself will not be subject to income t a x on the ordinary income and capital gains it has distributed to its shareholders for that year. To qualify as a RIC under the Code, the Fund must satisfy certain requirements, including the requirements that the Fund receive at least 90% of the Fund s gross income each year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to the Fund s investments in stock, securities, and foreign currencies (the "90% Test"), and that the Fund derive less than 30% of the Fund s gross income from the sale or other disposition of any of the following instruments which have been held for less than three months (the "30% Test"): (i) stock or securities; (ii) certain options, futures, or forward contracts; or (iii) foreign currencies (or certain options, futures, or forward contracts on such foreign currencies). Provided that the Fund (i) is a RIC and (ii) distributes at least 90% of the Fund s net investment income (including, for this purpose, net realized short-term capital gains), the Fund itself will not be subject to Federal income taxes to the extent the Fund s net investment income and the Fund s net realized short-term capital gains, if any, are distributed to the shareholders of that Fund. To avoid an excise tax on its undistributed income, the Fund generally must distribute at least 98% of its income. Under current law, dividends derived from interest and dividends received by the Fund, together with distributions of any short-term capital gains, if any, are taxable to the shareholders of the Fund, as ordinary income at Federal income tax rates of up to 39.6%, whether or not such dividends and distributions are reinvested in shares of the Fund or are received in cash. Ordinary dividends paid to corporate or individual residents o f foreign countries generally are subject to a 30% withholding tax. The rate of withholding tax may be reduced if the United States has an income tax treaty with the foreign c o u n try where the recipient resides. Capital gains 19 distributions received by foreign investors should, in most cases, be exempt from U.S. tax. A foreign investor will be required to provide the Fund with supporting documentation in order for the Fund to apply a reduced rate or exemption from U.S. withholding tax. Shareholders are required by law to certify that their tax identification number is correct and that they are not subject to back-up withholding. In the absence of this certification, the Fund is required to withhold taxes at the rate of 31% on dividends, capital gains distributions, and redemptions. Shareholders who are non-resident aliens may be subject to a withholding tax on dividends earned. For further information regarding the taxation of dividends and distributions from the Fund and the tax treatment of shareholders of the Fund, see "Dividends, Distributions, and Taxes," in the Statement of Additional Information. Shareholders are urged to consult their own tax advisors regarding specific questions as to Federal, state or local taxes. MANAGEMENT OF THE TRUST Investment Adviser The Trust is provided investment advice and management services by PADCO Advisors, Inc., a Maryland corporation with offices at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The Advisor was incorporated in the State of Maryland on February 5, 1993. Albert P. Viragh, Jr., the Chairman of the Board and the President of the Advisor, owns a controlling interest in the Advisor. The portfolio manager of the Fund is Michael P. Byrum. Prior to joining the PADCO Advisors, Inc. organization in July 1993, Mr. Byrum worked for one year as an investor representative with Money Management Associates ("MMA"), a Maryland-based registered investment adviser. Mr. Byrum s responsibilities at MMA included brokerage solicitation and investor relations. M r . Byrum received his bachelor s degree in Business Administration from Miami University, of Oxford, Ohio, in 1992. Under an investment advisory agreement between the Trust and the Advisor, dated May 14, 1993, and as most recently amended on September 25, 1996, the Fund pays the Advisor a fee at an annualized rate of 0.55% of the average daily net assets of the Fund. The Advisor manages the investment and the reinvestment of the assets of the Fund, in accordance with the investment objectives, policies, and limitations of the Fund, subject to 20 the general supervision and control of the Trustees and the officers of the Trust. The Advisor bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated persons of the Advisor. The Advisor, from its own resources, including profits from advisory fees received from the Fund, provided such fees are legitimate and not excessive, also may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of Fund shares, which payments, to the extent made by the Advisor, may be in addition to those payments made pursuant to a plan of distribution for the Fund adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act (the " Distribution Plan"). See "Distribution Plan." Servicer General administrative, shareholder, dividend disbursement, transfer agent, and registrar services are provided to the Trust and the Fund by PADCO Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Servicer"), subject to the general supervision and control of the Trustees and the officers of the Trust, pursuant to a service agreement between the Trust and the Servicer, dated S e p tember 19, 1995, and as most recently amended on September 25, 1996. Under this service agreement, the Fund pays the Servicer a fee at an annualized rate of 0.20% of the average daily net assets of the Fund. The Servicer provides the Trust and the Fund with all required g e n eral administrative services, including, without limitation, office space, equipment, and personnel; clerical and general back office services; bookkeeping, internal accounting, and secretarial services; the determination of net asset values; and the preparation and filing of all reports, registration statements, proxy statements, and all other materials required to be filed or furnished by the Trust and the Fund under Federal and state securities laws. The Servicer also maintains the shareholder account records for t h e T r ust and the Fund, distributes dividends and distributions payable by the Fund, and produces statements with respect to account activity for the Fund and the shareholders of the Fund. The Servicer pays all fees and expenses that are directly related to the services provided by the Servicer to the Trust; the Fund reimburses the Servicer for all fees and expenses incurred by the Servicer which are not directly related to the services the Servicer provides to the Fund under the service agreement. Distributor 21 Pursuant to the Distribution Plan for the Fund adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act, the Fund is provided certain distribution services by PADCO Financial S e r v ices, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Distributor"), subject to the general supervision and control of the Trustees and the officers of the Trust. Under the Distribution Plan, dated March 8, 1996, the Fund reimburses the Distributor for a portion of the Distributor's costs incurred in distributing the shares of the Fund at an annualized rate not to exceed 0.25% of the average daily net assets of the Fund. See "Distribution Plan." Costs and Expenses The Fund bears all expenses of its operations other than those assumed by the Advisor, the Servicer, or the Distributor. Fund expenses include: the management fee; the servicing fee (including administrative, transfer agent, and shareholder servicing fees); payments to be made by the Fund to the Distributor under the Distribution Plan; custodian and accounting fees and expenses; legal and auditing fees; securities valuation expenses; fidelity bonds and other i n surance premiums; expenses of preparing and printing prospectuses, confirmations, proxy statements, and shareholder reports and notices; registration fees and expenses; proxy and annual meeting expenses, if any (to the extent that these expenses are not covered by payments made by the Fund under the Distribution Plan); all Federal, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); organizational costs; and non-interested Trustees fees and expenses. The Advisor has agreed to limit the operating expenses of the Fund so that the ratio of expenses, including investment management fees, to average net assets on an annual basis for the Fund shall not exceed 1.20%. Any expenses incurred by the Fund in excess of this amount will be absorbed by the Advisor. For the period of July 11, 1996 through September 30, 1996, the total expenses of the Fund were 1.24% of the Fund s average net assets (annualized). The Advisor has advanced the organizational expenses of the Fund. These costs, which are approximately $40,000, will be reimbursed by the Fund, and the Fund will amortize these costs over a five-year period from the date the Fund commences operations. DISTRIBUTION PLAN The Trust finances activities which are primarily intended to result in the sale of Fund shares and has adopted the 22 Distribution Plan for the Fund pursuant to Rule 12b-1 under the 1940 Act. The Trust's Distribution Plan for the Fund provides that the Fund will pay the Distributor monthly up to a maximum of 0.25% per annum of the Fund's daily net assets for expenses actually incurred by the Distributor during that month in the distribution and promotion of the Fund's shares, including the printing of certain reports used for sales purposes, expenses for preparation and printing of sales literature, and related expenses, including any maintenance, distribution, or service fees paid to securities dealers or brokers, administrators, investment advisers, institutions, i n c l u ding bank trust departments, and other persons ("Recipients") who have executed a distribution or service agreement with the Distributor. As of September 30, 1996, the Fund had total net assets of approximately $30.8 million and the Distributor s aggregated uncovered distribution charges for the Fund (i.e., the expenses actually incurred by the Distributor less amounts received by the Distributor pursuant to the Distribution Plan) are $3,089. The Glass-Steagall Act generally prohibits Federal and state chartered or supervised banks from engaging in the business of underwriting, selling, or distributing securities. Although the scope of this prohibition under the Glass-Steagall Act has not been clearly defined by the courts or appropriate regulatory agencies, the Distributor believes that the Glass- Steagall Act should not preclude a bank from performing shareholder support services or servicing and recordkeeping functions. The Distributor intends to engage banks only to perform such functions. Changes in Federal or state statutes and regulations pertaining to the permissible activities of banks and their affiliates or subsidiaries, as well as further judicial or administrative decisions or interpretations, however, could prevent a bank from continuing to perform all or a part of the contemplated services. If a bank were prohibited from so acting, the Trustees would consider what actions, if any, would be necessary to continue to provide such efficient and effective shareholder services. In such event, changes in the operation of the Fund might occur, including possible termination of any automatic investment or redemption or other services then provided by the bank. It is not expected that shareholders of the Fund would suffer any adverse financial consequences as a result of any of these occurrences. In addition, state securities laws on this issue may differ from the interpretations of Federal law expressed herein, and banks and other financial institutions may be required to register as dealers pursuant to state law. The Fund may execute portfolio transactions with, and purchase securities issued by, depository institutions that receive payments under the Distribution Plan. No preference for the instruments of such depository institutions will be shown in 23 the selection of investments. For further information regarding the Distribution Plan, see "Distribution Plan" in the Statement of Additional Information. PERFORMANCE INFORMATION From time to time, the Fund may advertise its current "yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The "effective yield" is calculated similarly, but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" b e c a u s e of the compounding effect of this assumed reinvestment. A description of the respective methods by which the yield and effective yield of the Fund are calculated is contained in the Statement of Additional Information under "Information on Computation of Yield." Since yield fluctuates, yield data cannot necessarily be used to compare an investment in the Fund s shares with bank d e posits, savings accounts, and similar investment alternatives which often provide an agreed or guaranteed fixed yield for a stated period of time. Shareholders of the Fund should remember that yield generally is a function of the kind and quality of the instrument held in portfolio, portfolio maturity, operating expenses, and market conditions. GENERAL INFORMATION ABOUT THE TRUST Organization and Description of Shares of Beneficial Interest The Trust is a registered open-end investment company under the 1940 Act. The Trust was organized as a Delaware business trust on February 10, 1993, and has present authorized capital of unlimited shares of beneficial interest of no par value which may be issued in more than one class. Currently, the Trust has issued shares of nine separate classes: The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield Fund, The Rydex U.S. Government Money Market Fund, and The Rydex Institutional Money Market Fund. Other separate classes may be added in the future. All shares of the Rydex Funds are freely transferable. The Rydex Fund shares do not have preemptive rights or cumulative 24 voting rights, and none of the shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Rydex Fund shares have equal voting rights, except that, in a matter affecting a particular series in the Trust, only shares of that series may be entitled to vote on the matter. Shareholder inquiries can be made by telephone (at 800-820-0888 or 301-468-8520) or by mail (to 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852). Under the Delaware General Corporation Law, a registered i n vestment company is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees of the Trust from office by votes cast at a meeting of Trust s h areholders or by written consent. If requested by shareholders of at least 10% of the outstanding shares of the Trust, the Trust will call a meeting of Trust shareholders for the purpose of voting upon the question of removal of a T r ustee or Trustees of the Trust and will assist in communications with other Trust shareholders. Unlike the stockholder of a corporation, shareholders of a business trust such as the Trust could be held personally liable, under certain circumstances, for the obligations of the business trust. The Trust s Declaration of Trust, however, disclaims liability of the shareholders of the Trust, the Trustees, or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Declaration of Trust provides for indemnification out of Trust property for all loss and expense of any Trust shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would not be able to meet the Trust s obligations and this risk, thus, should be considered remote. As of the date of this Prospectus, no officer or Trustee of the Trust owned any of the Fund shares. Trustees and Officers The Trust has a Board of Trustees which is responsible for the general supervision of the Trust s business. The day-to-day operations of the Trust are the responsibility of the Trust s officers. Auditors 25 Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are the auditors of and the independent public accountants for the Trust and the Fund. Custodian Pursuant to a separate custody agreement entered into by the Trust, Star Bank, N.A. (the "Custodian"), Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, serves as custodian for the Trust and the Fund. Under the terms of this c u s t ody agreement, the Custodian holds the portfolio securities of the Fund and keeps all necessary related accounts and records. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST IN ANY JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. 26 APPENDIX A COMMERCIAL PAPER RATINGS Moody's Investors Service, Inc. Commercial paper rated "Prime" by Moody's Investors Service, Inc. ("Moody's"), is based upon Moody's evaluation of many factors including: (1) the management of the issuer; (2) the issuer's industry or industries and the speculative-type risks which may be inherent in certain areas; (3) the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issue; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Relative differences in these factors determine whether the issuer's commercial paper is rated "Prime-1," "Prime-2," or "Prime-3" by Moody's. "Prime-1" indicates a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: (1) leading market positions in well-established industries; (2) high rates of return on funds employed; (3) conservative capitalization structures with moderate reliance on debt and ample asset protection; (4) broad margins in earnings coverage of fixed financial charges and high internal cash generation; and (5) well-established access to a range of financial markets and assured sources of alternative liquidity. "Prime-2" indicates a strong capacity for repayment of short-term promissory obligations. This repayment capacity normally will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to v a riation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Standard & Poor's Rating Group Commercial paper rated by Standard & Poor's Rating Group ("S&P") has the following characteristics: (1) liquidity ratios adequate to meet cash requirements; (2) long-term senior debt is rated "A" or better; (3) the issuer has access to at least two additional channels of borrowing; (4) basic earnings and cash flow have an upward trend with allowance made for unusual circumstances; (5) typically, the issuer's industry is well-established and the issuer has a strong A-1 position within the industry; and (6) the reliability and quality of management are unquestioned. The relative strength or weakness of the above factors determine whether the issuer's commercial paper is rated "A-1," "A-2," or "A-3." A-1 -- This designation rating indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. A-2 -- The capacity for timely payment on issues with this designation rating is strong; however, the relative degree of safety is not as high as for issues designated "A- 1." Fitch Investors Service, Inc. Commercial paper rated by Fitch Investors Service, Inc. ("Fitch"), reflects Fitch's current appraisal of the degree of assurance of timely payment of such debt. An appraisal results in the rating of an issuer's paper as "F-1," "F-2," "F-3," or "F-4." F-1 -- This designation rating indicates that the commercial paper is regarded as having the strongest degree of assurance for timely payment. F-2 -- Commercial paper issues assigned this designation rating reflect an assurance of timely payment only slightly less in degree than those issues rated "F-1." Duff and Phelps Credit Rating Co. Short-term ratings by Duff & Phelps Credit Rating Co. ("Duff") are consistent with the rating criteria utilized by m o ney market participants. The ratings apply to all obligations with maturities of under one year, including commercial paper, the uninsured portion of certificates of d e p o sit, unsecured bank loans, master notes, bankers acceptances, irrevocable letters of credit, and current maturities of long-term debt. Asset-backed commercial paper is also rated according to this scale. An emphasis of Duff's short-term ratings is placed on " l i quidity," which is defined as not only cash from operations, but also access to alternative sources of funds including trade credit, bank lines, and the capital markets. A-2 An important consideration is the level of an obligor's reliance on short-term funds on an ongoing basis. The distinguishing feature of Duff's short-term ratings is the refinement of the traditional "1" category. The majority of short-term debt issuers carry the highest rating, yet quality differences exist within that tier. As a consequence, Duff has incorporated gradations of "1+" (one plus) and "1-" (one minus) to assist investors in recognizing those differences. Duff 1+ -- This designation rating indicates the highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1 -- This designation rating indicates a very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff 1- -- This designation rating indicates a high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. Duff 2 -- This designation rating indicates a good certainty of timely payment. Liquidity factors and company fundamental are sound. Although ongoing funding needs may enlarge total financing requirements, access capital markets is good. Risk factors are small. IBCA, Inc. In addition to conducting a careful review of an institution's reports and published figures, IBCA's analysts regularly visit the companies for discussions with senior management. These meetings are fundamental to the preparation of individual reports and ratings. To keep abreast of any changes that may affect assessments, analysts maintain contact throughout the year with the management of the companies that the analysts cover. IBCA's analysts speak the languages of the countries that the analysts cover, which is essential to maximize the value of their meetings with management and to analyze properly a company's written materials. IBCA's analysts also have a thorough knowledge of the laws and accounting practices that A-3 govern the operations and reporting of companies within the various countries. Often, in order to ensure a full understanding of their position, companies entrust IBCA with confidential data. While these data cannot be disclosed in reports, these data are taken into account by IBCA when assigning IBCA's ratings. Before dispatch to subscribers, a draft of the report is submitted to each company to permit the correction of any factual errors and to enable the clarification of issues raised. IBCA's Rating Committees meet at regular intervals to review all ratings and to ensure that individual ratings are assigned consistently for institutions in all the countries covered. Following these committee meetings, IBCA ratings are issued directly to subscribers. At the same time, the company is informed of the ratings as a matter of courtesy, but not for discussion. A1+ -- This designation rating indicates obligations supported by the highest capacity for timely repayment. A1 -- This designation rating indicates obligations supported by a very strong capacity for timely repayment. A2 -- This designation rating indicates obligations supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. A-4 PART B PAGE Combined Statement of Additional Information of The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, and The Rydex U.S. Government Money Market Fund PAGE STATEMENT OF ADDITIONAL INFORMATION RYDEX SERIES TRUST 6116 Executive Boulevard, Suite 400 Rockville, Maryland 20852 (800) 820-0888 (301) 468-8520 The Rydex Series Trust (the "Trust") is a no-load mutual fund with nine separate investment portfolios (the "Funds" or "Rydex Funds"), seven of which Funds are described in this S t a t ement of Additional Information. The Funds are principally designed for professional money managers and investors who intend to invest in the Funds as part of an asset-allocation or market-timing investment strategy. Sales are made, without sales charge, at each Fund s per share net asset value. Except for the Rydex U.S. Government Money Market Fund, each Fund is intended to provide investment exposure with respect to a particular segment of the securities markets. Each of these Funds seeks investment results that correspond over time to a specified benchmark. The Funds may be used independently or in combination with each other as part of an overall investment strategy. Additional Funds may be created from time to time. The following are the Funds and their benchmarks: FUND BENCHMARK The Nova Fund 150% of the performance of the S&P 500 Composite Stock Price IndexTM The Ursa Fund Inverse (opposite) of the S&P 500 Composite Stock Price IndexTM Rydex OTC Fund NASDAQ 100 IndexTM (NDX) Rydex Precious Philadelphia Stock Exchange Gold/Silver Metals Fund IndexTM (XAU) Rydex U.S. 120% of the price movement of current Long Government Bond Treasury Bond Fund The Juno Fund Inverse (opposite) of the price movement of the current Long Treasury Bond The Trust also offers The Rydex U.S. Government Money Market Fund. This Fund seeks to provide security of principal, high current income, and liquidity by investing primarily in money PAGE market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities. The securities of the Rydex U.S. Government Money Market Fund are not deposits or obligations of any bank, and are not endorsed or guaranteed by any bank, and an investment in this Fund is neither insured nor guaranteed by the United States Government. The Rydex U.S. Government Money Market Fund seeks to maintain a constant $1.00 net asset value per share, although this cannot be assured. The Funds (other than the Rydex U.S. Government Money Market Fund) may engage in certain aggressive investment techniques, which include engaging in short sales and transactions in options and futures contracts. The Nova Fund and the Rydex U.S. Government Bond Fund also may use the speculative technique known as leverage to increase funds available for investment. See "Borrowing." Investors in the Nova Fund may experience substantial losses during sustained periods of falling equity prices, while investors in the Ursa Fund and the Juno Fund may experience substantial losses during sustained periods of rising equity prices and declining interest rates respectively. Because of the inherent risks in any investment, there can be no assurance that any Fund s investment objective will be achieved. None of the Funds alone constitutes a balanced investment plan, and certain of the Funds involve special risks not traditionally associated with investment companies. The nature of the Funds generally will result in significant portfolio turnover which would likely cause higher expenses and additional costs and increase the risk that the Fund will not qualify as a regulated investment company under the Federal tax laws. The Trust is not intended for investors whose principal objective is current income or preservation of capital and may not be a suitable investment for persons who intend to follow an "invest and hold" strategy. See "Special Risk Considerations in the Trust s Prospectus. The Trust also offers The Rydex Institutional Money Market Fund and, beginning on or about December 1, 1996 (subject to obtaining all necessary regulatory approvals), also will offer The Rydex High Yield Fund, each of which series of the Trust is described in a separate prospectus and a separate statement of additional information. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Trust's Prospectus, dated November 1, 1996. A copy of the Trust s Prospectus is available, without charge, upon request to the Trust at the address above or by telephoning the Trust at the telephone numbers above. 2 The date of this Statement of Additional Information is November 1, 1996. 3 STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Page THE RYDEX FUNDS INVESTMENT POLICIES AND TECHNIQUES INVESTMENT RESTRICTIONS PORTFOLIO TRANSACTIONS AND BROKERAGE MANAGEMENT OF THE TRUST PRINCIPAL HOLDERS OF SECURITIES DETERMINATION OF NET ASSET VALUE PERFORMANCE INFORMATION CALCULATION OF RETURN QUOTATIONS INFORMATION ON COMPUTATION OF YIELD DIVIDENDS, DISTRIBUTIONS, AND TAXES AUDITORS AND CUSTODIAN FINANCIAL STATEMENTS 4 THE RYDEX FUNDS The Trust is an open-end management investment company, and currently is composed of nine separate series, including The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money Market Fund, The Rydex Institutional Money Market Fund, and, beginning on or about December 1, 1996 (subject to obtaining all regulatory approvals), The Rydex High Yield Fund (collectively, the "Funds"); other separate Funds may be added in the future. The Funds are principally designed for professional money managers and investors who intend to follow an asset- allocation or market-timing investment strategy. Except for the Rydex U.S. Government Money Market Fund and the Rydex Institutional Money Market Fund, each Fund is intended to provide investment exposure with respect to a particular s e gment of the securities markets. These Funds seek investment results that correspond over time to a specified benchmark. The Funds may be used independently or in combination with each other as part of an overall investment strategy. Shares of any Fund may be exchanged, without any charge, for shares of any other Fund on the basis of the respective net asset values of the shares involved; provided, that, in connection with exchanges for shares of the Fund, certain minimum investment levels are maintained (see "Exchanges"). Copies of the separate Prospectus and Statement of Additional Information for each of the Rydex High Yield Fund and the Rydex Institutional Money Market Fund are available, without charge, upon request to the Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the Trust at (800) 820-0888 or (301) 468-8520. INVESTMENT POLICIES AND TECHNIQUES General Reference is made to the sections entitled "Investment Objectives and Policies" and "Investment Techniques and Other I n v estment Policies" in the Trust's Prospectus for a discussion of the investment objectives and policies of the Funds. In addition, set forth below is further information relating to the Funds. Portfolio management is provided to each Fund by the Trust's investment adviser, PADCO Advisors, Inc., a Maryland corporation with offices at 6116 Executive B o u l evard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). 5 The investment strategies of the Funds discussed below, and as discussed in the Trust's Prospectus, may be used by a Fund if, in the opinion of the Advisor, these strategies will be advantageous to the Fund. The Fund is free to reduce or eliminate the Fund's activity in any of those areas without changing the Fund's fundamental investment policies. There is no assurance that any of these strategies or any other strategies and methods of investment available to a Fund will result in the achievement of the Fund's objectives. Options Transactions Options on Securities. The Nova Fund, The Rydex OTC Fund (the "OTC Fund"), and the Rydex Precious Metals Fund (the "Metals Fund") may buy call options and write (sell) put options on securities, and the Ursa Fund may buy put options and write call options on securities for the purpose of realizing the Fund's investment objective. By writing a call option on securities, a Fund becomes obligated during the term of the option to sell the securities underlying the option at the exercise price if the option is exercised. By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price if the option is exercised. During the term of the option, the writer may be assigned an exercise notice by the broker-dealer through whom the option was sold. The exercise notice would require the writer to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates upon expiration of the option, or at such earlier time that the writer effects a closing purchase transaction by purchasing an option covering the same underlying security and having the same exercise price and expiration date as the one previously sold. Once an option has been exercised, the writer may not execute a closing purchase transaction. To secure the obligation to deliver the underlying security in the case of a call option, the writer of a call option is required to deposit in escrow the underlying security or other assets in accordance with the rules of the Options Clearing Corporation (the "OCC"), an institution created to interpose itself between buyers and sellers of options. The OCC assumes the other side of every purchase and sale transaction on an exchange and, by doing so, gives its guarantee to the transaction. Options on Security Indexes. The Nova Fund, the OTC Fund, and the Metals Fund may purchase call options and write put options, and the Ursa Fund may purchase put options and write call options, on stock indexes listed on national securities exchanges or traded in the over-the-counter market as an 6 investment vehicle for the purpose of realizing the Fund's investment objective. Options on indexes are settled in cash, not in delivery of securities. The exercising holder of an index option receives, instead of a security, cash equal to the difference between the closing price of the securities index and the exercise price of the option. When a Fund writes a covered option on an index, the Fund will be required to deposit and maintain with a custodian cash or high-grade, liquid short- term debt securities equal in value to the aggregate exercise price of a put or call option pursuant to the requirements and the rules of the applicable exchange. If, at the close of business on any day, the market value of the deposited securities falls below the contract price, the Fund will deposit with the custodian cash or high-grade, liquid short- term debt securities equal in value to the deficiency. Foreign Securities The Metals Fund may invest in issuers located outside the United States. These purchases may be made by purchasing American Depository Receipts ("ADRs"), "ordinary shares," or "New York shares" in the United States. ADRs are dollar- denominated receipts representing interests in the securities of a foreign issuer, which securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by United States banks and trust companies which evidence ownership of underlying securities issued by a foreign corporation. Generally, ADRs in registered form are designed for use in domestic securities markets and are traded on exchanges or over-the-counter in the United States. Ordinary shares are shares of foreign issuers that are traded abroad and on a United States exchange. New York shares are shares that a foreign issuer has allocated for trading in the United States. ADRs, ordinary shares, and New York shares all may be purchased with and sold for U.S. dollars, which protects the Metals Fund from the foreign settlement risks described below. Investing in foreign companies may involve risks not typically associated with investing in United States companies. The value of securities denominated in foreign currencies, and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign securities markets generally have less trading volume and less liquidity than United States markets, and prices in some foreign markets can be very volatile. Many foreign countries lack uniform accounting and disclosure standards comparable to those that apply to United States companies, and it may be more difficult to obtain reliable information regarding a foreign issuer's financial condition 7 and operations. In addition, the costs of foreign investing, i n cluding withholding taxes, brokerage commissions, and custodial fees, generally are higher than for United States investments. Investing in companies located abroad carries political and economic risks distinct from those associated with investing in the United States. Foreign investments may be affected by actions of foreign governments adverse to the interests of U n i ted States investors, including the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on United States investment, or on the ability to repatriate assets or to convert currency into U.S. dollars. There may be a greater possibility of default by f o r eign governments or foreign-government sponsored enterprises. Investments in foreign countries also involve a risk of local political, economic, or social instability, military action or unrest, or adverse diplomatic developments. At the present time, there are five major producers and processors of gold bullion and other precious metals and minerals. In order of magnitude, these producers and processors are: the Republic of South Africa, the former republics of the former Soviet Union, Canada, the United States, and Australia. Political and economic conditions in several of these countries may have a direct effect on the mining, distribution, and price of precious metals and minerals, and on the sales of central bank gold holdings, particularly in the case of South Africa and the former republics of the former Soviet Union. South African mining stocks represent a special risk in view of the history of political unrest in that country. Besides that factor, various government bodies such as the South African Ministry of Mines and the Reserve Bank of South Africa exercise regulatory authority over mining activity and the sale of gold. The policies of these South African government bodies in the future could be detrimental to the Metals Fund's objectives. U.S. Government Securities The Rydex U. S. Government Bond Fund (the "Bond Fund") invests primarily in U.S. Government Securities, and each of the other Funds also may invest in U.S. Government Securities. The Juno Fund may enter into short transactions on U.S. Government Securities. Securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one year or less; U.S. Treasury notes have initial maturities of one to ten 8 y e ars; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. Government S e c u r ities are issued or guaranteed by agencies or instrumentalities of the U.S. Government including, but not limited to, obligations of U.S. Government agencies or instrumentalities such as the Federal National Mortgage Association, the Government National Mortgage Association, the Small Business Administration, the Export-Import Bank, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan M a r k eting Association, and the National Credit Union Administration. Some obligations issued or guaranteed by U.S. Government a g encies and instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by Federal agencies, such as those securities issued by the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the Federal agency, while other obligations issued by or guaranteed by Federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. While the U.S. Government provides financial support to such U.S. Government-sponsored Federal agencies, no assurance can be given that the U.S. Government will always do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity. The Bond Fund will invest in such U.S. Government Securities only when the Advisor is satisfied that the credit risk with respect to the issuer is minimal. Repurchase Agreements As discussed in the Trust's Prospectus, each of the Funds may enter into repurchase agreements with financial institutions. The Funds each follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose condition will be continually monitored by the Advisor. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy 9 by a selling financial institution, a Fund will seek to liquidate such collateral. However, the exercising of each Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of each of the Funds, other than The Rydex U.S. Government Money Market Fund (the "Money Market Fund"), not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 15% (10% with respect to the Money Market Fund) of the Fund's total assets. The investments of each of the Funds in repurchase agreements, at times, may be substantial when, in the view of the Advisor, liquidity or other considerations so warrant. Zero Coupon Bonds The Bond Fund and the Juno Fund may invest in U.S. Treasury zero-coupon bonds. These securities are U.S. Treasury bonds which have been stripped of their unmatured interest coupons, t h e coupons themselves, and receipts or certificates representing interests in such stripped debt obligations and coupons. Interest is not paid in cash during the term of these securities, but is accrued and paid at maturity. Such o b l igations have greater price volatility than coupon obligations and other normal interest-paying securities, and the value of zero coupon securities reacts more quickly to changes in interest rates than do coupon bonds. Since dividend income is accrued throughout the term of the zero c o upon obligation, but is not actually received until maturity, the Fund may have to sell other securities to pay said accrued dividends prior to maturity of the zero coupon obligation. Unlike regular U.S. Treasury bonds which pay semi-annual interest, U.S. Treasury zero coupon bonds do not generate semi-annual coupon payments. Instead, zero coupon bonds are purchased at a substantial discount from the maturity value of such securities, the discount reflecting the current value of the deferred interest; this discount is amortized as interest income over the life of the security, and is taxable even though there is no cash return until maturity. Zero coupon U.S. Treasury issues originally were created by government bond dealers who bought U.S. Treasury bonds and issued receipts representing an ownership interest in the interest coupons or in the principal portion of the bonds. Subsequently, the U.S. Treasury began directly issuing zero coupon bonds with the introduction of "Separate Trading of Registered Interest and Principal of Securities" (or "STRIPS"). While zero coupon bonds eliminate the reinvestment r i sk of regular coupon issues, that is, the risk of subsequently investing the periodic interest payments at a 10 lower rate than that of the security held, zero coupon bonds fluctuate much more sharply than regular coupon-bearing bonds. Thus, when interest rates rise, the value of zero coupon bonds will decrease to a greater extent than will the value of regular bonds having the same interest rate. Reverse Repurchase Agreements The Ursa Fund, the Juno Fund, and the Money Market Fund may use reverse repurchase agreements as part of that Fund's investment strategy. Reverse repurchase agreements involve sales by a Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Funds intend to use the reverse repurchase technique only when this will be to the Fund's advantage to do so. Each Fund will establish a segregated account with the Trust's custodian bank in which the Fund will m a i ntain cash or cash equivalents or other portfolio securities equal in value to the Fund's obligations in respect of reverse repurchase agreements. Borrowing The Nova Fund and the Bond Fund may borrow money, including borrowing for investment purposes. Borrowing for investment is known as leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique which increases investment risk, but also increases investment opportunity. Since substantially all of a Fund s assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the net asset value per share of the Fund will increase more when the Fund s portfolio assets increase in value and decrease more when the Fund s portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions, the Nova Fund and the Bond Fund might have to sell portfolio securities to meet interest or principal payments at a time investment considerations would not favor such sales. The Nova Fund and the Bond Fund intend to use leverage during periods when the Advisor believes that the respective Fund s investment objective would be furthered. 11 Each Fund may borrow money to facilitate management of the Fund s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund promptly. As required by the Investment Company Act of 1940, as amended (the 1940 Act ), a Fund must maintain continuous asset c o verage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If, at any time, the value of the Fund s assets should fail to meet this 300% coverage test, the Fund, within three days (not including Sundays and holidays), will reduce the amount of the Fund s borrowings to the extent necessary to meet this 300% coverage. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations otherwise indicate that it would be disadvantageous to do so. In addition to the foregoing, the Funds are authorized to b o rrow money from a bank as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of the Fund s total assets. This borrowing i s not subject to the foregoing 300% asset coverage requirement. The Funds are authorized to pledge portfolio securities as the Advisor deems appropriate in connection with any borrowings. Lending of Portfolio Securities Subject to the investment restrictions set forth below, each of the Funds may lend portfolio securities to brokers, dealers, and financial institutions, provided that cash equal to at least 100% of the market value of the securities loaned is deposited by the borrower with the Fund and is maintained each business day in a segregated account pursuant to applicable regulations. While such securities are on loan, the borrower will pay the lending Fund any income accruing thereon, and the Fund may invest the cash collateral in portfolio securities, thereby earning additional income. A Fund will not lend its portfolio securities if such loans are not permitted by the laws or regulations of any state in which the Fund's shares are qualified for sale, and the Funds will not lend more than 33 1/3 of the value of the Fund's total assets, except that the Money Market Fund will not lend more than 10% of the value of the Money Market Fund's total assets. Loans would be subject to termination by the lending Fund on four business days' notice, or by the borrower on one day's notice. Borrowed securities must be returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities which occurs during the term of the loan 12 inures to the lending Fund and that Fund's shareholders. A l e n d i ng Fund may pay reasonable finders, borrowers, administrative, and custodial fees in connection with a loan. When-Issued and Delayed-Delivery Securities Each Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued or delayed- delivery basis (i.e., delivery and payment can take place b e tween a month and 120 days after the date of the t r ansaction). These securities are subject to market fluctuation and no interest accrues to the purchaser during this period. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, the Fund will record the transaction and thereafter reflect the value of the securities, each day, of such security in determining the Fund's net asset value. A Fund will not purchase securities on a when-issued or delayed- delivery basis if, as a result, more than 15% (10% with respect to the Money Market Fund) of the Fund s net assets would be so invested. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price. The Fund will also establish a segregated account with the Fund's custodian bank in which the Fund will maintain cash or liquid securities equal to or greater in value to the Fund s purchase commitments for such when-issued or delayed-delivery securities. The Trust does not believe that a Fund's net asset value or income will be adversely affected by the Fund's purchase of securities on a when-issued or delayed delivery basis. Investments in Other Investment Companies The Funds (other than the Bond Fund and the Money Market Fund) may invest in the securities of other investment companies to the extent that such an investment would be consistent with the requirements of Section 12(d)(1) of the 1940 Act. A Fund, therefore, may invest in the securities of another investment company (the "acquired company") provided that the Fund, immediately after such purchase or acquisition, does not own in the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) securities issued by the acquired company and all other investment companies (other than Treasury stock of the Fund) having an aggregate value in excess of 10% of the value of the total assets of the Fund. The Bond Fund and the Money Market Fund may invest in the securities of other investment companies only as part of a merger, reorganization, or acquisition, subject to the requirements of the 1940 Act. 13 If a Fund invests in, and, thus, is a shareholder of, another investment company, the Fund s shareholders will indirectly bear the Fund s proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund s own investment adviser and the other expenses that the Fund bears directly in connection with the Fund s own operations. The foregoing strategies, and those discussed in the Trust s Prospectus under the heading "Investment Objectives and Policies," may subject a Fund to the effects of interest rate fluctuations to a greater extent than would occur if such strategies were not used. While these strategies may be used by a Fund if, in the opinion of the Advisor, these strategies will be advantageous to the Fund, the Fund will be free to reduce or eliminate its activity in any of those areas without c h anging its fundamental investment policies. Certain provisions of the Internal Revenue Code, related regulations, and rulings of the Internal Revenue Service may also have the effect of reducing the extent to which the previously-cited techniques may be used by a Fund, either individually or in combination. Furthermore, there is no assurance that any of these strategies or any other strategies and methods of investment available to a Fund will result in the achievement of the Fund s objectives. Illiquid Securities While none of the Funds anticipates doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ( restricted securities ) under the Securities Act of 1933, as amended (the 1933 Act ), but which can be offered and sold to qualified institutional buyers under Rule 144A under the 1933 Act. A Fund will not invest more than 15% (10% with respect to the Money Market Fund) of the Fund s net assets in illiquid securities. Each Fund will adhere to a more restrictive limitation on the Fund s investment in illiquid securities as required by the securities laws of those jurisdictions where shares of the Fund are registered for sale. The term illiquid securities for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the staff of the Securities and Exchange Commission (the Commission ), illiquid securities also are considered to include, among other securities, purchased over- t h e-counter options, certain cover for over-the-counter options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities laws. The Fund may 14 not be able to sell illiquid securities when the Advisor considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investment in illiquid securities may have an adverse impact on net asset value. Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 1933 Act, which provides a safe harbor from 1933 Act registration requirements for qualifying sales to institutional investors. When Rule 144A restricted securities present an attractive investment opportunity and other meet selection criteria, a Fund may make such investments. Whether or not such securities are illiquid depends on the market that exists for the particular security. The Commission staff has taken the position that the liquidity of Rule 144A restricted securities is a question of fact for a board of trustees to determine, such determination to be based on a consideration of the readily-available trading markets and the review of any contractual restrictions. The staff also has acknowledged that, while a board of trustees retains ultimate responsibility, the trustees may delegate this function to an investment adviser. The trustees of the Trust (the Trustees) h a ve delegated this responsibility for determining the liquidity of Rule 144A restricted securities which may be invested in by a Fund to the Advisor. It is not possible to predict with assurance exactly how the market for Rule 144A restricted securities or any other security will develop. A security which when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly, a security which was deemed to be liquid at the time of acquisition may subsequently become illiquid. In such event, appropriate remedies will be considered to minimize the effect on the Fund s liquidity. Portfolio Turnover As discussed in the Trust's prospectus, the Trust anticipates that investors in the Funds, as part of a market-timing or asset allocation investment strategy, will frequently exchange shares of the Funds for shares in other Funds pursuant to the exchange policy of the Trust as well as frequently redeem shares of the Funds (see "Exchanges" in the Trust's Prospectus). The nature of the Funds has caused the Funds to experience substantial portfolio turnover. Because each Fund's portfolio turnover rate to a great extent will depend 15 on the purchase, redemption, and exchange activity of the Fund's investors, it is very difficult to estimate what the Fund's actual turnover rate will be in the future. However, the Trust expects that the portfolio turnover experienced the Funds will continue to be substantial. "Portfolio Turnover Rate" is defined under the rules of the Securities and Exchange Commission as the value of the s e curities purchased or securities sold, excluding all securities whose maturities at time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, instruments with remaining maturities of less than one year are excluded from the calculation of portfolio turnover rate. I n struments excluded from the calculation of portfolio turnover generally would include the futures contracts and option contracts in which the Funds invest since such contracts generally have a remaining maturity of less than one year. All instruments held by a Fund during a specified period may have a remaining maturity of less than one year in which case the portfolio turnover rate for that period, under the definition, would be equal to zero. However, because of the nature of Funds as described above, the actual portfolio turnover of the Funds has been and it is anticipated that their actual portfolio turnover in the future will be unusually high. INVESTMENT RESTRICTIONS As described in the section of the Trust's Prospectus entitled "Investment Objectives and Policies," each of the Funds has a d o pted certain investment restrictions as fundamental policies which cannot be changed without the approval of the holders of a "majority" of the outstanding shares of the Fund, as that term is defined in the 1940 Act. The term "majority" is defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the series present at a meeting of shareholders, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy; or (ii) more than 50% of the outstanding shares of the series. (All policies of a Fund not specifically identified in this Statement of Additional Information or the Trust's Prospectus as fundamental may be changed without a vote of the shareholders of the Fund.) For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment. Any subsequent change in a particular percentage resulting from fluctuations in value does not require the elimination of any security from a Fund's portfolio. 16 The following restrictions are applicable to the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the Juno Fund: A Fund shall not: 1. Lend any security or make any other loan if, as a result, more than 33 1/3% of the value of the Fund's total assets would be lent to other parties, except (i) through the purchase of a portion of an issue of debt securities in accordance with the Fund's investment objective, policies, and limitations, or (ii) by engaging in repurchase agreements with respect to portfolio securities, or (iii) through the loans of portfolio securities provided the borrower maintains collateral equal to at least 100% of the value of the borrowed security and marked-to- market daily. 2. Underwrite securities of any other issuer. 3. Purchase, hold, or deal in real estate or oil and gas interests, although the Fund may purchase and sell securities that are secured by real estate or interests therein and may purchase mortgage-related securities and may hold and sell real estate acquired for the Fund as a result of the ownership of securities. 4. Issue any senior security (as such term is defined in Section 18(f) of the 1940 Act) (including the amount of senior securities issued but excluding liabilities and indebtedness not constituting senior securities), except that the Fund may issue senior s e curities in connection with transactions in options, futures, options on futures, and other s i m ilar investments, and except as otherwise permitted herein and in Investment Restriction Nos. 5, 7, 8, 9, 10, 11, 13, and 14, as applicable to the Fund. 5. Pledge, mortgage, or hypothecate the Fund's assets, except to the extent necessary to secure permitted borrowings and to the extent related to the deposit of assets in escrow in connection with (i) the writing of covered put and call options, (ii) the purchase of securities on a forward-commitment or delayed-delivery basis, and (iii) collateral and i n itial or variation margin arrangements with respect to currency transactions, options, futures contracts, including those relating to indexes, and options on futures contracts or indexes. 17 The following restrictions are applicable to the Nova Fund, the Ursa Fund, the OTC Fund, the Bond Fund, and the Juno Fund: A Fund shall not: 6. Invest in commodities except that the Fund may purchase and sell futures contracts, including those relating to securities, currencies, indexes, and o p t ions on futures contracts or indexes and currencies underlying or related to any such futures contracts, and purchase and sell currencies (and o p tions thereon) or securities on a forward- commitment or delayed-delivery basis. 7. Invest 25% or more of the value of the Fund's total assets in the securities of one or more issuers conducting their principal business activities in the same industry. This limitation does not apply to investments or obligations of the U.S. Government or any of its agencies or instrumentalities. 18 The following restriction is applicable to the Ursa Fund, the OTC Fund, the Metals Fund, and the Money Market Fund: A Fund shall not: 8. Borrow money, except (i) as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of the value of the Fund's total assets from a bank or (ii) in an amount up to one-third of the value of the Fund's total assets, including the amount borrowed, in order to meet redemption requests without immediately selling portfolio instruments. This provision is not for i n v estment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. The following restriction is applicable to the Nova Fund, the OTC Fund, and the Metals Fund: A Fund shall not: 9. Make short sales of portfolio securities or purchase any portfolio securities on margin, except for such s h o rt-term credits as are necessary for the clearance of transactions. The deposit or payment by the Fund of initial or variation margin in connection with futures or options transactions is not considered to be a securities purchase on margin. The Fund may engage in short sales if, at the time of the short sale, the Fund owns or has the right to acquire an equal amount of the security being sold at no additional cost ("selling against the box"). The following restriction is applicable to the Nova Fund and the Bond Fund: A Fund shall not: 10. Borrow money, except the Fund may borrow money (i) from a bank in an amount not in excess of 33 1/3% of the total value of the Fund's assets (including the amount borrowed) less the Fund's liabilities (not including the Fund's borrowings), and (ii) for temporary purposes in an amount not in excess of 5% of the total value of the Fund's assets. 19 The following restriction is applicable to the Ursa Fund and the Juno Fund: A Fund shall not: 11. Make short sales of portfolio securities or maintain a short position unless at all times when a short position is open (i) the Fund maintains a segregated account with the Fund's custodian to cover the short position in accordance with the position of the Securities and Exchange Commission or (ii) the Fund o w n s an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short. The following restrictions are applicable to the Metals Fund: The Metals Fund shall not: 12. P u r chase and sell commodities or commodities contracts, but this shall not prevent the Metals Fund from: (a) trading in futures contracts and options on futures contracts; or (b) investing in precious-metals and precious minerals. 13. Invest 25% or more of the value of the Metals Fund's total assets in the securities of one or more issuers conducting their principal business activities in the same industry; except that the Metals Fund will invest 25% or more of the value of the Metals Fund's total assets in the securities in the metals-related and minerals-related industries. This limitation does not apply to investments or obligations of the U.S. Government or any of its agencies or instrumentalities. The following restriction is applicable to the Bond Fund: The Bond Fund shall not: 14. Make short sales of portfolio securities or purchase any portfolio securities on margin, except for such s h o rt-term credits as are necessary for the clearance of transactions. The deposit or payment by the Bond Fund of initial or variation margin in connection with futures or options transactions is not considered to be a securities purchase on margin. 20 The following restrictions are applicable to the Money Market Fund: The Money Market Fund shall not: 15. Make loans to others except through the purchase of qualified debt obligations, loans of portfolio securities and entry into repurchase agreements. 16. Lend the Money Market Fund's portfolio securities in excess of 15% of the Money Market Fund's total assets. Any loans of the Money Market Fund's portfolio securities will be made according to guidelines established by the Board of Trustees of the Trust, including maintenance of cash collateral of the borrower equal at all times to the current market value of the securities loaned. 17. Issue senior securities, except as permitted by the M o ney Market Fund's investment objectives and policies. 18. Write or purchase put or call options. 19. Invest in securities of other investment companies, except as these securities may be acquired as part of a merger, consolidation, acquisition of assets, or plan of reorganization. 20. Mortgage, pledge, or hypothecate the Money Market Fund's assets except to secure permitted borrowings. In those cases, the Money Market Fund may mortgage, pledge, or hypothecate assets having a market value not exceeding the lesser of the dollar amounts borrowed or 15% of the value of total assets of the Money Market Fund at the time of the borrowing. 21. Make short sales of portfolio securities or purchase any portfolio securities on margin, except for such s h o rt-term credits as are necessary for the clearance of transactions. The following restriction is applicable to the Juno Fund: The Juno Fund shall not: 22. Borrow money, except (i) as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of the value of the Fund's total assets from a bank or (ii) in an amount up to one-third of the value of the Fund's total assets, including the amount borrowed, in order to 21 meet redemption requests without immediately selling portfolio instruments. This provision is not for i n v estment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. The Juno Fund shall not make purchases while borrowing in excess of 5% of the value of its total assets. For purposes of this l i m i tation, Fund assets invested in reverse repurchase agreements are included in the amounts borrowed. Furthermore, the Trustees have adopted additional investment restrictions for each Fund. These restrictions are not fundamental investment policies, but rather are operating policies of each Fund, as indicated, and may be changed by the Trustees without Fund shareholder approval. With respect to each of the Funds, except as otherwise indicated, these additional investment restrictions adopted by the Trustees, to date, are as follows: 1. The Fund will not invest in warrants. 2. The Fund will not invest in real estate limited partnerships. 3. The Fund will not invest in mineral leases; except that the Metals Fund may invest in mineral leases although the Metals Fund does not presently intend to invest in such leases. In addition, none of the Funds presently intends: 1. To lend the Fund's assets. If, in the future, a Fund does lend its assets, the Fund will adhere to all limitations on the Fund's ability to lend its assets as required by the securities laws of those j u r i sdictions where shares of the Fund are registered for sale. 2. To enter into currency transactions; except that the Metals Fund may enter into currency transactions although the Metals Fund does not presently intend to enter into such transactions. 3. To purchase illiquid securities. If in the future, a Fund does purchase illiquid securities, the Fund will not invest more than 15% of its net assets in illiquid securities; except that the Money Market Fund will not invest more than 10% of its net assets in illiquid securities. Each Fund will adhere to a 22 more restrictive limitation on the Fund's investment in illiquid securities as required by the securities laws of those jurisdictions where shares of the Fund are registered for sale. 4. To purchase and sell real property (including limited partnership interests), to purchase and sell securities that are secured by real estate or interests therein, to purchase mortgage-related securities, or to hold and sell real estate acquired for the Fund as a result of the ownership of securities. If a percentage restriction is adhered to at the time of an investment, a later increase or decrease in the investment's percentage of the value of the Fund's total assets resulting from a change in such values or assets will not constitute a violation of the percentage restriction. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to the general supervision by the Trustees, the A d visor is responsible for decisions to buy and sell securities for each of the Funds, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. The Advisor expects that the Funds may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder The Advisor may serve as an investment manager to a number of clients, including other investment companies. It is the p r a c tice of the Advisor to cause purchase and sale transactions to be allocated among the Funds and others whose assets the Advisor manages in such manner as the Advisor deems equitable. The main factors considered by the Advisor in making such allocations among the Funds and other client a c counts of the Advisor are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinions of the person(s) responsible, if any, for managing the portfolios of the Funds and the other client accounts. The policy of each Fund regarding purchases and sales of s e c u rities for the Fund's portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, each Fund's policy is to pay commissions 23 which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. Each Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and the Advisor from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Advisor relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable. Purchases and sales of U.S. Government securities are normally transacted through issuers, underwriters or major dealers in U.S. Government Securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices. In seeking to implement a Fund's policies, the Advisor effects transactions with those brokers and dealers who the Advisor believes provide the most favorable prices and are capable of providing efficient executions. If the Advisor believes such prices and executions are obtainable from more than one broker or dealer, the Advisor may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or the Advisor. Such services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. If the broker-dealer providing these additional services is acting as a principal for its own account, no commissions would be payable. If the broker-dealer is not a principal, a higher commission may be justified, at the determination of the Advisor, for the additional services. The information and services received by the Advisor from brokers and dealers may be of benefit to the Advisor in the management of accounts of some of the Advisor's other clients and may not in all cases benefit a Fund directly. While the receipt of such information and services is useful in varying degrees and would generally reduce the amount of research or services otherwise performed by the Advisor and thereby reduce the Advisor's expenses, this information and these services 24 are of indeterminable value and the management fee paid to the Advisor is not reduced by any amount that may be attributable to the value of such information and services. The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund commenced operations on July 12, 1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3, 1994, March 3, 1995, and December 3, 1993, respectively. For the period from inception to June 30, 1994, total brokerage commissions paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the Money Market Fund amounted to $ 1 50,696, $197,412, $23,577, $381,380, $6,324, and $0, respectively. For the period from July 1, 1994 (or inception, if later) to June 30, 1995, total brokerage commissions paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund amounted to $268,283, $494,223, $35,421, $550,858, $2,390, $14,999, and $0, respectively. For the period from July 1, 1995 to June 30, 1996, total brokerage commissions paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, The Juno Fund, and the Money Market Fund amounted to $293,000, $669,000, $673,000, $35,000, $11,000, $23,000, and $0, respectively. MANAGEMENT OF THE TRUST The Trustees are responsible for the general supervision of the Trust's business. The day-to-day operations of the Trust are the responsibilities of the Trust's officers. The names and addresses (and ages) of the Trustees and the officers of the Trust and the officers of the Advisor, together with information as to their principal business occupations during the past five years, are set forth below. Fees and expenses for non-interested Trustees will be paid by the Trust. Trustees *Albert P. Viragh, Jr. (55) Chairman of the Board of Trustees and President of the Trust; Chairman of the Board, President, and Treasurer of PADCO Advisors, Inc., investment adviser to the Trust, 1993 to present; Chairman of the Board, President, and Treasurer of PADCO Service Company, Inc., shareholder and transfer agent servicer to the Trust, 1993 to present; Chairman of the Board of Managers of the Rydex Advisor Variable Annuity Account (the Separate Account ), a separate account of Great American Reserve Insurance C o mpany, 1996 to present; Chairman of the Board, President, and Treasurer of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to 25 present; Chairman of the Board, President, and Treasurer of PADCO Financial Services, Inc., a registered broker- dealer firm, and the Rydex Institutional Money Market Fund s principal underwriter, 1996 to present; Vice P r esident of Rushmore Investment Advisors Ltd., a registered investment adviser, 1985 to 1993. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Corey A. Colehour (51) Trustee of the Trust; Manager of the Separate Account, 1996 to present; Senior Vice President of Marketing of Schield Management Company, a registered investment adviser, 1985 to present. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. J. Kenneth Dalton (55) Trustee of the Trust; Manager of the Separate Account, 1 9 9 6 to present; Mortgage Banking Consultant and Investor, The Dalton Group, April 1995 to present; President, CRAM Mortgage Group, Inc. 1966 to April 1995. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. 26 Roger Somers (52) Trustee of the Trust; Manager of the Separate Account, 1996 to present; President, Arrow Limousine, 1963 to present. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Officers Timothy P. Hagan (54) Treasurer and Vice President of the Trust; Vice President of PADCO Advisors, Inc., investment adviser to the Trust, 1993 to present; Treasurer and Vice President of the Separate Account, 1996 to present; Vice President of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to present; Employee of PADCO Service Company, Inc., shareholder and transfer agent servicer to the Trust, 1993 to present; President and D i rector of Rushmore Services, Inc., a registered transfer agent, 1981 to 1993. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Robert M. Steele (38) Secretary and Vice President of the Trust; Vice President of PADCO Advisors, Inc., investment adviser to the Trust, 1994 to present; Secretary and Vice President of the Separate Account, 1996 to present; Vice President of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to present; Vice President of The Boston Company, Inc., an institutional money management firm, 1987 to 1994. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Michael P. Byrum (26) Assistant Secretary of the Trust; Employee of PADCO Advisors, Inc., 1993 to present; portfolio manager of The Ursa Fund (since 1996), The Rydex Precious Metals Fund (since 1993), The Rydex U.S. Government Money Market Fund (since 1993), and The Rydex Institutional Money Market Fund (since 1996), each a series of the Trust; Assistant Secretary of the Separate Account, 1996 to present; Employee of PADCO Advisors II, Inc., investment adviser to the Separate Account; Investment Representative, Money Management Associates, a registered investment adviser, 1992 to 1993; Student, Miami University, of Oxford, Ohio (B.A., Business Administration, 1992). Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. __________________________ 27 * This Trustee is deemed to be an "interested person" of the Trust, within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated with the Advisor, as described herein. Under an investment advisory agreement with the Advisor, dated May 14, 1993, and amended on November 2, 1993, and also a m e n ded on December 13, 1994, March 8, 1996, and September 25, 1996, the Advisor serves as the investment adviser for each series of the Trust and provides investment advice to the Funds and oversees the day-to-day operations of the Funds, subject to direction and control by the Trustees and the officers of the Trust. The Trust currently is composed of nine separate series, the Nova Fund, the Ursa Fund, the Rydex OTC Fund, the Rydex Precious Metals Fund, the Rydex U.S. Government Bond Fund, the Juno Fund, the Rydex U.S. Government Money Market Fund, The Rydex High Yield Fund, and the Rydex Institutional Money Market Fund; other separate series may be added in the future. As of the September 30, 1996, net Trust assets under management of the Advisor were a p proximately $973 million. Pursuant to the advisory agreement with the Advisor, the Funds pay the Advisor the following fees at an annual rate based on the average daily net assets for each respective Fund, as set forth below: The Nova Fund 0.75% The Ursa Fund 0.90% The Rydex OTC Fund 0.75% The Rydex Precious Metals Fund 0.75% The Rydex U.S. Government Bond Fund 0.50% The Juno Fund 0.90% The Rydex U.S. Government Money Market Fund 0.50% The Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund commenced operations on July 12, 1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3, 1994, March 3, 1995, and December 3, 1993, respectively. For the period from inception to June 30, 1994, total management fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the Money Market Fund to the Advisor amounted to $158,834, $193,185, $14,901, $16,816, $4,888, and $163,459, respectively. For the period from July 1, 1994 (or inception, if later) to June 30, 1995, total management fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to $411,286, $1,587,040, $361,659, $221,309, $7,704, $29,837, and $727,027, respectively. For the period from July 1, 1995 to June 30, 1996, total management fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund 28 to the Advisor amounted to $1,022,794, $1,607,706, $541,443, $406,902, $97,820, $174,866, and $891,864, respectively. The Advisor reimbursed the Bond Fund $0, $5,831, and $0 for the fiscal years ended June 30, 1994, 1995, and 1996, respectively. The Advisor manages the investment and the reinvestment of the assets of each of the Funds, in accordance with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Trustees and the officers of the Trust. The Advisor bears all costs associated with providing these advisory services and the expenses of the Trustees of the Trust who are affiliated with or interested persons of the Advisor. The Advisor, from its own resources, including profits from advisory fees received from the Funds, provided such fees are legitimate and not excessive, may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of Fund shares, and otherwise currently pay all distribution costs for Fund shares. General administrative, shareholder, dividend disbursement, transfer agent, and registrar services are provided to the Trust and the Funds by PADCO Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Servicer"), subject to the general supervision and control of the Trustees and the officers of the Trust, pursuant to a service agreement between the Trust and the Servicer, dated September 19, 1995, and amended on March 8, 1996 and also amended on September 25, 1996. The Servicer is wholly-owned by Albert P. Viragh, Jr., who is the Chairman of the Board and the President of the Trust and the sole controlling person and majority owner of the Advisor. Under this service agreement, the Funds pay the Servicer the following fees at an annual rate based on the average daily net assets for each respective Fund, as set forth below: The Nova Fund 0.25% The Ursa Fund 0.25% The Rydex OTC Fund 0.20% The Rydex Precious Metals Fund 0.20% The Rydex U.S. Government Bond Fund 0.20% The Juno Fund 0.25% The Rydex U.S. Government Money Market Fund 0.20% For the period from inception to June 30, 1994, total service fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the Money Market Fund to the Advisor amounted to $37,545, $53,647, $3,973, $4,641, $1,955, and $65,383, respectively. For the period from July 1, 1994 29 (or inception, if later) to June 30, 1995, total service fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to $137,082, $440,721, $96,637, $59,001, $3,333, $8,232, and $290,811, respectively. For the period from July 1, 1995 to June 30, 1996, total service fees paid by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to $327,476, $451,107, $123,358, $114,476, $37,793, $47,333, and $403,167, respectively. Under the service agreement, the Servicer provides the Trust and each Fund with all required general administrative s e r vices, including, without limitation, office space, equipment, and personnel; clerical and general back office services; bookkeeping, internal accounting, and secretarial services; the determination of net asset values; and the p r e p a ration and filing of all reports, registration statements, proxy statements, and all other materials required to be filed or furnished by the Trust and each Fund under Federal and state securities laws. The Servicer also maintains the shareholder account records for each Fund, distributes dividends and distributions payable by each Fund, and produces statements with respect to account activity for each Fund and each Fund's shareholders. The Servicer pays all fees and expenses that are directly related to the services provided by the Servicer to each Fund; each Fund reimburses the Servicer for all fees and expenses incurred by the Servicer which are not directly related to the services the Servicer provides to the Fund under the service agreement. Each Fund bears all expenses of its operations other than those assumed by the Advisor or the Servicer. Fund expenses include: the management fee; the servicing fee (including administrative, transfer agent, and shareholder servicing fees); custodian and accounting fees and expenses; legal and auditing fees; securities valuation expenses; fidelity bonds and other insurance premiums; expenses of preparing and printing prospectuses, confirmations, proxy statements, and s h areholder reports and notices; registration fees and expenses; proxy and annual meeting expenses, if any; all F e d e r al, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); o r ganizational costs; non-interested Trustees' fees and expenses; the costs and expenses of redeeming shares of the Fund; fees and expenses paid to any securities pricing organization; dues and expenses associated with membership in any mutual fund organization; and costs for incoming telephone WATTS lines. In addition, each of the Funds pays an equal portion of the Trustee fees and expenses for attendance at Trustee meetings for the Trustees of the Trust who are not affiliated with or interested persons of the Advisor. 30 For the period from inception to June 30, 1994, the total expenses of Fund operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, and the Money Market Fund to the Advisor amounted to $376,156, $ 3 67,676, $44,250, $45,787, $30,901, and $384,373, respectively. For the period from July 1, 1994 (or inception, if later) to June 30, 1995, the total expenses of Fund operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the Advisor amounted to $785,175, $ 2 , 4 41,508, $680,241, $405,626, $40,599, $51,932, and $1,290,628, respectively. For the period from July 1, 1995 to June 30, 1996, the total expenses of Fund operations borne by the Nova Fund, the Ursa Fund, the OTC Fund, the Metals Fund, the Bond Fund, the Juno Fund, and the Money Market Fund to the A d v i sor amounted to $1,747,874, $2,469,816, $916,004, $704,167, $236,172, $320,232, and $1,758,657, respectively. The aggregate compensation paid by the Trust to each of its trustees serving during the fiscal year ended June 30, 1996, is set forth in the table below:
Pension or Aggregate Retirement Compensation Benefits Accrued Estimated Annual Name of Person, from the as Part of the Benefit upon Position Trust** Trust s Expenses Retirement ----------- ---------- ------------- ---------- Albert P. Viragh, $0 $0 $0 Jr.* Chairman and President Corey A. Colehour $7,500 $0 $0 Trustee J. Kenneth Dalton $4,500 $0 $0 Trustee Roger Somers $7,500 $0 $0 Trustee * Denotes an interested person of the Trust. ** Mr. David R. Petersen, who resigned as a Trustee, effective October 13, 1995, was paid $2,000 in aggregate compensation by the Trust during the fiscal year ended June 30, 1996.
31 PRINCIPAL HOLDERS OF SECURITIES As of October 17, 1996, the following persons were the only persons who were record owners or, to the knowledge of the Trust, beneficial owners of 5% or more of the shares of the Funds. Fund Name and Address Number of Shares % ownership ------ ----------------- ---------------- ------------ Nova National Financial 4,638,399.963 26.6%1/ Fund Services Corp. P.O. Box 3908 New York, NY 10008 Schwab & Company 2,846,108.327 16.3%1/ 101 Montgomery Street San Francisco, CA 94104 First Trust Corp. 1,085,284.837 6.2%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Portfolio Advisory 1,085,284.837 6.2% 2/ Services 725 South Figueroa Suite 2328 Los Angeles, CA 90017 Donaldson Lufkin 1,077,196.868 6.2%1/ Jenrette P.O. Box 2052 Jersey City, NJ 07303 First Trust Corp. 886,137.511 5.1%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Keystone Capital 886,137.511 5.1%2/ Management 32
Fund Name and Address Number of Shares % ownership ------ ----------------- ---------------- ------------ The Hatten Building Suite 313 Gulfport, MS 39502 Ursa Schwab & Company 7,394,264.720 17.1%1/ Fund 101 Montgomery Street San Francisco, CA 94104 National Financial 4,025,622.414 9.3%1/ Services Corp. P.O. Box 3908 New York, NY 10008 Donaldson Lufkin 3,290,932.667 7.6%1/ Jenrette P.O. Box 2052 Jersey City, NJ 07303 Schwab & Company 2,681,825.883 6.2%1/ 101 Montgomery Street San Francisco, CA 94104 OTC Fund First Trust Corp. 1,742,714.527 25.3%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Keystone Capital 1,742,714.527 25.3%2/ Management The Hatten Building Suite 313 Gulfport, MS 39502 Donaldson Lufkin 650,141.713 9.4%1/ Jenrette P.O. Box 2052 Jersey City, NJ 07303 33
Fund Name and Address Number of Shares % ownership ------ ----------------- ---------------- ------------ Stocktontrust 575,744.824 8.4%1/ Nominee Partnership c/o Stockton Trust, Inc. 3001 East Camelback Phoenix, AZ 85016 First Trust Corp. 502,513.450 7.3%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Potomac Fund 502,513.450 7.3%2/ Management 19522 Clubhouse Road Gaithersburg, MD 20879 First Trust Corp. 483,725.149 7.0%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Trendline Research 483,725.149 7.0%2/ & Mgmt. 1100 Boulders Parkway Suite 702 Richmond, VA 23225 Precious First Trust Corp. 544,187.863 16.1%1/ Metals P.O. Box 173736 Fund Denver, CO 80217 Record Owner for: Clark Capital 544,187.863 16.1%2/ 1735 Market Street Philadelphia, PA 19103 34
Fund Name and Address Number of Shares % ownership ------ ----------------- ---------------- ------------ Donaldson Lufkin 226,588.181 6.7%1/ Jenrette P.O. Box 2052 Jersey City, NJ 07303 U.S. Independent Trust 265,817.521 21.3%1/ Govern- Corporation ment 15255 S. 94th Avenue Bond Suite 303 Fund Orland Park, IL 60462-3897 Record Owner for: Brookstreet 265,817.521 21.3%2/ Securities 2361 Campus Drive Suite 210 Irvine, CA 92715 National Financial 214,773.435 17.2%1/ Services Corp. P.O. Box 3908 New York, NY 10008 Independent Trust 129,575.912 10.4%1/ Corporation 15255 S. 94th Avenue Suite 303 Orland Park, IL 60462-3897 Record Owner for: Brookstreet 129,575.912 10.4%2/ Securities 2361 Campus Drive Suite 210 Irvine, CA 92715 Independent Trust 92,026.093 7.4%1/ Corporation 15255 S. 94th Avenue Suite 303 Orland Park, IL 60462-3897 35
Fund Name and Address Number of Shares % ownership ------ ----------------- ---------------- ------------ Record Owner for: Trendstat Capital 92,026.093 7.4%2/ Management, Inc. 6991 East Camelback Suite D210 Scottsdale, AZ 85251 Juno National Financial 168,993.240 11.7%1/ Fund Services Corp. P.O. Box 3908 New York, NY 10008 Donaldson Lufkin 135,642.359 9.4%1/ Jenrette P.O. Box 2052 Jersey City, NJ 07303 1/ Record owner only. 2/ Beneficial owner only.
As of the date of this Statement of Additional Information, the Trustees and the officers of the Trust, as a group, owned, of record and beneficially, less than 1.0% of the outstanding shares of each Fund. DETERMINATION OF NET ASSET VALUE The Money Market Fund will utilize the amortized cost method i n v aluing its portfolio securities for purposes of determining the net asset value of the shares of the Money Market Fund. The Money Market Fund will utilize the amortized cost method in valuing its portfolio securities even though the portfolio securities may increase or decrease in market value, generally, in connection with changes in interest rates. The amortized cost method of valuation involves valuing a security at its cost adjusted by a constant a m o rtization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the 36 market value of the instrument. While this method provides certainty in valuation, this method may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Money Market Fund would receive if this Fund sold the instrument. During such periods, the yield to investors in the Money Market Fund may differ somewhat from that obtained in a similar company which uses mark-to-market values for all its portfolio securities. For example, if the use of amortized cost resulted in a lower (higher) aggregate portfolio value on a particular day, a prospective investor in the Money Market Fund would be able to obtain a somewhat higher (lower) yield than would result from investment in such a similar company and existing investors would receive less (more) investment income. The purpose of this method of calculation is to facilitate the maintenance of a constant net asset value per share of $1.00. The Money Market Fund's use of the amortized cost method to value its portfolio securities and the maintenance of the per share net asset value of $1.00 is permitted pursuant to Rule 2a-7 under the 1940 Act (the "Rule"), and is conditioned on the Money Market Fund's compliance with various conditions including: (a) the Board is obligated, as a particular responsibility within the overall duty of care owed to the M o ney Market Fund's shareholders, to establish written procedures reasonably designed, taking into account current market conditions and the Money Market Fund's investment objectives, to stabilize the net asset value per share as computed for the purpose of distribution and redemption at $1.00 per share; (b) the procedures should provide for (i) the calculation, at such intervals as the Trustees determine are appropriate and as are reasonable in light of current market conditions, of the deviation, if any, between net asset value per share using amortized cost to value portfolio securities and net asset value per share based upon available market quotations with respect to such portfolio securities; (ii) the periodic review by the Trustees of the amount of deviation as well as methods used to calculate the amount of deviation; and (iii) the maintenance of written records of the procedures, the Trustees considerations made pursuant to the procedures and any actions taken upon such considerations; (c) the Trustees should consider what steps should be taken, if any, in the event of a difference of more than 1/2 of 1% between the two methods of valuation; and (d) the Trustees should take such action as the Trustees deem appropriate (such as shortening the average portfolio maturity, realizing gains or losses, or, as provided by the Trust's Declaration of Trust, reducing the number of the outstanding shares of the Money Market Fund) to eliminate or reduce to the extent reasonably practicable material dilution or other unfair results to investors or existing shareholders. Any reduction of the outstanding shares of the Money Market Fund will be effected 37 by having each shareholder proportionately contribute to the Money Market Fund's capital the shares necessary to eliminate or reduce the material dilution or other unfair results to investors or existing shareholders. Each Money Market Fund shareholder will be deemed to have agreed to such contribution in these circumstances by investment in the Money Market Fund. The Rule further requires that the Money Market Fund limit its investments to U.S. dollar-denominated instruments which the Trustees determine present minimal credit risks and which are Eligible Securities (as defined below). The Rule also requires the Money Market Fund to maintain a dollar-weighted average portfolio maturity (not more than 90 days) appropriate to the Money Market Fund's objective of maintaining a stable net asset value of $1.00 per share and precludes the purchase of any instrument with a remaining maturity of more than thirteen months. Should the disposition of a portfolio s e curity result in a dollar-weighted average portfolio maturity of more than 90 days, the Money Market Fund would be required to invest its available cash in such a manner as to reduce such maturity to 90 days or less as soon as reasonably practicable. Generally, for purposes of the procedures adopted under the Rule, the maturity of a portfolio instrument is deemed to be the period remaining (calculated from the trade date or such other date on which the Money Market Fund's interest in the instrument is subject to market action) until the date noted on the face of the instrument as the date on which the principal amount must be paid, or, in the case of an instrument called for redemption, the date on which the redemption payment must be made. A variable rate obligation that is subject to a demand feature is deemed to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. A floating rate instrument that is subject to a demand feature is deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand. An Eligible Security is defined in the Rule to mean a security which: (a) has a remaining maturity of thirteen months or less; (b) either (i) is rated in the two highest short-term rating categories by any two nationally-recognized statistical rating organizations ("NSROs") that have issued a short-term rating with respect to the security or class of debt obligations of the issuer, or (ii) if only one NSRO has issued a short-term rating with respect to the security, then by that NSRO; (c) was a long-term security at the time of issuance whose issuer has outstanding a short-term debt obligation 38 which is comparable in priority and security and has a rating as specified in clause (b) above; or (d) if no rating is assigned by any NSRO as provided in clauses (b) and (c) above, the unrated security is determined by the Trustees to be of comparable quality to any such rated security. As permitted by the Rule, the Trustees have delegated to the Advisor, subject to the Trustees' oversight pursuant to guidelines and procedures adopted by the Trustees, the authority to determine which securities present minimal credit risks and which unrated securities are comparable in quality to rated securities. If the Trustees determine that it is no longer in the best interests of the Money Market Fund and its shareholders to maintain a stable price of $1.00 per share, or if the Trustees believe that maintaining such price no longer reflects a market-based net asset value per share, the Trustees have the right to change from an amortized cost basis of valuation to valuation based on market quotations. The Money Market Fund will notify shareholders of any such change. The Money Market Fund will manage its portfolio in an effort to maintain a constant $1.00 per share price, but the Money Market Fund cannot assure that the value of the shares of the Money Market Fund will never deviate from this price. Since dividends from net investment income (and net short-term capital gains, if any) are declared and accrued on a daily b a sis, the net asset value per share, under ordinary circumstances, is likely to remain constant. Otherwise, r e alized and unrealized gains and losses will not be distributed on a daily basis but will be reflected in the Money Market Fund's net asset value. The amounts of such gains and losses will be considered by the Trustees in determining the action to be taken to maintain the Money Market Fund's $1.00 per share net asset value. Such action may include distribution at any time of part or all of the then-accumulated undistributed net realized capital gains, or reduction or elimination of daily dividends by an amount equal to part or all of the then-accumulated net realized capital losses. However, if realized losses should exceed the sum of net investment income plus realized gains on any day, the net asset value per share on that day might decline below $1.00 per share. In such circumstances, the Money Market Fund may reduce or eliminate the payment of daily dividends for a period of time in an effort to restore the Money Market Fund's $1.00 per share net asset value. A decline in prices of securities could result in significant unrealized depreciation on a mark-to-market basis. Under these circumstances the Money Market Fund may reduce or eliminate the payment of dividends, and utilize a net asset value per share as 39 determined by using available market quotations, or reduce the number of Money Market Fund shares outstanding. PERFORMANCE INFORMATION From time to time, each of the Funds (other than the Money M a r ket Fund) may include the Fund's total return in advertisements or reports to shareholders or prospective shareholders. Quotations of average annual total return for a Fund will be expressed in terms of the average annual compounded rate of return on a hypothetical investment in the Fund over a period of at least one, five, and ten years (up to the life of the Fund) (the ending date of the period will be stated). Total return of a Fund is calculated from two factors: the amount of dividends earned by each Fund share and by the increase or decrease in value of the Fund's share price. See "Calculation of Return Quotations." Performance information for each of the Funds contained in reports to shareholders or prospective shareholders, advertisements, and other promotional literature may be c o m pared to the record of various unmanaged indexes. Performance information for the Nova Fund, the Ursa Fund, and the Metals Fund may be compared to various unmanaged indexes, including, but not limited to, the S&P500 Index or the Dow Jones Industrial Average. Performance information for the Metals Fund also may be compared to its current benchmark, the XAU Index. Performance information for the OTC Fund may be compared to various unmanaged indexes, including, but not limited to, its current benchmark, the NASDAQ 100 IndexTM, and the NASDAQ Composite IndexTM. The NASDAQ Composite IndexTM comparison may be provided to show how the OTC Fund's total return compares to the record of a broad average of over-the- counter stock prices over the same period. The OTC Fund has the ability to invest in securities not included in the NASDAQ 100 IndexTM or the NASDAQ Composite IndexTM, and the OTC Fund's investment portfolio may or may not be similar in composition to NASDAQ 100 IndexTM or the NASDAQ Composite IndexTM. The NASDAQ Composite IndexTM is based on the prices of an unmanaged group of stocks and, unlike the OTC Fund's returns, the returns of the NASDAQ Composite IndexTM, and such other unmanaged indexes, may assume the reinvestment of dividends, but generally do not reflect payments of brokerage commissions or deductions for operating costs and other expenses of investing. Performance information for the Bond Fund and the Juno Fund may be compared to various unmanaged indexes, including, but not limited to, the Shearson Lehman Government (LT) Index. S u ch unmanaged indexes may assume the reinvestment of dividends, but generally do not reflect deductions for 40 operating costs and expenses. In addition, a Fund's total return may be compared to the performance of broad groups of comparable mutual funds with similar investment goals, as such performance is tracked and published by such independent organizations as Lipper Analytical Services, Inc. ("Lipper"), and CDA Investment Technologies, Inc., among others. When Lipper's tracking results are used, the Fund will be compared to Lipper's appropriate fund category, that is, by fund objective and portfolio holdings. Accordingly, the Lipper ranking and comparison, which may be used by the Trust in p e r formance reports, will be drawn from the "Capital Appreciation Funds" grouping for each of the Nova Fund and the Ursa Fund, from the "Small Company Growth Funds" grouping for the OTC Fund, from the "Precious Metals Funds" grouping for the Metals Fund, and from the "Bond Funds" grouping for the Bond Fund and the Juno Fund. Rankings may be listed among one or more of the asset-size classes as determined by Lipper. Since the assets in all mutual funds are always changing, a Fund may be ranked within one Lipper asset-size class at one time and in another Lipper asset-size class at some other time. Footnotes in advertisements and other marketing literature will include the time period and Lipper asset-size c l a s s , as applicable, for the ranking in question. Performance figures are based on historical results and are not intended to indicate future performance. CALCULATION OF RETURN QUOTATIONS For purposes of quoting and comparing the performance of a Fund (other than the Money Market Fund) to that of other m u tual funds and to other relevant market indexes in advertisements or in reports to shareholders, performance for the Fund may be stated in terms of total return. Under the rules of the Securities and Exchange Commission ("SEC Rules"), Funds advertising performance must include total return quotes calculated according to the following formula: P(1+T)n=ERV Where: P = a hypothetical initial payment of $1,000; T = average annual total return; n = number of years (1, 5, or 10); and ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5, or 10 year periods at the end of t h e 1, 5, or 10 year periods (or fractional portion thereof). 41 Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication, and will cover 1, 5, and 10 year periods or a shorter period dating from the effectiveness of the Registration Statement of the Trust. In calculating the ending redeemable value, all dividends and distributions by a Fund are assumed to have been reinvested at net asset value as described in the Trust's Prospectus on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5, and 10 year periods (or fractional portion thereof) that would equate the initial amount invested to the ending redeemable value. From time to time, each Fund, other than the Money Market Fund, also may include in such advertising a total return figure that is not calculated according to the formula set f o r th above in order to compare more accurately the performance of the Fund with other measures of investment return. For example, in comparing the total return of a Fund with data published by Lipper Analytical Services, Inc., or with the performance of the S&P500 Index or the Dow Jones Industrial Average for each of the Nova Fund and the Ursa Fund, the NASDAQ 100 IndexTM for the OTC Fund, the XAU Index for the Metals Fund, and the Lehman Government (LT) Index for the Bond Fund and the Juno Fund, each respective Fund calculates its aggregate total return for the specified periods of time by assuming the investment of $10,000 in Fund shares and assuming the reinvestment of each dividend or other distribution at net asset value on the reinvestment date. Percentage increases are determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the beginning value. Such alternative total return information will be given no greater prominence in such advertising than the information prescribed under SEC Rules. For the one year period ended June 30, 1996, and for the p e r i o d from inception of the Funds (see "Portfolio Transactions and Brokerage") to June 30, 1996, the average annual compounded rate of return of the respective Funds (other than the Money Market Fund), assuming the reinvestment of all dividends and distributions, was as follows:
42 One Year From Inception The Nova Fund 32.77% 71.89% The Ursa Fund -14.11% -22.21% The Rydex OTC Fund 26.44% 65.03% The Rydex Precious Metals Fund 3.67% -8.72% The Rydex U.S. Government Bond Fund -1.48% -1.75% The Juno Fund 4.30% -5.30%
INFORMATION ON COMPUTATION OF YIELD The Bond Fund. In addition to the total return quotations discussed above, the Bond Fund also may advertise the Bond Fund's yield based on a thirty-day (or one month) period ended on the date of the most recent balance sheet included in the Trust's Registration Statement, computed by dividing the net investment income per share of the Bond Fund earned during the period by the maximum offering price per Bond Fund share on the last day of the period, according to the following formula: YIELD = 2[( a-b +1)6-1] cd Where: a = dividends and interest earned during the period; b = expenses accrued for the period (net of reimbursements); c = the average daily number of shares outstanding during the period that were entitled to receive dividends; and d = the maximum offering price per share on the last day of the period. 43 Under this formula, interest earned on debt obligations for purposes of "a" above, is calculated by (i) computing the yield to maturity of each obligation held by the Bond Fund based on the market value of the obligation (including actual accrued interest) at the close of business on the last day of each month, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest), (ii) dividing that figure by 360 and multiplying the quotient by the market value of the obligation (including actual accrued interest as referred to above) to determine the interest income on the obligation that is in the Bond Fund's portfolio (assuming a month of thirty days), and (iii) computing the total of the interest earned on all debt obligations and all dividends accrued on all equity securities during the thirty-day or one month period. In computing dividends accrued, dividend income is recognized by accruing 1/360 of the stated dividend rate of a security each day that the security is in the Bond Fund's portfolio. Undeclared earned income, computed in accordance with generally accepted accounting principles, may be subtracted from the maximum offering price calculation required pursuant to "d" above. The Bond Fund from time to time may also advertise its yield based on a thirty-day period ending on a date other than the most recent balance sheet included in the Trust's Registration Statement, computed in accordance with the yield formula described above, as adjusted to conform with the differing period for which the yield computation is based. Any quotation of performance stated in terms of yield (whether based on a thirty-day or one month period) will be given no greater prominence than the information prescribed under SEC Rules. In addition, all advertisements containing performance data of any kind will include a legend disclosing that such performance data represents past performance and that the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost of such shares. The Bond Fund's yield as of September 30, 1996, based on a thirty-day base period, was approximately 5.51%. The Money Market Fund. The Money Market Fund's annualized current yield, as may be quoted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining, for a stated seven-day period, the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom (which reflect deductions of all expenses of the Money Market Fund such as management fees), in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the 44 period, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7). The Money Market Fund's annualized effective yield, as may be q u oted from time to time in advertisements and other communications to shareholders and potential investors, is computed by determining (for the same stated seven-day period as the current yield) the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom (which reflect deductions of all expenses of the Money Market Fund such as management fees), in the value of a hypothetical pre- existing account having a balance of one share at the beginning of the period, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The Money Market Fund's annualized effective yield and annualized current yield, for the seven-day period ended September 30, 1996, were 4.45% and 4.36%, respectively. The yields quoted in any advertisement or other communication should not be considered a representation of the yields of the Money Market Fund in the future since the yield is not fixed. Actual yields will depend not only on the type, quality, and maturities of the investments held by the Money Market Fund and changes in interest rates on such investments, but also on changes in the Money Market Fund's expenses during the period. Yield information may be useful in reviewing the performance of the Money Market Fund and for providing a basis for comparison with other investment alternatives. However, unlike bank deposits or other investments which typically pay a fixed yield for a stated period of time, the Money Market Fund's yield fluctuates. DIVIDENDS, DISTRIBUTIONS, AND TAXES Dividends and Distributions. Dividends from net investment income and any distributions of net realized capital gains from each of the Funds will be distributed as described in the Trust's Prospectus under "Dividends and Distributions." All such distributions of a Fund normally automatically will be reinvested without charge in additional shares of the same Fund. As discussed in the Trust's Prospectus, the Money Market Fund intends to declare dividends daily from net investment income 45 (and net short-term capital gains, if any) and distribute such dividends monthly. Net income, for dividend purposes, includes accrued interest and accretion of original issue and market discount, plus or minus any short-term gains or losses r e a l ized on sales of portfolio securities, less the amortization of market premium and the estimated expenses of the Money Market Fund. Net income will be calculated immediately prior to the determination of net asset value per share of the Money Market Fund. The Trustees may revise the dividend policy, or postpone the payment of dividends, if the Money Market Fund should have or anticipate any large unexpected expense, loss, or fluctuation in net assets which, in the opinion of the Trustees, might have a significant adverse effect on shareholders of the Money Market Fund. On occasion, in order to maintain a constant $1.00 per share net asset value for the Money Market Fund, the Trustees may direct that the number of outstanding shares of the Money Market Fund be reduced in each shareholder's account. Such reduction may result in taxable income to a shareholder of the Money Market Fund in excess of the net increase (i.e., dividends, less such reduction), if any, in the shareholder's account for a period of time. Furthermore, such reduction may be realized as a capital loss when the shares are liquidated. With respect to the investment by the Bond Fund in U.S. Treasury zero coupon bonds, a portion of the difference between the issue price of zero coupon securities and the face value of such securities (the "original issue discount") is considered to be income to the Bond Fund each year, even though the Bond Fund will not receive cash interest payments from these securities. This original issue discount (imputed income) will comprise a part of the investment company taxable income of the Bond Fund which must be distributed to shareholders of the Bond Fund in order to maintain the qualification of the Bond Fund as a regulated investment company (a "RIC") under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), as described immediately below under "Regulated Investment Company Status," and to avoid Federal income tax at the level of the Bond Fund. Shareholders of the Bond Fund will be subject to income tax on such original issue discount, whether or not such shareholders elect to receive their distributions in cash. Regulated Investment Company Status. As a RIC, a Fund would not be subject to Federal income taxes on the net investment income and capital gains that the Fund distributes to the Fund's shareholders. The distribution of net investment income and capital gains will be taxable to Fund shareholders regardless of whether the shareholder elects to receive these distributions in cash or in additional shares. Distributions 46 reported to Fund shareholders as long-term capital gains shall be taxable as such, regardless of how long the shareholder has owned the shares. Fund shareholders will be notified annually by the Fund as to the Federal tax status of all distributions made by the Fund. Distributions may be subject to state and local taxes. Shareholders of the Money Market Fund will be subject to Federal income tax on dividends paid from interest income derived from taxable securities and on distributions of realized net short-term capital gains. Interest and realized net short-term capital gains distributions are taxable to a shareholder of the Money Market Fund as ordinary dividend income regardless of whether the shareholder receives such distributions in additional shares of the Money Market Fund or in cash. Since the Money Market Fund's income is expected to be derived entirely from interest rather than dividends, none of such distributions will be eligible for the Federal dividends received deduction available to corporations. Each of the Funds will seek to qualify for treatment as a RIC under the Code. Provided that a Fund (i) is a RIC and (ii) distributes at least 90% of the Fund's net investment income (including, for this purpose, net realized short-term capital gains), the Fund itself will not be subject to Federal income taxes to the extent the Fund's net investment income and the Fund's net realized long- and short-term capital gains, if any, are distributed to the Fund's shareholders. To avoid an excise tax on its undistributed income, each Fund generally must distribute at least 98% of its income, including its net long-term capital gains. One of several requirements for RIC qualification is that the Fund must receive at least 90% of the Fund's gross income each year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to the Fund's investments in stock, securities, and foreign currencies (the "90% Test"). Income from investments in precious metals and in precious minerals will not qualify as gross income from "securities" for purposes of the 90% Test. The Metals Fund, therefore, intends to restrict its investment in precious metals and in precious minerals to avoid a violation of the 90% Test. In addition, under the Code, a Fund will not qualify as a RIC for any taxable year if more than 30% of the Fund's gross income for that year is derived from gains on the sale of securities held less than three months (the "30% Test"). These requirements may also restrict the extent of a Fund's a c tivities in option and other portfolio transactions. Specifically, the 30% Test will limit the extent to which a Fund may: (i) sell securities held for less than three 47 months; (ii) write options which expire in less than three months; and (iii) effect closing transactions with respect to call or put options that have been written or purchased within the preceding three months. Finally, as discussed below, this 30% Test requirement also may limit investments by a Fund in futures contracts and options on stock indexes, securities, and futures contracts. Each of the Funds, other than the Money Market Fund, expects to have greater difficulty than other mutual funds in satisfying the 30% Test because of frequent redemptions and exchanges of shares that are expected to occur as investors in the Fund seek to take advantage of anticipated changes in market conditions as a part of their market-timing investment strategies. To minimize the risk that it will not satisfy the 30% Test because of such frequent redemptions and exchanges of shares, each Fund will seek to meet that Fund's obligations in c o n nection with redemptions and exchanges without the realization of gains on the sales of stock or securities, options, futures or forward contracts, options on futures c o n tracts, or foreign currencies (or options, futures contracts, or forward contracts on such foreign currencies). In this regard, the Fund will seek (consistent with the Fund's investment strategies) to use available cash, proceeds of borrowing facilities, proceeds of the sale of stock or securities, options, futures or forward contracts, options on futures contracts, or foreign currencies (or options, futures contracts, or forward contracts on such foreign currencies) that have been held for three months or more, and the proceeds of the sale of such assets that produce either no gain or the smallest amount of such gain. Section 851(h)(3) of the Code provides a special rule for series mutual funds with respect to the 30% Test. Pursuant to Section 851(h)(3), a RIC that is part of a series fund will not fail the 30% Test as a result of sales made within five days of "abnormal redemptions" if: (i) the sum of the percentages for abnormal redemptions exceeds 30%; and (ii) the RIC of which such fund is a part would meet the 30% Test if all the funds of the investment company were treated as a single corporation. Abnormal redemptions are defined as redemptions which occur on any day when net redemptions exceed one percent of net asset value. If abnormal redemptions require a Fund to sell securities with a holding period of less than three months, the Fund intends to make those sales within five days of such redemptions so as to qualify for the exclusion afforded by Section 851(h)(3) of the Code if it is possible to do so. Despite each Fund's objective to satisfy the requirements of Section 851 of the Code, there can be no assurance that a Fund's efforts to achieve that objective will be successful. 48 If a Fund does not satisfy the 30% Test for the Fund's first taxable year, or for any subsequent taxable year, the Fund will not qualify as a RIC for that year. If a Fund fails to qualify as a RIC for any taxable year, the Fund would be taxed in the same manner as an ordinary corporation. In that event, the Fund would not be entitled to deduct the distributions which the Fund had paid to shareholders and, thus, would incur a corporate income tax liability on all of the Fund's taxable income whether or not distributed. The imposition of corporate income taxes on the Fund would directly reduce the return to an investor from an investment in the Fund. In the event of a failure by a Fund to qualify as a RIC, the Fund's distributions, to the extent such distributions are derived from the Fund's current or accumulated earnings and profits, would constitute dividends that would be taxable to the shareholders of the Fund as ordinary income and would be eligible for the dividends received deduction for corporate shareholders. This treatment would also apply to any portion of the distributions that might have been treated in the shareholder's hands as long-term capital gains, as discussed below, had the Fund qualified as a RIC. If a Fund were to fail to qualify as a RIC for one or more taxable years, the Fund could then qualify (or requalify) as a RIC for a subsequent taxable year only if the Fund had distributed to the Fund's shareholders a taxable dividend equal to the full amount of any earnings or profits (less the interest charge mentioned below, if applicable) attributable to such period. The Fund might also be required to pay to the U.S. Internal Revenue Service (the "IRS") interest on 50% of such accumulated earnings and profits. In addition, pursuant to the Code and an interpretative notice issued by the IRS, if the Fund should fail to qualify as a RIC and should thereafter seek to requalify as a RIC, the Fund may be subject to tax on the excess (if any) of the fair market of the Fund's assets over the Fund's basis in such assets, as of the day immediately before the first taxable year for which the Fund seeks to requalify as a RIC. If a Fund determines that the Fund will not qualify as a RIC under Subchapter M of the Code, the Fund will establish procedures to reflect the anticipated tax liability in the Fund's net asset value. When a Fund, other than the Money Market Fund, is required to sell securities to meet significant redemptions or exchanges, the Fund may enter into futures contracts as a hedge against price changes in the securities to be sold. Gains realized by the Fund upon closing out the Fund's position in these contracts are subject to the 30% Test. Ordinarily, these gains could not be offset by declines in the value of the 49 hedged securities for purposes of the 30% Test. Section 851(g)(1) of the Code, however, provides that, in the case of a "designated hedge," for purposes of the 30% Test, increases and decreases in value (during the period of the hedge) of positions which are part of the hedge are to be netted. Section 851(g)(2) of the Code provides that a "designated hedge" exists when: (i) the taxpayer's risk of loss with respect to any position in property is reduced by reason of a c o n tractual obligation to sell substantially identical property; and (ii) the taxpayer clearly identifies the positions which are part of the hedge in the manner prescribed in the IRS regulations. IRS regulations have not yet been issued specifying how this identification requirement can be satisfied. The legislative history with respect to Section 851(g) states that, prior to issuance of regulations, the identification requirement is satisfied either by: (i) placing the positions that are part of the hedge in a separate account that is maintained by a broker, futures commission merchant ("FCM"), custodian, or similar person, and that is designated as a hedging account, provided that such person maintaining such account makes notations identifying the hedged and hedging positions and the d a te on which the hedge is established; or (ii) the designation by such a broker, FCM, custodian, or similar person of such positions as a hedge for purposes of these provisions, provided that the RIC is provided with a written confirmation stating the date that the hedge is established and identifying the hedged and hedging positions. When a Fund, other than the Money Market Fund, enters into futures contracts to hedge against price changes of securities to be sold, the Fund may identify such securities and contracts as a hedge so as to qualify under Section 851(g)(1) of the Code. There can be no assurances, however, that a Fund (or the Fund's agents) will be able to comply with the identification requirements that may be contained in future IRS regulations. Moreover, the netting rule of Section 851(g)(1) is available only if the securities to be sold and the property subject to the futures contracts constitute "substantially identical" property. Each of the Funds, other than the Money Market Fund, generally intends to sell pro rata the securities being hedged, but it is unclear whether the s e c urities and the futures contracts would constitute "substantially identical" property. Special Considerations Applicable to The Rydex Precious Metals Fund. In general, with respect to the Metals Fund, gains from "foreign currencies" and from foreign currency options, f o reign currency futures, and forward foreign exchange contracts ("forward contracts") relating to investments in stock, securities, or foreign currencies will be qualifying 50 income for purposes of determining whether the Metals Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, futures, or forward contracts will be valued for purposes of the RIC diversification requirements applicable to the Metals Fund. Under Code Section 988, special rules are provided for certain transactions in a foreign currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from forward contracts, from futures contracts that are not "regulated futures contracts," and from unlisted options will be treated as ordinary income or loss under Code Section 988. Also, certain foreign exchange gains derived with respect to foreign fixed-income securities are also subject to Section 988 treatment. In general, Code Section 988 gains or losses will increase or decrease the amount of the Metals Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Metals Fund's net capital gain. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Metals Fund would not be able to make any ordinary dividend distributions. The Metals Fund may incur a liability for dividend withholding tax as a result of the Metals Fund's investment in stock or securities of foreign corporations. If, at any year end, more than 50% of the assets of the Metals Fund are comprised of stock or securities of foreign corporations, the Metals Fund may elect to "pass through" to shareholders the amount of foreign taxes paid by the Metals Fund. The Metals Fund will make such an election only if the Metals Fund deems this to be in the best interests of its shareholders. If the Metals Fund does not qualify to make this election or does qualify, but does not choose to do so, the imposition of such taxes would directly reduce the return to an investor from an investment in the Metals Fund. Transactions By the Funds. If a call option written by a Fund expires, the amount of the premium received by the Fund for the option will be short-term or long-term capital gain to the Fund depending on the Fund's holding period for the underlying security or underlying futures contract. If such an option is closed by a Fund, any gain or loss realized by the Fund as a result of the closing purchase transaction will be short-term or long-term capital gain or loss depending on the Fund's holding period for the underlying security or underlying futures contract. If the holder of a call option exercises the holder's right under the option, any gain or loss realized by the Fund upon the sale of the underlying security or 51 underlying futures contract pursuant to such exercise will be short-term or long-term capital gain or loss to the Fund depending on the Fund's holding period for the underlying security or underlying futures contract. With respect to call options purchased by a Fund, the Fund will realize short-term or long-term capital gain or loss if such option is sold and will realize short-term or long-term capital loss if the option is allowed to expire depending on the Fund's holding period for the call option. If such a call option is exercised, the amount paid by the Fund for the option will be added to the basis of the stock or futures contract so acquired. A Fund has available to it a number of elections under the Code concerning the treatment of option transactions for tax purposes. A Fund will utilize the tax treatment that, in the Fund's judgment, will be most favorable to a majority of investors in the Fund. Taxation of these transactions will vary according to the elections made by the Fund. These tax considerations may have an impact on investment decisions made by the Fund. Each of the Nova Fund, the Ursa Fund, the OTC Fund, and the Metals Fund in its operations also will utilize options on stock indexes. Options on "broad based" stock indexes are classified as "nonequity options" under the Code. Gains and losses resulting from the expiration, exercise, or closing of such nonequity options, as well as gains and losses resulting from futures contract transactions, will be treated as long- term capital gain or loss to the extent of 60% thereof and short-term capital gain or loss to the extent of 40% thereof (hereinafter, "blended gain or loss"). In addition, any nonequity option and futures contract held by a Fund on the last day of a fiscal year will be treated as sold for market value on that date, and gain or loss recognized as a result of such deemed sale will be blended gain or loss. The trading strategies of each of the Nova Fund, the Ursa Fund, the OTC Fund, and the Metals Fund involving nonequity options on stock indexes may constitute "straddle" transactions. "Straddles" may affect the taxation of such instruments and may cause the postponement of recognition of losses incurred in certain closing transactions. Each of these four Funds will also have available to the Fund a number of elections under the Code concerning the treatment of option transactions for tax purposes. Each such Fund will utilize the tax treatment that, in the Fund's judgment, will be most favorable to a majority of investors in the Fund. Taxation of these transactions will vary according to the elections made by the Fund. These tax considerations may have an impact on investment decisions made by the Fund. 52 A Fund's transactions in options, under some circumstances, could preclude the Fund's qualifying for the special tax treatment available to investment companies meeting the requirements of Subchapter M of the Code. However, it is the intention of each Fund's portfolio management to limit gains from such investments to less than 10% of the gross income of the Fund during any fiscal year in order to maintain this qualification. Back-Up Withholding. Each Fund is required to withhold and remit to the U.S. Treasury 31% of (i) reportable taxable dividends and distributions and (ii) the proceeds of any redemptions of Fund shares with respect to any shareholder who is not exempt from withholding and who fails to furnish the Trust with a correct taxpayer identification number, who fails to report fully dividend or interest income, or who fails to certify to the Trust that the shareholder has provided a c o r r e ct taxpayer identification number and that the shareholder is not subject to withholding. (An individual's taxpayer identification number is the individual's social security number.) The 31% "back-up withholding tax" is not an additional tax and may be credited against a taxpayer's regular Federal income tax liability. Other Issues. Each Fund may be subject to tax or taxes in certain states where the Fund does business. Furthermore, in those states which have income tax laws, the tax treatment of a Fund and of Fund shareholders with respect to distributions by the Fund may differ from Federal tax treatment. Shareholders are urged to consult their own tax advisors regarding the application of the provisions of tax law described in this Statement of Additional Information in light of the particular tax situations of the shareholders and regarding specific questions as to Federal, state, or local taxes. AUDITORS AND CUSTODIAN Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are the auditors and the independent certified public accountants of the Trust and each of the Funds. Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, acts as the Custodian bank for the Trust and each of the Funds. FINANCIAL STATEMENTS The Financial Statements (audited) of the Trust for the fiscal year ended June 30, 1996, are incorporated by reference from the Trust's 1996 Annual Report to Shareholders. Copies of the Trust's Annual Report may be obtained without charge by contacting the Trust at 6116 Executive Boulevard, Suite 400, 53 Rockville, Maryland 20852, or by telephoning the Trust at 800- 820-0888 or 301-468-8520. 54 Audited Financial Statements for Rydex Series Trust, for the Fiscal Year Ended June 30, 1996, Including the Report of Deloitte & Touche LLP, Independent Auditors for Rydex Series Trust PAGE -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ ANNUAL REPORT, JUNE 30, 1996 RYDEX SERIES TRUST 6116 Executive Boulevard, Suite 400 Rockville, MD 20852 [RYDEX INVESTMENT FLEXIBILITY LOGO (301) 468-8520 (800) 820-0888 APPEARS HERE] -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ DEAR SHAREHOLDER: We are pleased to present the Rydex Series Trust Annual Report for the fiscal year ended June 30, 1996. We will briefly describe the economic environment for U.S. Shareholders for the period covered by this report. In addition, we will discuss how the Rydex Funds performed in this environment relative to their stated objectives. FISCAL YEAR IN REVIEW The U.S. Economy was characterized by slow to moderate economic growth and low inflation during much of our latest fiscal year. The equity markets ended the period generally higher, while bonds, trading in a wide range, finished slightly higher, as measured by the Lehman Long T-Bond Index. During the period, the U.S. Federal Reserve Board (the Fed) held eight regularly scheduled FOMC meetings to establish monetary policy. The Fed reduced its federal funds target rate from 6.00% to 5.25% in an effort to promote a soft landing for the economy (See graph). Short term interest rates, 56 as represented by the three month T- Bill, followed suit. The Federal Reserve Board attempts to strike a balance between restrictive monetary policy that may drive the economy into a recession and easy monetary policy which may promote excessive inflation. The Fed's bias toward easing indicated their belief that lower interest rates were needed to spur economic growth and prevent a recession. [SHORT TERM INTEREST RATE CHART APPEARS HERE ] Source: Bloomberg Financial Markets A number of macroeconomic indicators supported the Fed's view. Specifically, the Consumer Price Index (a common measure of inflation) remained stable for the third and fourth quarter of 1995 at 2.0% and 2.4%, respectively. Real GDP measured at 3.6% for the third quarter 1995 and a lackluster 0.5% for the fourth quarter. In addition, in early 1996, Federal budget battles led to two government shutdowns which furthered the cause of economic weakness. All indications were for low inflation and slowing economic growth to continue. As a result, the consensus forecast was for the Fed to continue to lower the federal funds target rate to prevent a recession. However, in early 1996, several economic indicators caused market psychology to change almost in the blink of an eye. Several reports of conflicting macroeconomic data led most market participants to question whether the economy could sustain a period of slow growth and low inflation. Unfortunately, the major question on Wall Street in early 1996, the direction of the economy and interest rates, was far from being resolved. Of particular note was the U.S. 57 nonfarm payroll employment data. The payroll employment data is the primary monthly indicator of aggregate economic activity because it encompasses every major sector of the economy. It is released on the first Friday of each month. In early 1996, a series of released employment data figures shocked the market by coming in above expectations. Specifically, the February and May employment numbers came in far above estimates, triggering sharp sell- offs in the bond market and pushing long-term interest rates higher. The three month moving average confirmed an upward trend in payroll employment. [PAYROLL EMPLOYMENT CHART APPEARS HERE ] Source: Bureau of Labor Statistics As the new year progressed, it became clear that the economy was growing stronger than originally thought. The first quarter GDP growth rate was a robust 2.3% and the forecast of 3.6% for the second quarter was in contrast to 1995's growth rate of 2.0%. Payroll employment rose by an average of 229,000 a month for the first six months of 1996. Producer inflation picked up due to higher commodity and oil prices. As a result, the market reversed its expectations of further easing by the Fed (for the time being) to an expectation of tightening. Overall, the economy ended the second quarter on a firm note, suggesting a surprising amount of forward momentum going into the second half of the year. FUND STRATEGY AND PERFORMANCE The following is a description of each of the Rydex Funds as compared to their respective benchmarks. Each Fund, with the exception of the U.S Government Money Market Fund, has an investment objective to correlate its returns to a particular benchmark as stated below. 58 2 The Nova Fund ------------- Benchmark: 150% of the performance of the S & P 500 Composite Stock Price Index Inception: July 12, 1993 The general stock market, as represented by the S & P 500 Composite Stock Price Index, ended the fiscal year with a 23.11% total return. The Nova Fund ended the period with a 32.77% total return. To achieve its objective, Nova invested primarily in S & P 500 futures contracts and call options on S & P 500 futures contracts. Nova was able to outperform the S & P 500 Index and perform consistent with its benchmark by using its call options and futures contracts to maintain 150% exposure to the market. [LINE GRAPH APPEARS HERE] -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (7-12-93) 6-30-96 to 6-30-96 -------------------------------------------------------------- --------------- Nova Fund 32.77% 71.89% Standard & Poor's 500 Stock Index 23.11% 49.37% -------------------------------------------------------------- ---------------
59 Past performance is no guarantee of future results. The S & P 500 Stock Index is an unmanaged stock index and, unlike the Fund, has no management fees or other operating expenses to reduce its reported return. Returns are historical and include changes in principal and reinvested dividends and capital gains. 3 The Ursa Fund ------------- Benchmark: Inverse (opposite) of the S & P 500 Composite Stock Price Index Inception: January 7, 1994 Similar to the Nova Fund, Ursa utilizes S & P 500 futures contracts and options on S & P 500 futures contracts to achieve its objective. The Ursa Fund showed a -14.11% total return for the period as a result of its short position in the S & P 500 Index. This compared to a 23.11% return for the S & P 500. Ursa performed better than its benchmark since it is able to earn interest on cash balances which it is required to keep in order to cover its short positions. [LINE GRAPH APPEARS HERE] -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (1-7-94) 6-30-96 to 6-30-96 -------------------------------------------------------------- -------------- Ursa Fund -14.11% -22.21% 60 Standard & Poor's 500 Stock Index 23.11% 42.72% -------------------------------------------------------------- --------------
Past performance is no guarantee of future results. The S & P 500 Stock Index is an unmanaged stock index and, unlike the Fund, has no management fees or other operating expenses to reduce its reported return. Returns are historical and include changes in principal and reinvested dividends and capital gains. 4 The Rydex OTC Fund ------------------ Benchmark: NASDAQ 100 Index (NDX) Inception: February 14, 1994 Over-the-counter securities performed quite well during the fiscal year. The NASDAQ Composite Index, which represents the universe of all OTC securities, was up 26.95% during the period. The OTC Fund outperformed its benchmark, the NASDAQ 100, by .55 percentage points during the fiscal year. The Fund performed i n sync with the NASDAQ 100 by closely matching its investments to that of the index. Generally, the Fund owned approximately eighty of the highest capitalization stocks that comprise the NASDAQ 100. These stocks represented roughly 95% of the capitalization of the index. [LINE GRAPH APPEARS HERE] -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (2-14-94) 61 6-30-96 to 6-30-96 -------------------------------------------------------------- ---- OTC Fund 26.44% 65.03% NASDAQ 100 Index 25.89% 67.19% NASDAQ Composite Index 26.95% 50.87% -------------------------------------------------------------- ----
Past performance is no guarantee of future results. The NASDAQ Composite Index and the NASDAQ 100 Index are unmanaged stock indices and, unlike the Fund, have no management fees or other operating expenses to reduce their reported returns. Returns are historical and include changes in principal and reinvested dividends and capital gains. 5 The Rydex Precious Metals Fund ------------------------------ Benchmark: Philadelphia Stock Exchange Gold/Silver Index (XAU) Inception: December 1, 1993 Gold prices remained within a trading range of $380 an ounce to $430 an ounce for the fiscal year. The XAU Index--which is comprised of mainly North American gold and silver mining and production companies--had a turbulent year. Between June and November the XAU fell from 120.19 to 107.18 or 10.8%. Gold stocks were mainly pressured by Central Bank selling of gold bullion and at the prospects for low inflation. After November, the index made impressive gains until the end of May when it reached 148.89. Unfortunately, much of that gain was lost by the end of the fiscal year. The Rydex Precious Metals Fund mimicked the performance of the XAU Index during the period due to a similar weighting of stocks held by the fund as in the index. [LINE GRAPH APPEARS HERE] 62 -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (12-1-93) 6-30-96 to 6-30-96 -------------------------------------------------------------- --------------- Precious Metals Fund 3.67% -8.72% Philadelphia Stock Exchange Gold/Silver Index 2.97% 2.40% Standard & Poor's 500 Stock Index 23.11% 45.19% -------------------------------------------------------------- ---------------
Past performance is no guarantee of future results. The S & P 500 Index and the PSE Gold/Silver Index are unmanaged stock indexes and, unlike the Fund, have no management fees or other operating expenses to reduce their reported returns. Returns are historical and include changes in principal and reinvested dividends and capital gains. 6 The Rydex U. S. Government Bond Fund ------------------------------------ Benchmark: 120% of the price movement of current Long Treasury Bond Inception: January 3, 1994 To meet its objective, the Fund purchased U. S. Government Bonds and options on Treasury Bond futures traded on the Chicago Board of Trade. Throughout the period, the Fund held a position in the current 30-year Treasury Bond. By 63 combining a position in the 30-year Treasury Bond with call options on Treasury Bond futures, the Fund effectively increased its duration to approximate 120% exposure to the Long Bond. The rise in interest rates during 1996 caused the price of the longer term Treasury Bonds to decrease. As a result, the Fund ended the period with a total return of -1.48%. [LINE GRAPH APPEARS HERE] -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (1-3-94) 6-30-96 to 6-30-96 -------------------------------------------------------------- --------------- U.S. Government Bond Fund -1.48% -1.75% Price movement of 30 year Treasury Bond -5.17% -9.72% Lehman Brothers Long T-Bond Index 3.36% 14.46% -------------------------------------------------------------- ---------------
Past performance is no guarantee of future results. The Lehman Brothers Long T- Bond Index is an unmanaged bond index and, unlike the Fund, has no management fees or other operating expenses to reduce its reported return. The Price movement of the 30-year Treasury Bond represents a cumulative percentage change in its closing price. Returns are historical and include changes in principal and reinvested dividends and capital gains. 7 64 The Juno Fund ------------- Benchmark: Inverse (opposite) of the price movement of current Long Treasury Bond Inception: March 3, 1995 To achieve its objective, Juno attempts to approximate a 100% short position in the Long Treasury Bond. During the fiscal year, the Fund sold Treasury Bond Futures and bought puts on the Treasury Bond Futures traded on the Chicago Board of Trade. Generally, the Treasury Bond Futures will have a high correlation to the 30-year Treasury Bond. For the fiscal year, the price movement on the 30-year Treasury Bond was down 5.17%. Juno was up 4.30% under- performing its benchmark by .87 percentage points. Juno's under-performance was due to the fact that the bond futures did not decline as much as the cash bond during the period. [LINE GRAPH APPEARS HERE] -------------------------------------------------------------- ------------------
Total Return ------------ One Year ended Since Inception (3-3-95) 6-30-96 to 6-30-96 -------------------------------------------------------------- --------------- The Juno Fund 4.30% -5.30% Price movement of 30 year Treasury Bond -5.17% 6.04% Lehman Brothers Long T-Bond Index 3.36% 16.71% 65 -------------------------------------------------------------- ---------------
Past performance is no guarantee of future results. The Lehman Brothers Long T- Bond Index is an unmanaged bond index and, unlike the Fund, has no management fees or other operating expenses to reduce its reported return. The Price movement of the 30-year Treasury Bond represents a cumulative percentage change in its closing price. Returns are historical and include changes in principal and reinvested dividends and capital gains. 8 THE RYDEX U. S. GOVERNMENT MONEY MARKET FUND The objective of the Rydex U. S. Government Money Market Fund is to provide security of principal, high current income, and liquidity. To meet its objective, the Fund invested in U. S. Government money market instruments, keeping the Fund's average maturity to a minimum. The low average maturity allowed the Fund to accommodate a high turnover while participating in increases in short term interest rates. For the fiscal year, the Fund posted an average annual total return of 4.60%. During the fiscal year shareholders redeemed $2,520,809,574 from the Nova Fund. A portion of those proceeds received by shareholders represent capital gain distributions in the amounts of $12,578,277 in the Nova Fund. Additionally, on September 29, 1995 the OTC Fund made a long-term capital gain d i stribution of $511,919 to shareholders of record of September 28, 1995. This notification is to meet certain IRS requirements. IN SUMMARY The past year has been an eventful period for investors. We are pleased with 66 the performance of each of our funds as they have afforded our shareholders opportunities in step with specific market benchmarks. As always, we remain committed to providing new, innovative products to service the needs of professional money managers and their clients. At Rydex, we appreciate our shareholder's confidence which is represented by our asset growth over the past few years. If you have any questions or comments, call us at (800) 820-0888 or (301) 468-8520. Sincerely, /s/ Albert P. Viragh Albert P. (Skip) Viragh Chairman of the Board 9 RYDEX SERIES TRUST NOVA FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Contracts (Note 1) ------------ --------------- OPTIONS PURCHASED 15.9% Call Options on: S&P 500 Futures Contracts Expiring September 1996 at 530 67 (Cost $29,691,424) 423 $ 31,048,200 ------------ Face Amount ------------ U.S. TREASURY OBLIGATIONS 25.3% U.S. Treasury Bills 5.12% due 9/12/96 (Cost $49,480,889) $50,000,000 49,480,889 ------------ REPURCHASE AGREEMENT 58.8% Repurchase Agreement Collateralized by U.S. Treasury Obligations-- 5.45% due 7/1/96 (Note 3) 114,900,000 114,900,000 ------------ Total Investments 100% (Cost $194,072,313) $195,429,089 ============ -------------------------------------------------------------- ----------------- Unrealized Gain Contracts (Note 1) ------------ --------------- FUTURES CONTRACTS PURCHASED S&P 500 Futures Contracts Expiring September 1996 (Underlying Face Amount at Market Value $191,287,475) 570 $ 1,595,338 ============
See Notes to Financial Statements. 68 10 RYDEX SERIES TRUST URSA FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Contracts (Note 1) ----------- --------------- OPTIONS PURCHASED 52.8% Put Options on: S&P 500 Futures Contract Expiring September 1996 at 750 (Cost $3,192,635) 89 $ 3,257,400 ------------ Call Options on: S&P 500 Index Expiring August 21, 1996 at 320 (Cost $200,056,600) 6,000 210,648,000 ------------ Total Options Purchased (Cost $203,249,235) 213,905,400 ------------ Face Amount ----------- U.S. TREASURY OBLIGATIONS 24.5% 69 U.S. Treasury Bill 4.97% due 8/15/96 $50,000,000 49,689,375 U.S. Treasury Bill 5.10% due 9/12/96 50,000,000 49,483,424 ------------ Total U.S. Treasury Obligations (Cost $99,172,799) 99,172,799 ------------ REPURCHASE AGREEMENT 22.7% Repurchase Agreement Collateralized by U.S. Treasury Obligations-- 5.45% due 7/1/96 (Note 3) 92,000,000 92,000,000 ------------ Total Investments 100% (Cost $394,422,034) $405,078,199 ============ -------------------------------------------------------------- --------------- Unrealized Gain Contracts (Note 1) ----------- --------------- FUTURES CONTRACTS SOLD S&P 500 Futures Contract Expiring September 1996 (Underlying Face Amount at Market Value $164,682,875) 484 $ 892,600 ============ Market Value WRITTEN OPTIONS CONTRACTS (Note 1) ------------ Call Options on: S&P 500 Index Expiring August 21, 1996 at 330 70 (Proceeds $194,132,927) 6,000 $204,690,000 ============
See Notes to Financial Statements. 11 RYDEX SERIES TRUST U.S. GOVERNMENT MONEY MARKET FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Face Amount (Note 1) ----------- ------------ FEDERAL AGENCY DISCOUNT NOTES 29.4% Federal National Mortgage Association 5.18% due 7/1/96 $10,000,000 $ 10,000,000 Federal National Mortgage Association 5.26% due 7/15/96 10,000,000 9,994,155 Federal National Mortgage Association 5.19% due 7/18/96 10,000,000 9,975,492 Federal National Mortgage Association 5.27% due 7/25/96 10,000,000 9,964,867 Federal National Mortgage Association 5.28% due 7/30/96 10,000,000 9,957,467 71 ------------ Total Federal Agency Discount Notes (Cost $49,891,981) 49,891,981 ------------ REPURCHASE AGREEMENT 70.6% Repurchase Agreement Collateralized by U.S. Treasury Obligations--5.45% due 7/1/96 (Note 3) 120,000,000 120,000,000 ------------ Total Investments 100% (Cost $169,891,981) $169,891,981 ============
See Notes to Financial Statements. 12 RYDEX SERIES TRUST OVER-THE-COUNTER FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Shares (Note 1) ------ ----------- COMMON STOCKS 80.1% Microsoft Corp.* 61,278 $ 7,361,020 Intel Corp. 85,350 6,267,891 Cisco Systems, Inc.* 57,636 3,263,638 Oracle Systems Corp.* 70,300 2,772,437 Amgen* 27,733 1,497,582 MCI Communications, Inc. 56,272 1,441,970 Sun Microsystems, Inc.* 18,979 1,117,389 72 Worldcom, Inc.* 20,064 1,111,044 Tele-Communications, Inc. 60,017 1,087,808 U.S. Healthcare, Inc. 14,331 788,205 U.S. Robotics, Inc.* 9,192 785,916 3Com Corp.* 14,959 684,374 Tellabs, Inc.* 9,342 624,746 HBO & Company 8,586 581,702 Parametric Technology* 13,392 580,878 Applied Materials, Inc.* 18,928 577,304 Novell, Inc.* 38,095 528,568 MFS Communications* 12,989 488,711 Dell Computer Corp.* 9,522 484,432 Stratcom* 7,762 436,612 Price/Costco, Inc.* 19,840 429,040 Chiron Corp.* 4,305 421,890 America Online, Inc.* 8,932 390,775 Nordstrom, Inc. 8,624 383,768 Comcast Corp. Class A 20,325 376,012 Peoplesoft, Inc.* 5,170 368,363 Northwest Airline Corp.* 9,303 367,468 DSC Communications Corp.* 12,109 364,783 Paychex, Inc. 7,495 360,697 Informix Corp.* 15,412 346,770 Qualcomm* 6,386 339,256 Willamette Industries, Inc. 5,611 333,854 BMC Software, Inc.* 5,354 319,902 Staples* 15,982 311,649 Oxford Health Plans, Inc.* 7,554 310,658 Glenayre Tech., Inc.* 6,213 310,650 Atmel Corp.* 10,269 309,354 ADC Telecommunications, Inc.* 6,388 287,460 Sigma Aldrich Corp. 5,050 270,175
Market Value Shares (Note 1) ------ ----------- Viking Office Products* 8,571 $ 268,915 Adaptec* 5,661 268,190 Adobe Systems 7,470 267,986 Apple Computer, Inc. 12,513 262,773 Cintas Corp. 4,887 261,455 Gateway 2000, Inc.* 7,570 257,380 St. Jude Medical, Inc.* 7,335 245,722 Paging Network* 10,205 244,920 Linear Technology Corp. 7,793 233,790 73 Xilinx, Inc.* 7,302 231,838 Stryker Corp.* 10,107 229,934 Intuit, Inc.* 4,710 222,548 Tyson Foods, Inc. 7,960 217,905 NEXTEL Communications, Inc.* 11,394 217,198 AES Corp.* 7,617 215,180 Boston Chicken Inc.* 6,520 211,900 PACCAR, Inc. 3,984 195,216 Worthington Industries, Inc. 9,329 194,743 American Greetings, Corp. 6,960 190,530 Biogen, Inc.* 3,382 185,587 Centocor, Inc.* 6,106 182,417 Genzyme Corp.* 3,506 176,177 Biomet, Inc.* 12,092 173,822 Altera Corp.* 4,529 172,102 Healthcare Compare Corp.* 3,528 171,990 Sybase, Inc.* 7,107 167,903 Compuware Corp.* 4,239 167,441 McCormick & Co. 6,995 154,764 General Nutrition Companies, Inc.* 8,806 154,105 Electronics Arts, Inc.* 5,760 154,080 Cracker Barrel Old Country Store, Inc. 6,310 153,018 Idexx Laboratories Inc.* 3,898 152,997 Autodesk, Inc. 4,831 144,326 KLA Instruments, Inc.* 4,986 115,925 Cirrus Logic, Inc.* 6,314 110,495 American Power Conversion Corp.* 9,273 95,048 Perrigo Company* 7,384 83,070 Lam Research Corp.* 3,032 78,832 Stewart & Stevenson Services, Inc. 3,465 78,829 ----------- Total Common Stocks (Cost $38,825,017) $46,395,802 -----------
* Non-Income Producing Securities. See Notes to Financial Statements. 13 RYDEX SERIES TRUST OVER-THE-COUNTER FUND SCHEDULE OF INVESTMENTS (continued) -------------------------------------------------------------- ------------------ June 30, 1996 74 -------------------------------------------------------------- ------------------
Market Value Contracts (Note 1) ----------- ----------- OPTIONS PURCHASED 0.0% Call Options On: NASDAQ 100 Option Contract Expiring July 1996 at 690 (Cost $34,349) 37 $ 32,375 ----------- Face Amount ----------- REPURCHASE AGREEMENT 19.9% Repurchase Agreement Collateralized by U.S. Treasury Obligations--5.45% due 7/1/96 (Note 3) $11,500,000 11,500,000 ----------- Total Investments 100% (Cost $50,359,366) $57,928,177 =========== -------------------------------------------------------------- --------------- Market Value Contracts (Note 1) ----------- ----------- 75 WRITTEN OPTIONS CONTRACTS Put Options On: NASDAQ 100 Option Contract Expiring July 1996 at 690 (Proceeds $88,577) 37 $ 74,463 ===========
See Notes to Financial Statements. 14 RYDEX SERIES TRUST PRECIOUS METALS FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Shares (Note 1) ------- ----------- COMMON STOCKS 94.8% Mining and Precious Metals Stocks Barrick Gold Corp. 428,073 $11,611,480 Placer Dome, Ltd. 286,354 6,836,702 Newmont Mining Corp. 118,961 5,873,711 Homestake Mining Co. 175,528 3,005,917 Santa Fe Pacific Gold Corp. 157,471 2,224,278 Echo Bay Mines, Ltd. 156,426 1,681,580 TVX Gold, Inc.* 191,582 1,388,969 Battle Mountain Gold Co. 95,842 694,854 Pegasus Gold, Inc.* 41,718 511,046 Horsham Corp. 32,443 450,147 ASA Limited 11,492 448,188 Hecla Mining Co. 61,144 428,008 Getchell Gold Corp.* 11,106 391,486 First Mississippi Corp. 11,882 264,374 76 Agnico Eagle Mines, Ltd. 14,496 235,560 Hemlo Gold Mines, Inc. 9,900 105,188 Kinross Gold Corp.* 8,700 65,250 Freeport McMoran, Inc., Class A 1,887 56,374 Engelhard Corp. 2,438 56,074 Newmont Gold Corp. 1,100 55,412 Cambior, Inc. 2,908 38,894 Anglo American Gold Investment Co., Ltd. 3,470 29,495 Western Deep Levels, Ltd. 800 29,000 Amax Gold, Inc.* 4,324 23,782 Amax, Inc.* 592 17,982 MK Gold Co.* 4,437 6,656 Siskon Gold Corp., Class A* 2,959 5,178 Buffelsfontein Gold Mining Co., Ltd.* 894 4,135 ----------- Total Common Stocks (Cost $38,944,761) $36,539,720 -----------
* Non-Income Producing Securities. See Notes to Financial Statements. 15 RYDEX SERIES TRUST PRECIOUS METALS FUND SCHEDULE OF INVESTMENTS (continued) -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Contracts (Note 1) ----------- ----------- OPTIONS PURCHASED 0.0% Call Options On: XAU Index Option Contract Expiring July 1996 at 130 77 (Cost $10,060) 20 $ 2,750 ----------- Face Amount ----------- REPURCHASE AGREEMENT 5.2% Repurchase Agreement Collateralized by U.S. Treasury Obligations-- 5.45% due 7/1/96 (Note 3) $2,000,000 2,000,000 ----------- Total Investments 100% (Cost $40,954,821) $38,542,470 =========== -------------------------------------------------------------- --------------- Market Value Contracts (Note 1) ----------- ----------- WRITTEN OPTION CONTRACTS Put Options On: XAU Index Expiring July 1996 at 130 (Proceeds $9,189) 20 $ 14,250 ===========
See Notes to Financial Statements. 16 78 RYDEX SERIES TRUST U.S. GOVERNMENT BOND FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Face Amount (Note1) ----------- ----------- U.S. TREASURY OBLIGATIONS 92.0% U.S. Treasury Bond 6.00% due 2/15/2026 (Cost $16,295,276) $18,519,000 $16,418,251 ----------- Contracts ----------- OPTIONS PURCHASED 3.0% Call Options On: U.S. Treasury Bond Futures Contract Expiring September 1996 at 100 (Cost $451,165) 55 525,078 ----------- Face Amount ----------- REPURCHASE AGREEMENT 5.0% 79 Repurchase Agreement Collateralized by U.S. Treasury Obligations-- 5.45% due 7/1/96 (Note 3) $ 900,000 900,000 ----------- Total Investments 100.0% (Cost $17,646,441) $17,843,329 ===========
See Notes to Financial Statements. 17 RYDEX SERIES TRUST JUNO FUND SCHEDULE OF INVESTMENTS -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Market Value Contracts (Note 1) ----------- ----------- OPTIONS PURCHASED 0.7% Put Options On: U.S. Treasury Bond Futures Contracts Expiring September 1996 at 132 (Cost $141,622) 6,000 $ 134,812 ----------- 80 Face Amount ----------- REPURCHASE AGREEMENT 99.3% Repurchase Agreement collateralized by U.S. Treasury Obligations--5.45% 7/1/96 (Note 3) $18,700,000 18,700,000 ----------- Total Investments 100% (Cost $18,841,622) $18,834,812 =========== -------------------------------------------------------------- ---------------- Unrealized Contracts (Loss) ----------- ----------- FUTURES CONTRACTS SOLD U.S. Treasury Bond Futures Contract Expiring September 1996 (Underlying Face Amount at Market Value $18,291,719) 167 $ (380,793) ===========
See Notes to Financial Statements. 18 RYDEX SERIES TRUST STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------- ------------------ 81 June 30, 1996 -------------------------------------------------------------- ------------------
U.S. Government Nova Ursa Money Fund Fund Market Fund ------------ ------------ ------------ ASSETS Securities at Value (Note 1)--See Accompanying Schedules $195,429,089 $405,078,199 $169,891,981 Receivable for Future Contracts Settlement 932,795 0 0 Investment Income Receivable 51,911 41,783 54,500 Cash in Custodian Bank 1,526,720 1,524,942 2,121 Cash on Deposit with Broker 0 4,175,000 0 Receivable for Shares Purchased 36,514,486 1,054,705 11,921,785 Unamortized Organization Costs (Note 1) 70,760 41,417 22,333 Prepaid Expenses 8,929 14,155 16,957 ------------ ------------ ------------ Total Assets 234,534,690 411,930,201 181,909,677 ------------ ------------ ------------ LIABILITIES Payable for Securities Purchased 4,028,551 0 0 Payable for Futures Contracts Settlement 0 963,305 0 Written Options at Market Value 0 204,690,000 0 82 Liability for Shares Redeemed 5,809,645 13,518,618 27,876,178 Dividends Payable 0 0 6,435 Investment Advisory Fee Payable 101,726 142,245 62,886 Transfer Agent Fee Payable 33,909 39,513 25,154 Other Liabilities 19,743 23,252 14,477 ------------ ------------ ------------ Total Liabilities 9,993,574 219,376,933 27,985,130 ------------ ------------ ------------ NET ASSETS $224,541,116 $192,553,268 $153,924,547 ============ ============ ============ Shares Outstanding 14,321,854 25,507,832 153,983,648 ============ ============ ============ Net Asset Value Per Share $15.68 $7.55 $1.00 ====== ===== =====
See Notes to Financial Statements. 19 RYDEX SERIES TRUST STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------- ------------------ June 30, 1996 -------------------------------------------------------------- ------------------
Over-the- Precious U.S. Counter Metals Government Juno 83 Fund Fund Bond Fund Fund ----------- ----------- ----------- ----------- ASSETS Securities at Value (Note 1)-- See Accompanying Schedules $57,928,177 $38,542,470 $17,843,329 $18,834,812 Receivable for Securities Sold 4,639,775 2,396,213 0 0 Investment Income Receivable 7,425 10,008 418,552 8,493 Cash in Custodian Bank 49,838 91,025 15,918 74,025 Cash on Deposit with Broker 532,705 197,692 0 403,686 Receivable for Shares Purchased 10,302,505 317,286 4,255,955 30,486 Unamortized Organization Costs (Note 1) 12,352 17,098 10,391 24,852 Other Assets 7,287 4,987 4,093 974 ----------- ----------- ----------- ----------- Total Assets 73,480,064 41,576,779 22,548,238 19,377,328 ----------- ----------- ----------- ----------- LIABILITIES Payable for Securities Purchased 16,424,003 1,306,676 2,490,360 0 Payable for Futures Contracts Settlement 0 0 0 194,870 Written Options at Market Value 74,463 14,250 0 0 Liability for Shares Redeemed 8,204,898 3,625,201 1,550,956 260,825 Dividends Payable 0 0 155,645 0 Investment Advisory Fee Payable 26,440 30,914 6,427 12,681 Transfer Agent Fee Payable 7,051 8,244 2,571 3,523 Organization Expense Payable 84 to Advisor 0 0 0 33,792 Other Liabilities 27,295 17,924 11,134 12,024 ----------- ----------- ----------- ----------- Total Liabilities 24,764,150 5,003,209 4,217,093 517,715 ----------- ----------- ----------- ----------- NET ASSETS $48,715,914 $36,573,570 $18,331,145 $18,859,613 =========== =========== =========== =========== Shares Outstanding 3,213,376 4,039,466 2,043,061 1,991,493 =========== =========== =========== =========== Net Asset Value Per Share $15.16 $9.05 $8.97 $9.47 ====== ===== ===== =====
See Notes to Financial Statements. 20 RYDEX SERIES TRUST STATEMENT OF OPERATIONS -------------------------------------------------------------- ------------------ Year Ended June 30, 1996 -------------------------------------------------------------- ------------------
U.S. Government Nova Ursa Money Fund Fund Market Fund ----------- ------------ ----------- 85 INVESTMENT INCOME Interest $ 5,854,668 $ 8,410,112 $9,185,697 Dividends 0 0 0 ----------- ------------ ---------- Total Income 5,854,668 8,410,112 9,185,697 ----------- ------------ ---------- EXPENSES Advisory Fees (Note 4) 1,022,794 1,607,706 891,864 Transfer Agent Fees (Note 4) 327,476 451,107 403,167 Audit and Outside Services 90,116 108,157 129,480 Accounting Fees (Note 4) 21,463 24,343 5,683 Legal 59,596 66,258 66,647 Organizational Expenses 34,953 16,583 8,901 Registration Fees 20,997 56,530 108,866 Custodian Fees 76,774 76,277 37,995 Miscellaneous 93,705 62,855 106,054 ----------- ------------ ---------- Total Expenses 1,747,874 2,469,816 1,758,657 Custodian Fees Paid Indirectly (Note 5) 72,371 71,474 32,792 ----------- ------------ ---------- Net Expenses 1,675,503 2,398,342 1,725,865 ----------- ------------ ---------- Net Investment Income 4,179,165 6,011,770 7,459,832 ----------- ------------ ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net Realized Gain (Loss) on: 86 Investment Securities 16,449,931 71,815,746 467 Written Options (985,101) (82,325,052) 0 Futures Contracts 6,629,915 (26,008,525) 0 ----------- ------------ ---------- Total Net Realized Gain (Loss) 22,094,745 (36,517,831) 467 Net Change in Unrealized Appreciation (Depreciation) on Investments, Options and Futures Contracts 2,685,556 3,161,168 0 ----------- ------------ ---------- Net Gain (Loss) on Investments 24,780,301 (33,356,663) 467 ----------- ------------ ---------- Net Increase (Decrease) in Net Assets from Operations $28,959,466 $(27,344,893) $7,460,299 =========== ============ ==========
See Notes to Financial Statements. 21 RYDEX SERIES TRUST STATEMENT OF OPERATIONS -------------------------------------------------------------- ------------------ Year Ended June 30, 1996 -------------------------------------------------------------- ------------------
Over-the- Precious U.S. Counter Metals Government Juno Fund Fund Bond Fund Fund 87 ---------- ----------- ---------- ----------- INVESTMENT INCOME Interest $1,048,165 $ 303,537 $1,111,295 $ 1,014,806 Dividends 148,945 376,675 0 0 ---------- ----------- ---------- ----------- Total Income 1,197,110 680,212 1,111,295 1,014,806 ---------- ----------- ---------- ----------- EXPENSES Advisory Fees (Note 2) 541,443 406,902 97,820 174,866 Transfer Agent Fees (Note 2) 123,358 114,476 37,793 47,333 Audit and Outside Services 90,610 66,908 28,067 18,097 Accounting Fees (Note 4) 0 13,469 7,545 8,276 Legal 19,049 18,081 11,068 5,127 Organizational Expenses 4,945 6,844 2,899 6,775 Registration Fees 23,997 30,041 16,394 12,790 Custodian Fees 59,835 32,224 12,592 20,426 Miscellaneous 52,767 15,222 21,994 26,542 ---------- ----------- ---------- ----------- Total Expenses 916,004 704,167 236,172 320,232 Custodian Fees Paid Indirectly (Note 5) 23,410 20,521 7,789 16,022 ---------- ----------- ---------- ----------- Net Expenses 892,594 683,646 228,383 304,210 ---------- ----------- ---------- ----------- Net Investment Income (Loss) 304,516 (3,434) 882,912 710,596 ---------- ----------- ---------- ----------- REALIZED AND UNREALIZED GAIN 88 (LOSS) ON INVESTMENTS Net Realized Gain (Loss) on: Investment Securities 7,421,330 2,270,470 (103,013) 7,014 Written Options (12,698) 17,800 0 0 Futures Contracts 0 0 0 (1,862,302) ---------- ----------- ---------- ----------- Total Net Realized Gain (Loss) 7,408,632 2,288,270 (103,013) (1,855,288) Net Change in Unrealized Appreciation (Depreciation) on Investments, Options and Futures Contracts (894,564) (6,585,369) 188,414 (397,053) ---------- ----------- ---------- ----------- Net Gain (Loss) on Investments 6,514,068 (4,297,099) 85,401 (2,252,341) ---------- ----------- ---------- ----------- Net Increase (Decrease) in Net Assets from Operations $6,818,584 $(4,300,533) $ 968,313 $(1,541,745) ========== =========== ========== ===========
See Notes to Financial Statements. 22 RYDEX SERIES TRUST STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Nova Fund Ursa Fund ------------------------- -------------------------- 89 Year Ended Year Ended Year Ended Year Ended June 30,1996 June 30,1995 June 30,1996 June 30,1995 ------------ ------------ ------------ ------------ FROM INVESTMENT ACTIVITIES Net Investment Income (Loss) $ 4,179,165 $ 1,439,357 $ 6,011,770 $ 6,175,756 Net Realized Gain (Loss) on Investments 22,094,745 13,817,408 (36,517,831) (35,881,477) Net Change in Unrealized Appreciation (Depreciation) of Investments, Options and Futures Contracts 2,685,556 1,292,835 3,161,168 (6,422,346) ------------ ------------ ------------ ------------ Net Increase (Decrease) in Net Assets from Operations 28,959,466 16,549,600 (27,344,893) (36,128,067) ------------ ------------ ------------ ------------ Distributions to Shareholders From Net Investment Income (Note 1) 0 (1,456,675) 0 (5,638,191) From Realized Gain on Investments 0 (4,253,350) 0 0 Net Increase (Decrease) in Net Assets from Shares Transactions (Note 8) 132,666,112 (25,838,163) 92,269,466 58,496,332 ------------ ------------ ------------ ------------ Net Increase in Net Assets 161,625,578 (14,998,588) 64,924,573 16,730,074 ------------ ------------ ------------ ------------ NET ASSETS--Beginning of 90 Period 62,915,538 77,914,126 127,628,695 110,898,621 ------------ ------------ ------------ ------------ NET ASSETS--End of Period $224,541,116 $ 62,915,538 $192,553,268 $127,628,695 ============ ============ ============ ============
See Notes to Financial Statements. 23 RYDEX SERIES TRUST STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
U.S. Government Money Market Fund --------------------------- Year Ended Year Ended June 30,1996 June 30,1995 ------------- ------------ FROM INVESTMENT ACTIVITIES Net Investment Income (Loss) $ 7,459,832 $ 6,154,866 Net Realized Gain (Loss) on Investments 467 0 Net Change in Unrealized Appreciation (Depreciation) of Investments 0 0 ------------- ------------ Net Increase (Decrease) in Net Assets from 91 Operations 7,460,299 6,154,866 ------------- ------------ Distributions to Shareholders From Net Investment Income (Note 1) (7,466,933) (6,073,204) From Realized Gain on Investments (467) 0 Net Increase (Decrease) in Net Assets from Shares Transactions (Note 8) (130,266,747) 196,010,161 ------------- ------------ Net Increase (Decrease) in Net Assets (130,273,848) 196,091,823 ------------- ------------ NET ASSETS--Beginning of Period 284,198,395 88,106,572 ------------- ------------ NET ASSETS--End of Period $ 153,924,547 $284,198,395 ============= ============
See Notes to Financial Statements. 24 RYDEX SERIES TRUST STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Over-the- Precious Metals Counter Fund Fund -------------------------- -------------------------- 92 Year Ended Year Ended Year Ended Year Ended June 30,1996 June 30,1995 June 30,1996 June 30,1995 ------------ ------------ ------------ ------------ FROM INVESTMENT ACTIVITIES Net Investment Income (Loss) $ 304,516 $ 647,070 $ (3,434) $ 339,855 Net Realized Gain (Loss) on Investments 7,408,632 8,710,161 2,288,270 (9,206,800) Net Change in Unrealized Appreciation (Depreciation) of Investments, and Option Contracts (894,564) 8,840,779 (6,585,369) 4,226,627 ------------ ----------- ----------- ----------- Net Increase (Decrease) in Net Assets from Operations 6,818,584 18,198,010 (4,300,533) (4,640,318) Distributions to Shareholders From Net Investment Income (Note 1) 0 (542,955) 0 (332,993) From Realized Gain on Investments (1,826,446) (3,435,400) 0 0 Net Increase (Decrease) in Net Assets from Shares Transactions (Note 8) (18,223,812) 17,033,155 13,022 44,308,359 ------------ ----------- ----------- ----------- Net Increase (Decrease) in Net Assets (13,231,674) 31,252,810 (4,287,511) 39,335,048 ------------ ----------- ----------- ----------- NET ASSETS--Beginning of Period 61,947,588 30,694,778 40,861,081 1,526,033 93 ------------ ----------- ----------- ----------- NET ASSETS--End of Period $ 48,715,914 $61,947,588 $36,573,570 $40,861,081 ============ =========== =========== ===========
See Notes to Financial Statements. 25 RYDEX SERIES TRUST STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
U.S. Government Bond Fund Juno Fund -------------------------- --------------------------- Year Ended Year Ended Year Ended Period Ended June 30,1996 June 30,1995 June 30,1996 June 30,1995* ------------ ------------ ------------ ------------- FROM INVESTMENT ACTIVITIES Net Investment Income (Loss) $ 882,912 $ 71,541 $ 710,596 $ 135,504 Net Realized Gain (Loss) on Investments (103,013) 277,544 (1,855,288) (1,636,350) Net Change in Unrealized Appreciation (Depreciation) of Investments, Options 94 and Futures Contracts 188,414 56,925 (397,053) 9,450 ----------- ---------- ----------- ----------- Net Increase (Decrease) in Net Assets from Operations 968,313 406,010 (1,541,745) (1,491,396) Distributions to Shareholders From Net Investment Income (Note 1) (885,787) (46,239) 0 0 From Realized Gain on Investments (243,678) 0 0 0 Net Increase (Decrease) in Net Assets from Shares Transactions (Note 8) 15,900,788 667,535 16,100,047 5,792,707 ----------- ---------- ----------- ----------- Net Increase (Decrease) in Net Assets 15,739,636 1,027,306 14,558,302 4,301,311 ----------- ---------- ----------- ----------- NET ASSETS--Beginning of Period 2,591,509 1,564,203 4,301,311 0 ----------- ---------- ----------- ----------- NET ASSETS--End of Period $18,331,145 $2,591,509 $18,859,613 $ 4,301,311 =========== ========== =========== ===========
* Commencement Of Operations: March 3, 1995. See Notes to Financial Statements. 26 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS 95 -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Nova Fund ---------------------------------------- For the Year For the Year For the Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 11.81 $ 9.77 $ 10.01 -------- ------- ------- Net Investment Income .56 .28 .01 Net Realized and Unrealized Gains (Losses) on Securities 3.31 2.88 (.25) -------- ------- ------- Net Increase (Decrease) in Net Asset Value from Operations 3.87 3.16 (.24) Dividends to Shareholders .00 (.29) .00 Distributions to Shareholders From Net Realized Capital Gain .00 (.83) .00 -------- ------- ------- Net Increase (Decrease) in Net Asset Value 3.87 2.04 (.24) -------- ------- ------- NET ASSET VALUE--END OF PERIOD $ 15.68 $ 11.81 $ 9.77 96 ======== ======= ======= TOTAL INVESTMENT RETURN 32.77% 32.65% (2.47)% RATIOS TO AVERAGE NET ASSETS Expenses 1.31% 1.43% 1.73%** Net Investment Income 3.14% 2.62% 1.05%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 0% 0% 0% Net Assets, End of Period (000's omitted) $224,541 $62,916 $77,914
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: July 12, 1993. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 27 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Ursa Fund ---------------------------------------- For the Year For the Year For the Period 97 Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 8.79 $ 10.54 $ 10.00 -------- -------- -------- Net Investment Income .30 .35 .01 Net Realized and Unrealized Gains (Losses) on Securities (1.54) (1.78) .53 -------- -------- -------- Net Increase (Decrease) in Net Asset Value from Operations (1.24) (1.43) .54 Dividends to Shareholders .00 (.32) .00 Distributions to Shareholders From Net Realized Capital Gain .00 .00 .00 -------- -------- -------- Net Increase (Decrease) in Net Asset Value (1.24) (1.75) .54 -------- -------- -------- NET ASSET VALUE--END OF PERIOD $ 7.55 $ 8.79 $ 10.54 ======== ======== ======== TOTAL INVESTMENT RETURN (14.11)% (14.08)% 10.89% RATIOS TO AVERAGE NET ASSETS Expenses 1.39% 1.39% 1.67%** Net Investment Income 3.38% 3.50% 1.43%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 0% 0% 0% Net Assets, End of Period (000's 98 omitted) $192,553 $127,629 $110,899
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: January 7, 1994. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 28 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Money Market Fund ---------------------------------------- For the Year For the Year For the Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994* ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 99 -------- -------- ------- Net Investment Income .04 .04 .01 Net Realized and Unrealized Gains (Losses) on Securities .00 .00 .00 -------- -------- ------- Net Increase (Decrease) in Net Asset Value from Operations .04 .04 .01 Dividends to Shareholders (.04) (.04) (.01) Distributions to Shareholders From Net Realized Capital Gain .00 .00 .00 -------- -------- ------- Net Increase (Decrease) in Net Asset Value .00 .00 .00 -------- -------- ------- NET ASSET VALUE--END OF PERIOD $ 1.00 $ 1.00 $ 1.00 ======== ======== ======= TOTAL INVESTMENT RETURN 4.60% 4.43% 2.47% RATIOS TO AVERAGE NET ASSETS Expenses 0.99% 0.89% 1.16%** Net Investment Income 4.18% 4.23% 2.34%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 0% 0% 0% Net Assets, End of Period (000's omitted) $153,925 $284,198 $88,107
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: December 3, 1993. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno 100 Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 29 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Over-the-Counter Fund ---------------------------------------- For the Year For the Year For the Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994 * ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 12.22 $ 8.76 $ 10.00 ---------- ---------- ---------- Net Investment Income (Loss) .06 .14 .01 Net Realized and Unrealized Gains (Losses) on Securities 3.24 4.17 (1.25) ---------- ---------- ---------- Net Increase (Decrease) in Net Asset Value from Operations 3.30 4.31 (1.24) 101 Dividends to Shareholders .00 (.12) .00 Distributions to Shareholders From Net Realized Capital Gain (.36) (.73) .00 ---------- ---------- ---------- Net Increase (Decrease) in Net Asset Value 2.94 3.46 (1.24) ---------- ---------- ---------- NET ASSET VALUE--END OF PERIOD $ 15.16 $ 12.22 $ 8.76 ========== ========== ========== TOTAL INVESTMENT RETURN 26.44% 49.00% (30.17)% RATIOS TO AVERAGE NET ASSETS Expenses 1.33% 1.41% 1.97%** Net Investment Income 0.44% 1.34% 1.69%** SUPPLEMENTARY DATA: Portfolio Turnover Rate 2,578.56% 2,241.00% 1,171.00% Net Assets, End of Period (000's omitted) $ 48,716 $ 61,948 $ 30,695
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: February 14, 1994. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 30 RYDEX SERIES TRUST 102 FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Precious Metals Fund ---------------------------------------- For the Year For the Year For the Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994 * ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 8.73 $ 8.29 $ 10.00 ---------- ---------- ---------- Net Investment Income (Loss) .00 .10 .01 Net Realized and Unrealized Gains (Losses) on Securities .32 .43 (1.72) ---------- ---------- ---------- Net Increase (Decrease) in Net Asset Value from Operations .32 .53 (1.71) Dividends to Shareholders .00 (.09) .00 Distributions to Shareholders From Net Realized Capital Gain .00 .00 .00 ---------- ---------- ---------- Net Increase (Decrease) in Net Asset Value .32 .44 (1.71) ---------- ---------- ---------- 103 NET ASSET VALUE--END OF PERIOD $ 9.05 $ 8.73 $ 8.29 ========== ========== ========== TOTAL INVESTMENT RETURN 3.67% 6.21% (29.27)% RATIOS TO AVERAGE NET ASSETS Expenses 1.33% 1.38% 2.06%** Net Investment Income (0.01)% 1.15% 1.23%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 1,036.37% 1,765.00% 2,728.00% Average Commission Rate Paid**** 1.5100% -- -- Net Assets, End of Period (000's omitted) $ 36,574 $ 40,861 $ 1,526
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: December 1, 1993. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. **** For fiscal years beginning on or after September 1, 1995 the fund is required to disclose its average commission rate per share for purchases and sales of equity securities. See Notes to Financial Statements. 31 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ 104 -------------------------------------------------------------- ------------------
U.S. Government Bond Fund ---------------------------------------- For the Year For the Year For the Period Ended Ended Ended June 30, June 30, June 30, 1996 1995 1994 * ------------ ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 9.55 $ 8.24 $ 10.00 -------- ---------- ---------- Net Investment Income (Loss) .46 .39 .02 Net Realized and Unrealized Gains (Losses) on Securities (.45) 1.17 (1.76) -------- ---------- ---------- Net Increase (Decrease) in Net Asset Value from Operations .01 1.56 (1.74) Dividends to Shareholders (.46) (.25) (.02) Distributions to Shareholders From Net Realized Capital Gain (.13) .00 .00 -------- ---------- ---------- Net Increase (Decrease) in Net Asset Value (.58) 1.31 (1.76) -------- ---------- ---------- NET ASSET VALUE--END OF PERIOD $ 8.97 $ 9.55 $ 8.24 ======== ========== ========== 105 TOTAL INVESTMENT RETURN (1.48)% 18.97% (32.63)% RATIOS TO AVERAGE NET ASSETS Expenses 1.26% 2.26% 3.05%** Net Investment Income 4.73% 4.64% 3.39%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 780.30% 3,452.59% 1,290.00% Net Assets, End of Period (000's omitted) $ 18,331 $ 2,592 $ 1,564
+ The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: January 3, 1994. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 32 RYDEX SERIES TRUST FINANCIAL HIGHLIGHTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------
Juno Fund --------------------------- For the Year For the Period Ended Ended 106 June 30, June 30, 1996 1995 * ------------ -------------- PER SHARE OPERATING PERFORMANCE:+ NET ASSET VALUE--BEGINNING OF PERIOD $ 9.08 $ 10.00 ------- ------- Net Investment Income (Loss) .34 .14 Net Realized and Unrealized Gains (Losses) on Securities .05 (1.06) ------- ------- Net Increase (Decrease) in Net Asset Value from Operations .39 (.92) Dividends to Shareholders .00 .00 Distributions to Shareholders From Net Realized Capital Gain .00 .00 ------- ------- Net Increase (Decrease) in Net Asset Value .39 (.92) ------- ------- NET ASSET VALUE--END OF PERIOD $ 9.47 $ 9.08 ======= ======= TOTAL INVESTMENT RETURN 4.30% (9.20)% RATIOS TO AVERAGE NET ASSETS Expenses 1.64% 1.50%** Net Investment Income 3.63% 1.32%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 0.00% 0.00% Net Assets, End of Period (000's omitted) $18,860 $ 4,301
107 + The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the year. * Commencement of Operations: March 3, 1995. ** Annualized. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. The Nova, Ursa, and Juno Funds typically hold most of their investments in options and futures contracts which are deemed short-term securities. See Notes to Financial Statements. 33 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ 1. SIGNIFICANT ACCOUNTING POLICIES The Rydex Series Trust (the "Trust") is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as a non- diversified, open-ended investment company. The Trust consists of seven separate series, the Nova Fund, the Ursa Fund, the U.S. Government Money Market Fund, the Over-the-Counter Fund, the Precious Metals Fund, the U.S. Government Bond Fund and the Juno Fund. The following significant accounting policies are in conformity with generally accepted accounting principles and are consistently followed by the Trust. A. Securities listed on an exchange are valued at the latest quoted sales prices as of 4:00 P.M. on the valuation date. Securities not traded on an exchange are valued at their last sales price. Listed options held by the Trust 108 are valued at their last bid price. Over-the-counter options held by the Trust are valued using the average bid price obtained from one or more security dealers. The value of futures contracts purchased and sold by the Trust are accounted for using the unrealized gain or loss on the contracts that is determined by marking the contracts to their current realized settlement prices. Short term securities with less than sixty days to maturity are valued at amortized cost, which approximates market. Security and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under direction of the Board of Trustees of the Trust. B. Securities transactions are recorded on the trade date (the date the order to buy or sell is executed). Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is accrued on a daily basis. C. Net investment income is computed, and dividends are declared daily in the U.S. Government Money Market Fund and U.S. Government Bond Fund. Income dividends in these funds are paid monthly. Dividends are reinvested in additional shares unless shareholders request payment in cash. Generally, short-term capital gains are distributed monthly in the U.S. Government Money Market Fund. D. When the Trust engages in a short sale, an amount equal to the proceeds received by the Trust is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the market value of the short sale. The Trust maintains a segregated account of securities as collateral for the short sales. The Trust is exposed to market risk based on 109 the amount, if any, that the market value of the stock exceeds the market value of the securities in the segregated account. E. When the Trust writes (sells) an option, an amount equal to the premium received is entered in the Trust's accounting records as an asset and e q u ivalent liability. The amount of the liability is subsequently 34 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ marked to market to reflect the current value of the option written. When an option expires, or if the Trust enters into a closing purchase transaction, the Trust realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold). F. The Trust may purchase or sell stock index futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specified future delivery date and at a specific price. Upon entering into a contract, the Trust deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Trust agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Trust as unrealized gains or losses. When the contract is closed, the Trust records a realized gain or loss equal to the difference 110 between the value of the contract at the time it was opened and the value at the time it was closed. G. Futures contracts and written options involve to varying degrees, elements of market risk and risks in excess of the amount recognized in the Statements of Assets and Liabilities. The face or contract amounts reflect the extent of the involvement each fund has in the particular classes of instruments. Risks may be caused by an imperfect correlation between movements in the price of the instruments and the price of the underlying securities. H. The Trust intends to comply with the provisions of the Internal Revenue Code a p p licable to regulated investment companies and will distribute all net investment income to its shareholders. Therefore, no Federal income tax provision is required. I. Costs incurred by the Trust in connection with its organization and registration have been deferred and are being amortized on the straight-line method over a five year period beginning on the date on which the Trust commenced its investment activities. J. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. OPERATING POLICIES The Trust, which includes seven separate funds, utilizes futures contracts, options, and options on futures contracts in order to meet the specific investment objectives of the individual funds. 111 35 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ The Nova Fund, which is designed to provide total returns over time that are superior to the Standard and Poor's 500 Composite Stock Price Index ("S&P 500"), invests primarily in futures on the S&P 500 index and options on those futures in order to correlate its return with an amount approximately 150% of the performance of the S&P 500. The Ursa Fund primarily sells futures contracts and buys options on futures contracts in furtherance of its investment objective to inversely correlate the S&P 500. The Precious Metals Fund seeks capital appreciation. It buys primarily equity securities and purchases call options and sells put options on the XAU Index. The Bond Fund strives to provide income and capital appreciation. It purchases futures contracts on U.S. Treasury Bonds and buys call options on U.S. Treasury Bond futures as a substitute for a comparable market position in the underlying U.S. Treasury Securities. The Juno Fund seeks to inversely correlate with the price changes of the current Thirty Year Treasury Bond. To meet this objective, Juno primarily buys put options on Treasury Bond futures and sells Treasury Bond futures. The OTC Fund strives to provide investment results before fees and expenses that closely correlate the total return of the NASDAQ 100 Index. The fund invests in securities included in the NASDAQ 100 Index and buys call 112 options and sells put options on stock indexes. In addition, the Nova Fund, the Ursa Fund, the OTC Fund, and the Precious Metals Fund write options to further meet their investment objectives. The risks inherent in the use of options, futures contracts, and options on futures contracts include 1) adverse changes in the value of such instruments; 2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the price of the underlying securities, index, or futures contract; 3) the possible absences of a liquid secondary market for any particular instrument at any time; and 4) the possible need to defer c l o s i ng out certain positions to avoid adverse tax consequences. 3. REPURCHASE AGREEMENTS The Trust transfers uninvested cash balances into a single joint account, the daily aggregate balance of which is invested in repurchase agreements collateralized by Federal obligations. As of June 30, 1996, the repurchase agreements with Fuji Securities and PaineWebber Inc. in the joint account and the related collateral thereon were as follows:
Security Type Range of rates Par Value Market Value ------------- -------------- ------------ ------------ United States Treasury Bond 8.75%-11.875% $ 54,990,000 $ 67,679,000 United States Treasury Note 5.625%-6.875% $205,685,000 $207,321,000 United States Treasury Bill 5.45% $ 85,521,000 $ 85,000,000
36 RYDEX SERIES TRUST 113 NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ 4. INVESTMENT ADVISORY, TRANSACTIONS WITH AFFILIATES, AND TRANSFER AGENT SERVICES Under the terms of an investment advisory contract, the Trust pays PADCO Advisors, Inc., investment advisory fees calculated at an annual percentage rate of one half of one percent (0.50%) of the net assets of the U.S. Government Money Market Fund and the U.S. Government Bond Fund; three-quarters of one percent (0.75%) of the net assets of the Nova Fund, the Precious Metals Fund, and the Over-the-Counter Fund; and nine-tenths of one percent (0.90%) of the net assets of the Ursa Fund and the Juno Fund. PADCO Service Company, Inc., a subsidiary of the investment advisor, provides transfer agent service to the Trust at an annual rate of two-tenths of one percent (0.20%) of the net assets of the U.S. Government Money Market Fund, U . S . Government Bond Fund, Precious Metals Fund, and Over-the-Counter Fund and at an annual rate of one-quarter of one percent (0.25%) of the Nova Fund, the Ursa Fund, and the Juno Fund. The Trust paid PADCO Services Inc., $80,779 for accounting services during the fiscal year. Accounting fees are based on each fund's monthly average net assets. 5. ACCOUNTING FOR EXPENSES The increase in "Total Expenses," and the offsetting "Fees Paid Indirectly," reflect the amount that the funds would have paid for securities custodian 114 services in the absence of compensating balance arrangements. The values of these compensating balances for the year ended June 30, 1996 are as follow:
U.S. Government Money Nova Ursa Market Fund Fund Fund ------- ------- ---------- $72,371 $71,474 $32,792 Over- U.S. the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund ------- -------- ---------- ------- $23,410 $20,521 $ 7,789 $16,022
6. SECURITIES TRANSACTIONS During the year ended June 30, 1996 purchases and sales of investment securities were:
U.S. Government Money Nova Ursa Market Fund Fund Fund ----------- ----------- ----------- Purchases $ 0 $ 0 $ 0 Sales $ 0 $ 0 $ 0 U.S. Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund -------------- -------------- -------------- ----------- 115 Purchases $1,687,520,814 $ 501,063,230 $ 137,156,061 $ 0 Sales $1,708,510,775 $ 500,418,169 $ 123,000,803 $ 0
The transactions shown above exclude short-term and temporary cash investments. 37 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ 7. NET UNREALIZED APPRECIATION/DEPRECIATION OF SECURITIES At June 30, 1996 unrealized appreciation (depreciation) and cost of investment securities for Federal income tax purposes was:
U.S. Government Money Nova Ursa Market Fund Fund Fund ------------ ------------ ------------ Gross Unrealized Appreciation $ 2,952,114 $ 11,548,765 $ 0 116 Gross Unrealized (Depreciation) 0 (10,557,073) 0 ------------ ------------ ------------ Net Unrealized Appreciation/ (Depreciation) $ 2,952,114 $ 991,692 $ 0 Cost of Investments for Federal Income Tax Purposes $194,072,313 $394,422,034 $169,891,981
Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund - - - -------- ----------- ----------- ----------- Gross Unrealized Appreciation $ 2,608,519 $ 361,720 $ 0 $ 0 Gross Unrealized (Depreciation) (4,423,621) (7,619,699) (525,860) (387,603) ----------- ----------- ----------- ----------- Net Unrealized Appreciation/ (Depreciation) $(1,815,102) $(7,257,979) $ (525,860) $ (387,603) Cost of Investments for Federal Income Tax Purposes $59,743,279 $45,800,449 $18,369,189 $18,841,622
8. SHARE TRANSACTIONS Transactions in dollars for the year ended June 30, 1996 were:
U.S. 117 Government Money Nova Ursa Market Fund Fund Fund -------------- -------------- -------------- S h a r es Purchased $2,653,475,866 $2,245,867,707 $4,139,232,212 Purchased through Dividend Reinvestment 0 0 7,466,821 -------------- -------------- -------------- T o t a l Purchased 2,653,475,866 2,245,867,707 4,146,699,033 S h a res Redeemed (2,520,809,754) (2,153,598,241) (4,276,965,780) -------------- -------------- -------------- Net Shares Purchased/ (Redeemed) $ 132,666,112 $ 92,269,466 $ (130,266,747) ============== ============== ============== U.S. Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund --------- ------------ ------------ ------------ Shares Purchased $2,261,882,356 $836,754,933 $189,414,530 $233,349,428 Purchased through Dividend Reinvestment 1,413,792 0 879,023 0 118 -------------- ------------ ------------ ------------ Total Purchased 2,263,296,148 836,754,933 190,293,553 233,349,428 Shares Redeemed (2,281,519,960) (836,741,911) (174,392,765) (217,249,381) -------------- ------------ ------------ ------------ Net Shares Purchased/ (Redeemed) $ (18,223,812) $ 13,022 $ 15,900,788 $ 16,100,047 ============== ============ ============ ============
38 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ Transactions in shares for the year ended June 30, 1996 were:
U.S. Government Money Nova Ursa Market Fund Fund Fund ------------ ------------ -------------- Shares Purchased 188,794,994 276,476,043 4,139,232,212 Dividend Reinvestment 0 0 7,466,821 119 ------------ ------------ -------------- Total Purchased 188,794,994 276,476,043 4,146,699,033 S h ares Redeemed (179,799,246) (265,490,770) (4,276,965,783 ------------ ------------ -------------- Net Shares Purchased/(Redeemed) 8,995,748 10,985,273 (130,266,750) ============ ============ ============== U.S. Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund ---------- ----------- ----------- ----------- Shares Purchased 168,346,003 87,901,045 19,714,470 25,594,613 Dividend Reinvestment 108,337 0 97,996 0 ------------ ----------- ----------- ----------- Total Purchased 168,454,340 87,901,045 19,812,466 25,594,613 Shares Redeemed (170,312,258) (88,544,497) (18,040,885) (24,076,731) ------------ ----------- ----------- ----------- Net Shares Purchased/(Redeemed) (1,857,918) (643,452) 1,771,581 1,517,882 ============ =========== =========== ===========
Transactions in dollars for the year ended June 30, 1995 were:
U.S. Government Money 120 Nova Ursa Market Fund Fund Fund --------------- --------------- ----------- Shares Purchased $ 1,557,769,087 $ 3,164,566,132 $ 3,587,402,384 Purchased through Dividend Reinvestment 5,223,393 4,561,095 6,208,014 --------------- --------------- --------------- Total Purchased 1,562,992,480 3,169,127,227 3,593,610,398 S h ares Redeemed (1,588,830,643) (3,110,630,895) (3,397,600,237) --------------- --------------- --------------- Net Shares Purchased/ (Redeemed) $ (25,838,163) $ 58,496,332 $ 196,010,161 =============== =============== =============== U.S. Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund* --------------- ------------- ------------ ------------ Shares Purchased $ 1,388,186,680 $ 772,461,150 $ 48,656,940 $ 64,916,051 Purchased through Dividend Reinvestment 3,427,684 301,229 41,641 0 --------------- ------------- ------------ ------------ Total Purchased 1,391,614,364 772,762,379 48,698,581 64,916,051 Shares Redeemed (1,374,581,209) (728,454,020) (48,031,046) (59,123,344) 121 --------------- ------------- ------------ ------------ Net Shares Purchased/ (Redeemed) $ 17,033,155 $ 44,308,359 $ 667,535 $ 5,792,707 =============== ============= ============ ============ * Commencement of Operations: March 3, 1995--Juno Fund.
39 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ Transactions in shares for the year ended June 30, 1995 were:
U.S. Government Money Nova Ursa Market Fund Fund Fund ------------ ------------ -------------- Shares Purchased 143,873,524 318,793,746 3,587,402,384 Purchased through Dividend Reinvestment 470,095 490,546 6,208,014 ------------ ------------ -------------- Total Purchased 144,343,619 319,284,292 3,593,610,398 122 S h ares Redeemed (146,990,905) (315,284,708) (3,397,600,237) ------------ ------------ -------------- Net Shares Purchased/(Redeemed) (2,647,286) 3,999,584 196,010,161 ============ ============ ============== U.S. Over-the- Precious Government Counter Metals Bond Juno Fund Fund Fund Fund* ------------ ----------- ---------- ---------- Shares Purchased 135,125,955 92,309,340 5,731,162 6,683,227 Purchased through Dividend Reinvestment 316,047 36,198 4,837 0 ------------ ----------- ---------- ---------- Total Purchased 135,442,002 92,345,538 5,735,999 6,683,227 Shares Redeemed (133,874,331) (87,846,703) (5,654,424) (6,209,616) ------------ ----------- ---------- ---------- Net Shares Purchased/(Redeemed) 1,567,671 4,498,835 81,575 473,611 ============ =========== ========== ==========
9. OPTION CONTRACTS WRITTEN During the year ended June 30, 1996 the Trust wrote the following contracts:
123 Nova Fund Ursa Fund ---------------------- ------------------------- Number of Initial Number of Initial Contracts Premiums Contracts Premiums --------- ------------ --------- --------------- Outstanding at Beginning of Period 0 $ 0 0 $ 0 Options Written 3,012 89,604,623 68,000 2,051,146,402 Options Terminated (3,012) (89,604,623) (62,000) (1,857,013,475) ------ ------------ ------- --------------- Outstanding at End of Period 0 $ 0 6,000 $ 194,132,927 ====== ============ ======= =============== Over-the-Counter Fund Precious Metals Fund ---------------------- ------------------------- Number of Initial Number of Initial Contracts Premiums Contracts Premiums --------- ------------ --------- --------------- Outstanding at Beginning of Period 34 $ 19,157 50 $ 17,598 Options Written 1,805 2,494,440 400 147,170 Options Terminated (1,802) (2,425,020) (430) (155,579) ------ ------------ ------- --------------- Outstanding at End of Period 37 $ 88,577 20 $ 9,189 124 ====== ============ ======= ===============
40 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (continued) -------------------------------------------------------------- ------------------ -------------------------------------------------------------- ------------------ 10. NET ASSETS At June 30, 1996, net assets consisted of:
U.S. Government Money Nova Fund Ursa Fund Market Fund ------------ ------------ ------------ Paid-In-Capital $221,230,953 $267,465,208 $153,931,181 Undistributed Net Investment Income 0 736,280 0 Overdistribution of Net Investment Income 0 0 (6,634) Accumulated Net Realized Gain (Loss) on Investments 358,049 (76,639,912) 0 Distribution in Excess of Realized Gains* 0 0 0 Net Unrealized 125 Appreciation (Depreciation) on Investments, Options and Futures Contracts 2,952,114 991,692 0 ------------ ------------ ------------ Net Assets $224,541,116 $192,553,268 $153,924,547 ============ ============ ============ Over-the- U.S. Counter Precious Government Juno Fund Metals Fund Bond Fund Fund ------------ ------------ ------------ ----------- Paid-In-Capital $ 49,698,232 $ 48,087,669 $ 18,713,170 $22,677,052 Undistributed Net Investment Income 976,052 0 16,759 61,802 Distribution in Excess of Net Investment Income 0 (1,091) 0 0 Accumulated Net Realized Gain (Loss) on Investments (9,541,295) (9,095,596) (351,994) (3,491,638) Distribution in Excess of Realized Gains* 0 0 (243,678) 0 Net Unrealized Appreciation (Depreciation) on Investments, Options and Futures Contracts 7,582,925 (2,417,412) 196,888 (387,603) ------------ ------------ ------------ ----------- Net Assets $ 48,715,914 $ 36,573,570 $ 18,331,145 $18,859,613 ============ ============ ============ ===========
126 * Realized capital gains differ for financial statement and tax purposes primarily because of the timing of the recognition of post October 31 capital losses. 41 RYDEX SERIES TRUST NOTES TO FINANCIAL STATEMENTS (concluded) -------------------------------------------------------------- ----------------- -------------------------------------------------------------- ----------------- 11. LOSS CARRYFORWARD--FEDERAL INCOME TAX At June 30, 1996, for Federal income tax purposes, the following funds had capital loss carryovers which may be applied against future net taxable realized gains of each succeeding year until the earlier of its utilization or its expiration:
Precious Expires Ursa Metals Juno June 30, Fund Fund Fund -------- ---------- --------- --------- 2003 $6,618,786 $0 $0 2004 43,168,709 4,249,968 3,647,178
42 RYDEX SERIES TRUST INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------- ----------------- 127 -------------------------------------------------------------- ----------------- The Shareholders and Board of Trustees, Rydex Series Trust: We have audited the statements of assets and liabilities, including the schedules of investments, of the Nova, Ursa, U.S. Government Money Market, Over-the-Counter, Precious Metals, U.S. Government Bond and Juno Funds of Rydex Series Trust as of June 30, 1996, the related statements of operations, changes in net assets, and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 1996 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of the Nova, Ursa, U.S. Government Money Market, Over-the-Counter, Precious Metals, U.S. 128 Government Bond and Juno Funds of the Rydex Series Trust as of June 30, 1996, the results of their operations, the changes in their net assets, and the financial highlights for the periods presented in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Princeton, New Jersey August 20, 1996 43 [LOGO OF RYDEX APPEARS HERE] The First Family of Funds Designed for Professional Money Managers Nova Fund Juno Fund ANNUAL REPORT Ursa Fund JUNE 30, 1996 OTC Fund Precious Metals Fund U.S. Government Bond Fund U.S. Government Money Market Nova Fund Juno Fund RYDEX SERIES TRUST Ursa Fund 6116 Executive Blvd., Suite 400 OTC Fund Rockville, MD 20852 Precious Metals Fund (301) 468-8520 (800) 820-0888 U.S. Government Bond Fund U.S. Government Money Market 129 Statement of Additional Information of The Rydex Institutional Money Market Fund PAGE RYDEX SERIES TRUST RYDEX INSTITUTIONAL MONEY MARKET FUND 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (800) 820-0888 (301) 468-8520 STATEMENT OF ADDITIONAL INFORMATION The Rydex Institutional Money Market Fund (the "Fund") is a diversified series of the Rydex Series Trust, an open-end management investment company (the "Trust"). The investment objectives of the Fund are security of principal, high current income, and liquidity consistent with preservation of capital. In attempting to achieve its objectives, the Fund will invest primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities, as well as in repurchase agreements secured by such securities and in bank money market instruments and commercial paper. The Fund is part of the Rydex Group of Funds, which is designed for professional money managers and knowledgeable investors who intend to invest in the Rydex Group of Funds as part of an asset-allocation or market-timing investment strategy. The securities of the Fund are not deposits or obligations of any bank, and are not endorsed or guaranteed by any bank, and an investment in the Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. Government. The Fund seeks to maintain a constant $1.00 net asset value per share, although this cannot be assured. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Fund's Prospectus, dated November 1, 1996. A copy of the Fund's Prospectus may be obtained without charge by writing or telephoning the Fund. The date of this Statement of Additional Information is November 1, 1996. STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS Page PAGE THE RYDEX FUNDS INVESTMENT POLICIES AND TECHNIQUES INVESTMENT RESTRICTIONS PORTFOLIO TRANSACTIONS MANAGEMENT OF THE TRUST DISTRIBUTION PLAN PRINCIPAL HOLDERS OF SECURITIES DETERMINATION OF NET ASSET VALUE INFORMATION ON COMPUTATION OF YIELD DIVIDENDS, DISTRIBUTIONS, AND TAXES AUDITORS AND CUSTODIAN FINANCIAL STATEMENTS 2 THE RYDEX FUNDS The Trust is an open-end management investment company, and currently is composed of nine separate series, including The Rydex Institutional Money Market Fund, The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex U.S. Government Money Market Fund, and, beginning on or about D e c ember 1, 1996 (subject to obtaining all necessary r e gulatory approvals), The Rydex High Yield Fund (collectively, the "Rydex Funds"); other separate Rydex Funds may be added in the future. Shares of any Rydex Fund may be exchanged, without any charge, for shares of any other Rydex Fund on the basis of the respective net asset values of the shares involved; provided, that, in connection with exchanges for shares of the Rydex Institutional Money Market Fund, certain minimum investment levels are maintained. Copies of t h e separate Prospectuses and Statements of Additional I n formation for the Rydex Funds other than the Rydex Institutional Money Market Fund are available, without charge, upon request to the Trust at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, or by telephoning the Trust at (800) 820-0888 or (301) 468-8520. INVESTMENT POLICIES AND TECHNIQUES General Reference is made to the sections entitled "Investment Objectives and Policies" in the Fund's Prospectus for a discussion of the investment objectives and policies of the Fund. In addition, set forth below is further information relating to the Fund. Portfolio management is provided to the Fund by the Trust's investment adviser, PADCO Advisors, Inc., a Maryland corporation with offices at 6116 Executive B o u l evard, Suite 400, Rockville, Maryland 20852 (the "Advisor"). The investment strategies of the Fund discussed below, and as discussed in the Fund's Prospectus, may be used by the Fund if, in the opinion of the Advisor, these strategies will be advantageous to the Fund. The Fund is free to reduce or eliminate the Fund's activity in any of those areas without changing the Fund's fundamental investment policies. There is no assurance that any of these strategies or any other strategies and methods of investment available to the Fund will result in the achievement of the Fund's objectives. U.S. Government Securities The Fund invests primarily in money market instruments which are issued or guaranteed, as to principal and interest, by the 3 U.S. Government, its agencies or instrumentalities ("U.S. G o v e rnment Securities"). Some obligations issued or guaranteed by U.S. Government agencies and instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by Federal agencies, such as those securities issued by the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase certain obligations of the F e d eral agency, while other obligations issued by or guaranteed by Federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. While the U.S. Government provides financial support to such U.S. Government-sponsored Federal agencies, no assurance can be given that the U.S. Government will always do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity. The Fund will invest in U.S. Government Securities only when the Advisor is satisfied that the credit risk with respect to the issuer is minimal. Repurchase Agreements As discussed in the Fund's Prospectus, the Fund may enter into repurchase agreements with financial institutions. The Fund follows certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well- capitalized and well-established financial institutions whose condition will be continually monitored by the Advisor. In a d d ition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercising of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of the Fund not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more than 10% of its net assets. The Fund's investments in repurchase agreements may, at times, be substantial when, in the view of the Advisor, liquidity or other considerations so warrant. When-Issued and Delayed Delivery Securities 4 As discussed in the Fund's Prospectus, the Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued or delayed delivery basis (i.e., delivery and payment can take place between a month and 120 days after the date of the transaction). At the time the Fund makes the commitment to purchase securities on a when-issued o r delayed delivery basis, the Fund will record the t r a n saction and thereafter reflect the value of the securities, each day, of such security in determining the Fund's net asset value. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price. The Fund will also establish a segregated account with its custodian bank in which the Fund will maintain cash or cash equivalents or other portfolio securities equal in value to commitments for such when-issued or delayed delivery securities. The Fund does not believe that the Fund's net asset value or income will be adversely affected by the Fund's purchase of securities on a when-issued or delayed delivery basis. The foregoing strategies, and those discussed in the Fund's Prospectus under the heading "Investment Objectives and Policies," may subject the Fund to the effects of interest rate fluctuations to a greater extent than would occur if such strategies were not used. While these strategies may be used by the Fund if, in the opinion of the Advisor, these strategies will be advantageous to the Fund, the Fund will be free to reduce or eliminate its activity in any of those areas without changing its fundamental investment policies. Certain provisions of the Internal Revenue Code, related regulations, and rulings of the Internal Revenue Service may also have the effect of reducing the extent to which the previously-cited techniques may be used by the Fund, either individually or in combination. Furthermore, there is no assurance that any of these strategies or any other strategies and methods of i n v estment available to the Fund will result in the achievement of the Fund s objectives. Illiquid Securities While the Fund does not anticipate doing so, the Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ( restricted securities ) under the Securities Act of 1933, as amended (the 1933 Act ), but which can be offered and sold to qualified institutional buyers under Rule 144A under the 1933 Act. The Fund will not invest more than 10% of the Fund s net assets in illiquid securities. The Fund will adhere to a more restrictive limitation on the Fund s i n v estment in illiquid securities as required by the securities laws of those jurisdictions where shares of the Fund are registered for sale. The term illiquid securities 5 for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the staff of the Securities and Exchange Commission (the Commission ), illiquid securities also are considered to include, among other securities, purchased over-the-counter options, certain cover for over-the-counter options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities laws. The Fund may not be able to sell illiquid securities when the Advisor considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investment in illiquid securities may have an adverse impact on net asset value. Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the 1933 Act, which provides a safe harbor from 1933 Act registration requirements for qualifying sales to institutional investors. When Rule 144A restricted securities present an attractive investment opportunity and other meet selection criteria, the Fund may make such investments. Whether or not such securities are illiquid depends on the market that exists for the particular security. The Commission staff has taken the position that the liquidity of Rule 144A restricted securities is a question of fact for a board of trustees to determine, such determination to be based on a consideration of the readily-available trading markets and the review of any contractual restrictions. The staff also has acknowledged that, while a board of trustees retains ultimate responsibility, the trustees may delegate this function to an investment adviser. The trustees of the Trust (the Trustees) h a ve delegated this responsibility for determining the liquidity of Rule 144A restricted securities which may be invested in by the Fund to the Advisor. It is not possible to predict with assurance exactly how the market for Rule 144A restricted securities or any other security will develop. A security which when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly, a security which was deemed to be liquid at the time of acquisition may subsequently become illiquid. In such event, appropriate remedies will be considered to minimize the effect on the Fund s liquidity. 6 INVESTMENT RESTRICTIONS As described in the section of the Fund's Prospectus entitled "Investment Objectives and Policies," the Fund has adopted certain investment restrictions as fundamental policies which cannot be changed without the approval of the holders of a "majority" of the outstanding shares of the Fund, as that term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"). The term "majority" is defined in the 1940 Act as the lesser of: (i) 67% or more of the shares of the series present at a meeting of shareholders, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy; or (ii) more than 50% of the outstanding shares of the series. (All policies of the Fund not specifically identified in this Statement of Additional Information or the Fund's Prospectus as fundamental may be changed without a vote of the shareholders of the Fund.) For p u r poses of the following limitations, all percentage limitations apply immediately after a purchase or initial investment. Any subsequent change in a particular percentage resulting from fluctuations in value does not require the elimination of any security from the Fund's portfolio. These restrictions provide that the Fund may not: 1. Borrow money, except (i) as a temporary measure for extraordinary or emergency purposes and then only in amounts not in excess of 5% of the value of its total assets from a bank or (ii) in an amount up to one-third of the value of its total assets, including the amount borrowed, in order to meet redemption requests without i m m e diately selling portfolio instruments. This provision is not for investment leverage but solely to facilitate management of the portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. 2. Mortgage, pledge, or hypothecate its assets except to secure permitted borrowings. In those cases, the Fund may mortgage, pledge, or hypothecate assets having a market value not exceeding the lesser of the dollar amounts borrowed or 15% of the value of total assets at the time of the borrowing. 3. Issue senior securities, except as permitted by its investment objectives and policies. 4. Write or purchase put or call options. 5. Underwrite the securities of another issuer. 7 6. Purchase, hold, or deal in real estate or oil and gas interests, although the Fund may purchase and sell securities that are secured by real estate or interests therein and may purchase mortgage-related securities and may hold and sell real estate acquired for the Fund as a result of the ownership of securities. 7. Make loans to others except through the purchase of qualified debt obligations, loans of portfolio securities and entry into repurchase agreements. 8. Make short sales of portfolio securities or purchase any portfolio securities on margin, except for such short- term credits as are necessary for the clearance of transactions. 9. Invest in securities of other investment companies, except as they may be acquired as part of a merger, c o n s olidation, acquisition of assets or plan of reorganization. 10. Lend its portfolio securities in excess of 15% of its total assets. Any loans of portfolio securities will be made according to guidelines established by the trustees of the Trust, including maintenance of cash collateral of the borrower equal at all times to the current market value of the securities loaned. The Fund has no present intention to borrow money or pledge assets in excess of 5% of the value of its net assets. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of investment, a later increase or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction. PORTFOLIO TRANSACTIONS Subject to the general supervision by the Trustees, and in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, the Advisor is responsible for decisions to buy and sell securities for each of the Rydex Funds (including the Fund) and the selection of brokers and dealers to effect the transactions. In seeking to implement the Fund's policies, the Advisor effects transactions with those brokers and dealers who the Advisor believes provide the most favorable prices and are capable of providing efficient executions. The Advisor may serve as an investment manager to a number of clients, including other investment companies. It is the p r a c tice of the Advisor to cause purchase and sale transactions to be allocated among the Rydex Funds and others whose assets the Advisor manages in such manner as the Advisor 8 deems equitable. The main factors considered by the Advisor in making such allocations among the Rydex Funds and other client accounts of the Advisor are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinions of the person(s) responsible, if any, for managing the portfolios of the Rydex Funds and the other client accounts. Purchases and sales of U.S. Government Securities are normally transacted through issuers, underwriters, or major dealers in U.S. Government Securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices. Portfolio turnover rate is defined as the value of the s e curities purchased or securities sold, excluding all securities whose maturities at time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. Based on this definition, it is anticipated that the Fund's policy of investing in government securities with remaining maturities of less than one year will not result in a quantifiable portfolio turnover rate. However, because of the short-term nature of the Fund's portfolio securities, it is anticipated that the number of purchases and sales or maturities of such securities will be substantial. Nevertheless, as brokerage commissions are not normally charged on purchases and sales of such securities, the large number of these transactions does not have an adverse effect upon the net yield and net asset value of the shares of the Fund. The Fund commenced operations on July 11, 1996. For the period from inception to September 30, 1996, total brokerage commissions paid by the Fund amounted to $0. MANAGEMENT OF THE TRUST The Trustees are responsible for the general supervision of the Trust's business. The day-to-day operations of the Trust are the responsibilities of the Trust's officers. The names and addresses (and ages) of the Trustees and the officers of the Trust and the officers of the Advisor, together with information as to their principal business occupations during the past five years, are set forth below. Fees and expenses for non-interested Trustees will be paid by the Trust. 9 Trustees *Albert P. Viragh, Jr. (55) Chairman of the Board of Trustees and President of the Trust; Chairman of the Board, President, and Treasurer of PADCO Advisors, Inc., investment adviser to the Trust, 1993 to present; Chairman of the Board, President, and Treasurer of PADCO Service Company, Inc., shareholder and transfer agent servicer to the Trust, 1993 to present; Chairman of the Board of Managers of the Rydex Advisor Variable Annuity Account (the Separate Account ), a separate account of Great American Reserve Insurance C o mpany, 1996 to present; Chairman of the Board, President, and Treasurer of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to present; Chairman of the Board, President, and Treasurer of PADCO Financial Services, Inc., a registered broker- dealer firm, and the Rydex Institutional Money Market Fund s principal underwriter, 1996 to present; Vice P r esident of Rushmore Investment Advisors Ltd., a registered investment adviser, 1985 to 1993. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Corey A. Colehour (51) Trustee of the Trust; Manager of the Separate Account, 1996 to present; Senior Vice President of Marketing of Schield Management Company, a registered investment adviser, 1985 to present. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. J. Kenneth Dalton (55) Trustee of the Trust; Manager of the Separate Account, 1 9 9 6 to present; Mortgage Banking Consultant and Investor, The Dalton Group, April 1995 to present; President, CRAM Mortgage Group, Inc. 1966 to April 1995. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Roger Somers (52) Trustee of the Trust; Manager of the Separate Account, 1996 to present; President, Arrow Limousine, 1963 to present. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Officers Timothy P. Hagan (54) 10 Treasurer and Vice President of the Trust; Vice President of PADCO Advisors, Inc., investment adviser to the Trust, 1993 to present; Treasurer and Vice President of the Separate Account, 1996 to present; Vice President of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to present; Employee of PADCO Service Company, Inc., shareholder and transfer agent servicer to the Trust, 1993 to present; President and D i rector of Rushmore Services, Inc., a registered transfer agent, 1981 to 1993. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Robert M. Steele (38) Secretary and Vice President of the Trust; Vice President of PADCO Advisors, Inc., investment adviser to the Trust, 1994 to present; Secretary and Vice President of the Separate Account, 1996 to present; Vice President of PADCO Advisors II, Inc., investment adviser to the Separate Account, 1996 to present; Vice President of The Boston Company, Inc., an institutional money management firm, 1987 to 1994. Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Michael P. Byrum (26) Assistant Secretary of the Trust; Employee of PADCO Advisors, Inc., 1993 to present; portfolio manager of The Ursa Fund (since 1996), The Rydex Precious Metals Fund (since 1993), The Rydex U.S. Government Money Market Fund (since 1993), and The Rydex Institutional Money Market Fund (since 1996), each a series of the Trust; Assistant Secretary of the Separate Account, 1996 to present; Employee of PADCO Advisors II, Inc., investment adviser to the Separate Account; Investment Representative, Money Management Associates, a registered investment adviser, 1992 to 1993; Student, Miami University, of Oxford, Ohio (B.A., Business Administration, 1992). Address: 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. _________________________ * This Trustee is deemed to be an "interested person" of the Trust, within the meaning of Section 2(a)(19) of the 1940 Act, inasmuch as this person is affiliated with the Advisor, as described herein. The Advisor, which has its office at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, provides the Fund with investment advisory services. The Advisor was incorporated in the State of Maryland on February 5, 1993. Albert P. Viragh, 11 Jr., the Chairman of the Board of Trustees and the President of the Advisor, owns a controlling interest in the Advisor. Under an investment advisory agreement with the Advisor, dated May 14, 1993, and amended on November 2, 1993, December 13, 1994, March 8, 1996, and September 25, 1996, the Advisor serves as the investment adviser for each series of the Trust and provides investment advice to the Funds and oversees the day-to-day operations of the Funds, subject to direction and control by the Trustees and the officers of the Trust. The Trust currently is composed of nine separate series, the Nova Fund, the Ursa Fund, the Rydex OTC Fund, the Rydex Precious Metals Fund, the Rydex U.S. Government Bond Fund, the Juno Fund, The Rydex High Yield Fund, the Rydex U.S. Government Money Market Fund, and the Rydex Institutional Money Market Fund; other separate series may be added in the future. As of September 30, 1996, net Trust assets under management of the A d v i s or were approximately $973 million, and as of September 30, 1996, net Fund assets under management of the Advisor were approximately $30.8 million. Pursuant to the advisory agreement, the Fund pays the Advisor a fee at an annual rate based on 0.55% of the net assets of the Fund. The Fund commenced operations on July 11, 1996. For the period from July 11, 1996 to September 30, 1996, total management fees paid by the Fund to the Advisor amounted to $47,002. The Advisor manages the investment and the reinvestment of the assets of the Fund, in accordance with the Fund's investment objectives, policies, and limitations, subject to the general supervision and control of the officers of the Trust and the Trustees. The Advisor bears all costs associated with providing these advisory services. The Advisor, from its own resources, including profits from advisory fees received from the Fund, provided such fees are legitimate and not excessive, may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of Fund shares, and otherwise currently pays all distribution costs for Fund shares. General administrative, shareholder, dividend disbursement, transfer agent, and registrar services are provided to the Trust and the Fund by PADCO Service Company, Inc., 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852 (the "Servicer"), subject to the general supervision and control of the Trustees and the officers of the Trust, pursuant to a service agreement between the Trust and the Servicer, dated September 19, 1995 and as amended on March 8, 1996 and also amended on September 25, 1996. The Servicer is wholly-owned by Albert P. Viragh, Jr., who is the Chairman of the Board and the President of the Trust and the sole controlling person and majority owner of the Advisor. 12 Under the service agreement with the Servicer, the Fund pays the Servicer an annual fee based on 0.20% of the net assets of the Fund. For the period from July 11, 1996 to September 30, 1996, total service fees paid by the Fund to the Servicer amounted to $17,100. Under the service agreement, the S e r vicer provides the Fund with all required general administrative services, including, without limitation, office space, equipment, and personnel; clerical and general back o f f ice services; bookkeeping, internal accounting, and secretarial services; the determination of net asset values; and the preparation and filing of all reports, registration statements, proxy statements, and all other materials required to be filed or furnished by the Fund under Federal and state securities laws. The Servicer also maintains the shareholder account records for the Fund, distributes dividends and distributions payable by the Fund, and produces statements with respect to account activity for the Fund and its shareholders. The Servicer pays all fees and expenses that are directly related to the services provided by the Servicer to the Fund; the Fund reimburses the Servicer for all fees and expenses incurred by the Servicer which are not directly related to the services the Servicer provides to the Fund under the service agreement. The Fund bears all expenses of its operations other than those assumed by the Advisor or the Servicer. Fund expenses include: the management fee; the servicing fee (including administrative, transfer agent, and shareholder servicing fees); custodian and accounting fees and expenses; legal and auditing fees; fidelity bonds and other insurance premiums; e x p e nses of preparing and printing prospectuses, confirmations, proxy statements, and shareholder reports and notices; registration fees and expenses; proxy and annual meeting expenses, if any; all Federal, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); organizational costs; non-interested trustees' fees and expenses; the costs and expenses of redeeming shares of the Fund; fees and expenses paid to any securities pricing organization; dues and expenses associated with membership in any mutual fund organization; and costs for incoming telephone WATTS lines. In addition, each of the nine Rydex Funds, including the Fund, pays an equal portion of the Trustee fees and expenses for attendance at Trustee meetings for the Trustees of the Trust who are not affiliated with or interested persons of the Advisor. For the period from July 11, 1996 to September 30, 1996, the total expenses of Fund operations borne by the Fund, other than those expenses assumed or reimbursed by the Advisor or the Servicer, amounted to $98,553. 13 The aggregate compensation paid by the Trust to each of its Trustees serving during the fiscal year ended June 30, 1996, is set forth in the table below:
Pension or Retirement Aggregate Benefits Estimated Compensation Accrued as Part Annual Benefit Name of Person, from the of the Trust s upon Position Trust** Expenses Retirement ---------- ---------- ------------- ---------- Albert P. Viragh, $0 $0 $0 Jr.* Chairman and President Corey A. Colehour $7,500 $0 $0 Trustee J. Kenneth Dalton $4,500 $0 $0 Trustee Roger Somers $7,500 $0 $0 Trustee ___________________________ * Denotes an "interested person" of the Trust. ** Mr. David R. Petersen, who resigned as a Trustee, effective October 13, 1995, was paid $2,000 in aggregate compensation by the Trust during the fiscal year ended June 30, 1996.
As of the date of this Statement of Additional Information, no person, other than the Advisor, was a record owner or, to the knowledge of the Trust, beneficial owner of 5% or more of the shares of the Fund. DISTRIBUTION PLAN Pursuant to the Trust's plan of distribution for the Fund adopted by the Trust pursuant to Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the Fund will pay PADCO Financial Services, Inc. (the "Distributor"), monthly at a rate not to exceed 0.25% of the average daily net assets of the Fund during that month for expenses actually incurred in the distribution and promotion of the Fund's shares, and the Distributor, in turn, on a quarterly basis will pay certain securities dealers or brokers, administrators, investment advisers, institutions, including bank trust departments, and other persons ("Recipients") amounts based on the average 14 daily net asset value of shares of the Fund owned by that Recipient or its customers during that quarter. No such payments, however, will be made to any Recipient in any quarter if the aggregate net asset value of all Fund shares held by the Recipient or its customers at the end of such quarter, taken without regard to the minimum holding period, does not exceed a minimum amount. The minimum holding period and minimum level of holdings, if any, will be determined from time to time by a majority of the Trustees of the Trust who are not "interested persons" of the Trust, as defined in the 1940 Act, and who have no direct or indirect financial interest in the operation of the Distribution Plan or any agreements related to the Distribution Plan (the "Rule 12b-1 Trustees"). The services to be provided by the Recipients may i n c l ude, but are not limited to, distributing sales literature, answering routine customer inquiries regarding the Trust and the Fund, assisting in establishing and maintaining shareholder accounts and processing purchase and redemption t r a nsactions, making the Trust's investment plans and shareholder services options available and providing such other information and services as the Distributor or the Trust may reasonably request from time to time. Pursuant to the Distribution Plan, the Distributor, in addition to being reimbursed by the Fund for any payments to Recipients, also will be entitled to reimbursement monthly (up to the maximum of 0.25% per annum of the average net assets of the Fund) for the Distributor's other expenses incurred in the distribution and promotion of the Fund's shares, including, but not limited to, the printing of certain reports used for sales purposes, advertisements, expenses of preparation and printing of sales literature, and other distribution related expenses, including any distribution or service fees paid to Recipients who have executed a distribution or service agreement with the Distributor. The maximum amount which may be paid to these Recipients by the Distributor (which will be determined according to the services provided in assisting investors with their accounts and/or shares sold) is 0.25% (on an annual basis) of the Fund's average net assets owned by those Recipients or by clients of those Recipients. For the period from July 11, 1996 to September 30, 1996, and pursuant to the Distribution Plan, the total reimbursement payments paid or payable by the Fund to the Distributor amounted to $21,627, which constituted 0.25 of 1% of the Fund's average daily net assets during this period. Of these payments by the Fund to the Distributor under the Distribution Plan, $16,740 was paid as compensation by the Distributor to Recipients pursuant to agreements related to the Distribution P l an, and $4,887 was spent on the printing of sales literature, travel entertainment, due diligence, and other promotional expenses; none of these payments was spent on 15 advertising and marketing, the printing and mailing of prospectuses for persons other than current shareholders of the Fund, or as compensation to wholesalers of the Distributor in respect of sales of shares of the Fund. In addition, for the period from July 11, 1996 to September 30, 1996, the Advisor, pursuant to agreements related to the Distribution Plan, also made payments from its own resources to Recipients aggregating $11,066. In the event that the Distributor is not fully reimbursed for payments or expenses incurred by the D i stributor, these unreimbursed expenses under the Distribution Plan will not be carried forward beyond twelve months from the date these expenses were incurred. For the period from July 11, 1996 to September 30, 1996, an aggregate of $3,089 of distribution expenses, or 0.04% of the average daily net assets of the Fund's shares (annualized), was not reimbursed or recovered by the Distributor through the receipt of reimbursement payments under the Distribution Plan. The Distributor is required to report in writing to the Trustees of the Trust at least quarterly on the monies reimbursed to the Distributor under the Distribution Plan, as well as to furnish the Trustees with such other information as may reasonably be requested in connection with the payments made under the Distribution Plan in order to enable the Trustees to make an informed determination as to whether the Distribution Plan should be continued. The Trustees of the Trust have determined that a consistent cash flow resulting from the sale of new shares of the Fund is necessary and appropriate to meet redemptions and to take advantage of buying opportunities without having to make unwarranted liquidations of portfolio securities of the Fund. The Trustees, therefore, felt that it will likely benefit the Fund to have monies available for the direct distribution activities of the Distributor in promoting the sale of the Fund's shares. The Trustees, including the Rule 12b-1 Trustees, concluded, in the exercise of their reasonable business judgment and in light of their fiduciary duties, that there is a reasonable likelihood that the Distribution Plan will benefit the Fund and its shareholders. The Distribution Plan has been approved by the Trustees of the Trust, including all of the Rule 12b-1 Trustees, and by the Fund's initial shareholder. The Distribution Plan must be renewed annually by the Trustees of the Trust, including by a majority of the Rule 12b-1 Trustees, cast in person at a meeting called for that purpose. The Distribution Plan and any distribution or service agreement may be terminated at any time, without any penalty, by the Trustees or by a vote of a majority of the Fund's outstanding shares on sixty (60) days' written notice. The Distributor or any Recipient also may 16 terminate their respective distribution or service agreement at any time upon written notice. T h e Distribution Plan and any distribution or service agreement may not be amended to increase materially the amount spent for distribution expenses or in any other material way without approval by a majority of the Fund's outstanding shares, and all material amendments to the Distribution Plan or any distribution or service agreement shall be approved by the Rule 12b-1 Trustees, cast in person at a meeting called for the purpose of voting on any such amendment. PRINCIPAL HOLDERS OF SECURITIES As of October 17, 1996, the following persons were the only persons who were record owners or, to the knowledge of the Trust, beneficial owners of 5% or more of the shares of the Fund:
Name and Address Number of Shares % Ownership ----------------- ---------------- ----------- Centurion Trust Co. 12,504,710.830 36.1%1/ 2525 East Camelback Road Suite 640 Phoenix, AZ 85016 Trust Company of America 8,268,087.240 23.8%1/ 7103 S. Revere Parkway Denver, CO 80217 Record Owner for: Satell Investment 8,268,087.240 23.8%2/ Management 8015 Broadway Suite 101 San Antonio, TX 78209 Independent Trust 4,253,999.820 12.3%1/ Corporation 15255 S. 94th Avenue Suite 303 Orland Park, IL 60462-3897 Record Owner for: 17 Name and Address Number of Shares % Ownership ----------------- ---------------- ----------- Portfolio Strategies 4,253,999.820 12.3%2/ 1102 Broadway Plaza Suite 302 Tacoma, WA 98402 National Financial 2,455,310.000 7.1%1/ Services Corp. P.O. Box 3908 New York, NY 10008 First Trust Corp. 2,059,117.620 5.9%1/ P.O. Box 173736 Denver, CO 80217 Record Owner for: Zweig/Avatar 2,059,117.620 5.9%2/ 900 Third Avenue New York, New York 10022 Independent Trust 1,794,309.660 5.2%1/ Corporation 15255 S. 94th Avenue Suite 303 Orland Park, IL 60462-3897 Record Owner for: Brookstreet Securities 1,794,309.660 5.2%2/ 2361 Campus Drive Suite 210 Irvine, CA 92715 1/ Record owner only. 2/ Beneficial owner only.
As of the date of this Statement of Additional Information, the Trustees and the officers of the Trust, as a group, owned, of record and beneficially, less than 1.0% of the outstanding shares of the Fund. DETERMINATION OF NET ASSET VALUE The net asset value of the Fund's shares is determined each day on which both the New York Stock Exchange (the "NYSE") and the Federal Reserve Bank of New York (the "New York Fed") are 18 open for business at 1:00 P.M., Eastern Time. Currently, the NYSE and the New York Fed are closed on weekends, and the following holiday closings have been scheduled for 1996: (i) N e w Y ear's Day, Martin Luther King Jr.'s Birthday, Washington's Birthday, Good Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day, and Christmas Day; and (ii) the preceding Friday when any of those holidays falls on a Saturday or the subsequent Monday when any one of those holidays falls on a Sunday. To the extent that portfolio securities of the Fund are traded in other markets on days when the NYSE or the New York Fed is closed, the Fund's net asset value may be affected on days when investors do not have access to the Fund to purchase or redeem shares. Although the Trust expects the same holiday schedule to be observed in the future, the NYSE and the New York Fed each may modify its holiday schedule at any time. The net asset value of the Fund serves as the basis for the purchase and redemption price of the Fund's shares. The Fund will utilize the amortized cost method in valuing its portfolio securities for purposes of determining the net asset value of the shares of the Fund. The Fund will utilize the amortized cost method in valuing its portfolio securities even though the portfolio securities may increase or decrease in market value, generally, in connection with changes in interest rates. The amortized cost method of valuation involves valuing a security at its cost adjusted by a constant a m o rtization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The Fund's use of the amortized cost method to value its portfolio securities and the maintenance of the per share net asset value of $1.00 is permitted pursuant to Rule 2a-7 under the 1940 Act (the "Rule"), and is conditioned on the Fund's compliance with various conditions including: (a) the Trustees are obligated, as a particular responsibility within the overall duty of care owed to the Fund's shareholders, to establish written procedures reasonably designed, taking into account current market conditions and the Fund's investment objectives, to stabilize the net asset value per share as computed for the purpose of distribution and redemption at $1.00 per share; (b) the procedures should provide for (i) the calculation, at such intervals as the Trustees determine are appropriate and as are reasonable in light of current market conditions, of the deviation, if any, between net asset value per share using amortized cost to value portfolio securities and net asset value per share based upon available market quotations with respect to such portfolio securities; (ii) the periodic review by the Trustees of the amount of deviation as well as methods used to calculate the amount of deviation; and (iii) the maintenance of written records of the procedures, 19 the Trustees' considerations made pursuant to the procedures and any actions taken upon such considerations; (c) the Trustees should consider what steps should be taken, if any, in the event of a difference of more than 1/2 of 1% between the two methods of valuation; and (d) the Trustees should take such action as the Trustees deem appropriate (such as shortening the average portfolio maturity, realizing gains or losses, or, as provided by the Declaration of Trust, reducing the number of the outstanding shares of the Fund) to eliminate or reduce to the extent reasonably practicable material dilution or other unfair results to investors or existing shareholders. Any reduction of outstanding shares will be effected by having each shareholder proportionately contribute to the Fund's capital the shares necessary to eliminate or reduce the material dilution or other unfair results to investors or existing shareholders. Each shareholder will be deemed to have agreed to such a contribution in these circumstances by investment in the Fund. The Rule further requires that the Fund limits its investments to U.S. dollar-denominated instruments which the Trustees determine present minimal credit risks and which are Eligible Securities (as defined below). The Rule also requires the Fund to maintain a dollar-weighted average portfolio maturity (not more than 90 days) appropriate to the Fund's objective of maintaining a stable net asset value of $1.00 per share and precludes the purchase of any instrument with a remaining maturity of more than thirteen months. Should the disposition of a portfolio security result in a dollar-weighted average portfolio maturity of more than 90 days, the Fund would be required to invest its available cash in such a manner as to reduce such maturity to 90 days or less as soon as reasonably practicable. An Eligible Security is defined in the Rule to mean a security which: (a) has a remaining maturity of thirteen months or less; (b) either (i) is rated in the two highest short-term rating categories by any two nationally-recognized statistical rating organizations ("NSROs") that have issued a short-term rating with respect to the security or class of debt obligations of the issuer, or (ii) if only one NSRO has issued a short-term rating with respect to the security, then by that NSRO; (c) was a long-term security at the time of issuance whose issuer has outstanding a short-term debt obligation which is comparable in priority and security and has a rating as specified in clause (b) above; or (d) if no rating is assigned by any NSRO as provided in clauses (b) and (c) above, the unrated security is determined by the Trustees to be of comparable quality to any such rated security. As permitted by the Rule, the Trustees have delegated to the Fund's Advisor, subject to the Trustees' oversight pursuant to 20 guidelines and procedures adopted by the Trustees, the authority to determine which securities present minimal credit risks and which unrated securities (and securities that are rated only by a single NSRO) are comparable in quality to rated securities. The Advisor will, under the supervision of the Trustees, cause the Fund to dispose of any security as soon as practicable if the security is no longer of high quality, unless the Trustees determine that this action would not be in the best interest of the Fund. If the Trustees determine that it is no longer in the best interests of the Fund and its shareholders to maintain a stable price of $1.00 per share, or if the Trustees believe that maintaining such price no longer reflects a market-based net asset value per share, the Trustees have the right to change from an amortized cost basis of valuation to valuation based on market quotations. The Fund will notify shareholders of any such change. The Fund will manage its portfolio in an effort to maintain a constant $1.00 per share price, but the Fund cannot assure that the value of the Fund's shares will never deviate from this price. Since dividends from net investment income (and net short-term capital gains, if any) are declared and accrued on a daily basis, the net asset value per share, under o r d inary circumstances, is likely to remain constant. Otherwise, realized and unrealized gains and losses will not be distributed on a daily basis but will be reflected in the Fund's net asset value. The amounts of such gains and losses will be considered by the Trustees in determining the action to be taken to maintain the Fund's $1.00 per share net asset value. Such action may include distribution at any time of part or all of the then-accumulated undistributed net realized capital gains, or reduction or elimination of daily dividends by an amount equal to part or all of the then-accumulated net realized capital losses. However, if realized losses should exceed the sum of net investment income plus realized gains on any day, the net asset value per share on that day might decline below $1.00 per share. In such circumstances, the Fund may reduce or eliminate the payment of daily dividends for a period of time in an effort to restore the Fund's $1.00 per share net asset value. A decline in prices of securities could result in significant unrealized depreciation on a mark- to-market basis. Under these circumstances the Fund may reduce or eliminate the payment of dividends, and utilize a net asset value per share as determined by using available market quotations, or reduce the number of its shares outstanding. Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets will be valued at their respective fair value as 21 determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of certain responsibilities regarding valuation to the Advisor or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determination. The Trustees, from time to time, will review these methods of valuation and will recommend changes which may be necessary to assure that the investments of the Funds are valued at fair value. INFORMATION ON COMPUTATION OF YIELD The Fund's annualized current yield, as may be quoted from time to time in advertisements and other communications to s h a r eholders and potential investors, is computed by determining, for a stated seven-day period, the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom (which reflect deductions of all expenses of the Fund such as management fees), in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7). The Fund's annualized effective yield, as may be quoted from time to time in advertisements and other communications to s h a r eholders and potential investors, is computed by determining (for the same stated seven-day period as the current yield), the net change, exclusive of capital changes and including the value of additional shares purchased with dividends and any dividends declared therefrom (which reflect deductions of all expenses of the Fund such as management fees), in the value of a hypothetical pre-existing account having a balance of one share at the beginning of the period, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The Fund s annualized effective yield and annualized current yield, for the seven-day period ended September 30, 1996, were 4.46% and 4.37%, respectively. The yields quoted in any advertisement or other communication should not be considered a representation of the yields of the Fund in the future since the yield is not fixed. Actual yields will depend not only on the type, quality, and maturities of the investments held by Fund and changes in 22 interest rates on such investments, but also on changes in the Fund's expenses during the period. Yield information may be useful in reviewing the performance of the Fund and for providing a basis for comparison with other investment alternatives. However, unlike bank deposits or other investments which typically pay a fixed yield for a stated period of time, the Fund's yield fluctuates. DIVIDENDS, DISTRIBUTIONS, AND TAXES Dividends and Distributions. As discussed in the Fund's Prospectus, the Fund intends to declare dividends daily from net investment income (and net short-term capital gains, if any) and distribute such dividends monthly. Net income, for dividend purposes, includes accrued interest and amortization of original issue and market discount, plus or minus any short-term gains or losses realized on sales of portfolio securities, less the amortization of market premium and the estimated expenses of the Fund. Net income will be calculated immediately prior to the determination of net asset value per share of the Fund. The Trustees may revise the dividend policy, or postpone the payment of dividends, if the Fund should have or anticipate any large unexpected expense, loss, or fluctuation in net assets which, in the opinion of the Trustees, might have a significant adverse effect on shareholders. On occasion, in order to maintain a constant $1.00 per share net asset value, the Trustees may direct that the number of outstanding shares be reduced in each shareholder's account. Such reduction may result in taxable income to a shareholder in excess of the net increase (i.e., dividends, less such reduction), if any, in the shareholder's account for a period of time. Furthermore, such reduction may be realized as a capital loss when the shares are liquidated. Regulated Investment Company Status. The Fund intends to qualify as a regulated investment company (a "RIC") under Subchapter M of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). As a RIC, the Fund itself would not be subject to Federal income taxes on the net investment income and capital gains that the Fund distributes to the Fund's shareholders. The distribution of net investment income and capital gains will be taxable to Fund shareholders regardless o f w h ether the shareholder elects to receive these distributions in cash or in additional shares. Distributions may be subject to state and local taxes. Shareholders will be subject to Federal income tax on dividends paid from interest income derived from taxable securities and on distributions of realized net short-term 23 capital gains. Interest and realized net short-term capital gains distributions are taxable to the shareholder as ordinary dividend income regardless of whether the shareholder receives such distributions in additional shares or in cash. Since the Fund's income is expected to be derived entirely from interest rather than dividends, none of such distributions will be e l i gible for the Federal dividends received deduction available to corporations. The Fund will seek to qualify for treatment as a RIC under the Code. Provided that the Fund (i) is a RIC and (ii) distributes at least 90% of the Fund's net investment income (including, for this purpose, net realized short-term capital gains), the Fund itself will not be subject to Federal income taxes to the extent the Fund's net investment income and the Fund's net realized short-term capital gains, if any, are distributed to the Fund's shareholders. To avoid an excise tax on its undistributed income, the Fund generally must distribute at least 98% of its income. One of several requirements for RIC qualification is that the Fund must receive at least 90% of the Fund's gross income each year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to the Fund's investments in stock, securities, and foreign currencies (the "90% Test"). In addition, under the Code, the Fund will not qualify as a RIC for any taxable year if more than 30% of the Fund's gross income for that year is derived from gains on the sale of securities held less than three months (the "30% Test"). If the Fund does not satisfy the 30% Test for the Fund's first taxable year, or for any subsequent taxable year, the Fund will not qualify as a RIC for that year. If the Fund fails to qualify as a RIC for any taxable year, the Fund would be taxed in the same manner as an ordinary corporation. In that event, the Fund would not be entitled to deduct the distributions which the Fund had paid to shareholders and, thus, would incur a corporate income tax liability on all of the Fund's taxable income whether or not distributed. The imposition of corporate income taxes on the Fund would directly reduce the return to an investor from an investment in the Fund. In the event of a failure by the Fund to qualify as a RIC, the Fund's distributions, to the extent such distributions are derived from the Fund's current or accumulated earnings and profits, would constitute dividends that would be taxable to the shareholders of the Fund as ordinary income and would be eligible for the dividends-received deduction for corporate shareholders. 24 If the Fund were to fail to qualify as a RIC for one or more taxable years, the Fund could then qualify (or requalify) as a RIC for a subsequent taxable year only if the Fund had distributed to the Fund's shareholders a taxable dividend equal to the full amount of any earnings or profits (less the interest charge mentioned below, if applicable) attributable to such period. The Fund might also be required to pay to the U.S. Internal Revenue Service (the "IRS") interest on 50% of such accumulated earnings and profits. In addition, pursuant to the Code and an interpretative notice issued by the IRS, if the Fund should fail to qualify as a RIC and should thereafter seek to requalify as a RIC, the Fund may be subject to tax on the excess (if any) of the fair market of the Fund's assets over the Fund's basis in such assets, as of the day immediately before the first taxable year for which the Fund seeks to requalify as a RIC. If the Fund determines that the Fund will not qualify as a RIC under Subchapter M of the Code, the Fund will establish procedures to reflect the anticipated tax liability in the Fund's net asset value. Back-Up Withholding. The Fund is required to withhold and remit to the U.S. Treasury 31% of (i) reportable taxable dividends and distributions and (ii) the proceeds of any redemptions of Fund shares with respect to any shareholder who is not exempt from withholding and who fails to furnish the Trust with a correct taxpayer identification number, who fails to report fully dividend or interest income, or who fails to certify to the Trust that the shareholder has provided a c o r r e ct taxpayer identification number and that the shareholder is not subject to withholding. (An individual's taxpayer identification number is the individual's social security number.) The 31% "back-up withholding tax" is not an additional tax and may be credited against a taxpayer's regular Federal income tax liability. Other Issues. The Fund may be subject to tax or taxes in certain states where the Fund does business. Furthermore, in those states which have income tax laws, the tax treatment of t h e F und and of Fund shareholders with respect to distributions by the Fund may differ from Federal tax treatment. Shareholders are urged to consult their own tax advisors regarding the application of the provisions of tax law described in this Statement of Additional Information in light of the particular tax situations of the shareholders and regarding specific questions as to Federal, state, or local taxes. AUDITORS AND CUSTODIAN 25 Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, are the auditors and the independent certified public accountants of the Trust and the Fund. Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, acts as the Custodian bank for the Trust and the Fund. FINANCIAL STATEMENTS Unaudited financial statements for the Fund, for the period from July 11, 1996 (the date the Fund commenced operations) to September 30, 1996, are included herein. 26 Unaudited Financial Statements for The Rydex Institutional Money Market Fund, for the Period From July 11, 1996 to September 30, 1996 PAGE RYDEX SERIES TRUST THE RYDEX INSTITUTIONAL MONEY MARKET FUND SCHEDULE OF INVESTMENTS September 30, 1996 (Unaudited)
Face Amount Market Value ----------- ------------ COMMERCIAL PAPER 22.6% American Express Credit 5.33% due 10/15/96 $1,000,000 $997,927 Ford Motor Credit Co. 5.37% due 10/15/96 2,000,000 1,995,823 General Electric Credit Corp. 5.34% due 10/10/96 1,000,000 998,665 General Motors Acceptance Corp. 5.34% due 10/7/96 1,000,000 999,100 General Motors Acceptance Corp. 5.36% due 10/9/96 1,000,000 998,809 General Motors Acceptance Corp. 5.37% due 10/11/96 1,000,000 998,508 Total Commercial Paper (Cost $6,988,842) 6,988,842 FEDERAL AGENCY DISCOUNT NOTES 19.3% Federal Home Loan Bank Board 5.21% due 10/16/96 1,000,000 997,829 Federal Home Loan Mortgage Corp. 5.37% due 11/13/96 2,000,000 1,987,172 Federal National Mortgage Assoc. 5.32% due 10/8/96 1,000,000 998,966 Federal National Mortgage Assoc. 5.16% due 11/15/96 1,000,000 993,550 Federal National Mortgage Assoc. 5.19% due 1/13/97 1,000,000 985,007 Total Federal Agency Discount Notes (Cost $5,962,524) U.S. TREASURY BILL 58.1% U.S. Treasury Bill 5.12% due 10/10/96 18,000,000 17,976,960 (Cost $17,976,960) PAGE Total Investments 100% (Cost $30,928,326) $30,928,326
29
RYDEX SERIES TRUST THE RYDEX INSTITUTIONAL MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES September 30, 1996 (Unaudited) ASSETS Securities at Value $30,928,326 Investment Income Receivable 3,105 Cash in Custodian Bank 55,953 Receivable for Shares Purchased 2,084,249 Total Assets 33,071,633 LIABILITIES Payable for Shares Redeemed 2,084,249 Dividends Payable 158,814 Investment Advisory Fee Payable 22,932 Transfer Agent Fee Payable 11,076 Distribution Fee Payable 11,887 Other Liabilities 1,791 Total Liabilities 2,290,749 NET ASSETS $30,780,884 Share Outstanding 30,780,884 Net Asset Value Per Share $1.00
PAGE
RYDEX SERIES TRUST THE RYDEX INSTITUTIONAL MONEY MARKET FUND STATEMENT OF OPERATIONS* September 30, 1996 (Unaudited) INVESTMENT INCOME Interest $453,849 EXPENSES Advisory Fees 47,002 Transfer Agent Fees 17,100 Distribution Fees 21,627 Registration Fees 4,399 Accounting Fees 4,188 Miscellaneous Expenses 4,237 Total Expenses 98,553 Net Investment Income 355,296 REAL AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net Realized Gain (Loss) on Investment Securities 0 Net Unrealized Gain (Loss) on Investment Securities 0 Net Gain (Loss) on Investments 0 Net Increase in Net Assets from Operations $355,296 * Since commencement of operations on July 11, 1996.
RYDEX SERIES TRUST THE RYDEX INSTITUTIONAL MONEY MARKET FUND STATEMENT OF CHANGES IN NET ASSETS* September 30, 1996 (Unaudited) PAGE FROM INVESTMENT ACTIVITIES Net Investment Income $355,296 Net Realized Gain (Loss) on Investments 0 Net Unrealized Gain (Loss) on 0 Investments Net Increase in Net Assets from 355,296 Operations Distributions to Shareholders: From Net Investment Income (355,296) From Realized Gain on Investments 0 Net Increase in Net Assets from Shares Transactions 30,780,884 NET ASSETS - Beginning of Period 0 NET ASSETS - End of Period $30,780,884 Shares Issued and Redeemed Shares Purchased 267,794,601 Shares Purchased through Dividend Reinvestment 196,660 Total Purchased 267,991,261 Shares Redeemed (237,210,377) Net Shares Purchased 30,780,884 * Since commencement of operations on July 11, 1996.
32
RYDEX SERIES TRUST THE RYDEX INSTITUTIONAL MONEY MARKET FUND FINANCIAL HIGHLIGHTS (For a Share Outstanding Throughout Each Period) The following financial highlights relating to the Fund for the period July 11, 1996 to September 30, 1996 are unaudited. For the Period Ended September 30, 1996* (Unaudited) --------------- PER SHARE OPERATING PERFORMANCE: NET ASSET VALUE -- BEGINNING OF PERIOD $ 1.00 Net Investment Income (Loss) 0.01 Net Realized and Unrealized Gains (Losses) on Securities 0.00 Net Increase (Decrease) in Net Asset Value Resulting from Operations 0.00 Dividends to Shareholders (0.01) Distributions to Shareholders From Net Realized Capital Gain 0.00 Net Increase (Decrease) in Net Asset Value 0.00 NET ASSET VALUE END OF PERIOD $ 1.00 TOTAL INVESTMENT RETURN 4.28%** RATIOS TO AVERAGE NET ASSETS Expenses 1.24%** Net Investment Income 4.22%** SUPPLEMENTARY DATA: Portfolio Turnover Rate*** 0.00% Net Assets, End of Period (000's omitted) $30,781 The per share data of the Financial Highlights table is calculated using the daily shares outstanding average for the period. * Commencement of Operations: July 11, 1996. ** Annualized for the period ended September 30, 1996. *** Portfolio turnover ratio is calculated without regard to short-term securities having a maturity of less than one year. PAGE
34 NOTES TO FINANCIAL STATEMENTS FOR THE RYDEX INSTITUTIONAL MONEY MARKET FUND 1. SIGNIFICANT ACCOUNTING POLICIES Rydex Series Trust (the Trust ) is registered with the Securities and Exchange Commission (the Commission ) under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Trust currently is comprised of nine separate series: The Nova Fund, The Ursa Fund, The Rydex U.S. Government Money Market Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex Institutional Money Market Fund, and The Rydex High Yield Fund (The Rydex High Yield Fund presently is in registration with the Commission and has not yet commenced operations). The following significant accounting policies are in conformity w i t h generally accepted accounting principles and are consistently followed by the Trust in the preparation of its financial statements: A. Securities listed on an exchange are valued at the latest quoted sales prices as of 4:00 p.m. on the valuation date. Securities not traded on an exchange are valued at their last sales price. Listed options held by the Trust are valued at their last bid price. Over-the counter options held by the Trust are valued using the average bid price obtained from one or more securities dealers. The value of futures contracts purchased and sold by the Trust are accounted for using the unrealized gain or loss on the contracts that is determined by marking the contracts to their current realized settlement prices. Short-term securities with less than sixty d a ys to maturity are valued at amortized cost, which approximates market value. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under direction of the Board of Trustees of the Trust. B. Securities transactions are recorded on the trade date (the date the order to buy or sell is executed). Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is accrued on a daily basis. C. Net investment income is computed, and dividends are declared, daily in The Rydex U.S. Government Money Market Fund, The Rydex Institutional Money Market Fund, and The Rydex U.S. Government Bond Fund. Income dividends in these series of the Trust are paid monthly. Dividends are reinvested in additional shares unless shareholders request payment in cash. Generally, short-term capital gains are distributed monthly in The Rydex U.S. Government Money Market Fund and The Rydex Institutional Money Market Fund. D. When a series of the Trust engages in a short sales transaction, an amount equal to the proceeds received by the Trust series is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the market value of the short sale. Each series of the Trust maintains a segregated account of securities as collateral for the short sales transactions engaged in by the series. The Trust is exposed to market risk based on the amount, if any, that the market value of the stock subject to the short sale exceeds the market value of the corresponding securities held as collateral in the segregated account. E. When a series of the Trust writes (sells) an option, an amount equal to the premium received is entered in the accounting records for that series as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current value of the option written. When an option expires, or if the Trust enters into a closing purchase transaction, the Trust realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold). F. Certain series of the Trust may purchase or sell stock index futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specified future delivery date and at a specific price. Upon entering into a contract, a series of the Trust deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Trust series agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Trust series as unrealized gains or losses. When the contract is closed, the Trust series records a realized gain or loss equal to the difference between the value of the contract at the time the contract was opened and the value at the time the contract was closed. G. Futures contracts and written options involve, to varying degrees, elements of market risk and risks in excess of the amount recognized in the Statements of Assets and Liabilities of a Trust series. The face or contract amounts of these instruments reflect the extent of the involvement each series has in the particular classes of instruments. Risks may be caused by an imperfect correlation between movements in the price of the instruments and the price of the underlying securities. H. Each series of the Trust intends to comply with the p r ovisions of the Internal Revenue Code applicable to 2 regulated investment companies and will distribute all net investment income to its shareholders. Therefore, no Federal income tax provision is required. I. Costs incurred by The Rydex Institutional Money M a r k et Fund in connection with its organization and registration have been deferred and are being amortized on the straight-line method over a five year period beginning on the date on which The Rydex Institutional Money Market Fund commenced its investment activities. J. The preparation of financial statements in conformity with generally accepted accounting principles requires Trust management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. OPERATING POLICIES The Trust currently is comprised of nine separate series, as identified in Note 1 above. Certain of these Trust series utilize futures contract, options, and options on futures contracts in order to meet the specific investment objectives of the individual series. The Nova Fund, which is designed to provide total returns over time that are superior to the Standard & Poor s 500 Composite Stock Price Index (the S&P500 Index"), invests primarily in futures contracts traded on the S&P500 Index and in options on those futures contracts in order to correlate The Nova Fund s return with an amount approximating 150% of the performance of the S&P500 Index. The Ursa Fund primarily sells futures contracts and buys options on futures contracts in furtherance of its investment objective to correlate The Ursa Fund s performance to the inverse of the performance of the S&P500 Index. The Rydex Precious Metals Fund seeks capital appreciation, and to this extent The Rydex Precious Metal Fund primarily purchases equity securities and purchases call options and sells put options on the Philadelphia Stock Exchange Gold/Silver Index. The Rydex U.S. Government Bond Fund strives to provide income and capital appreciation, and to this extent The Rydex U.S. Government Bond Fund primarily purchases futures contracts on U.S. Treasury bonds and purchases call options on U.S. Treasury bond futures contracts as a substitute for a comparable market position in the underlying U.S. Treasury securities. The Juno Fund seeks to correlate The Juno Fund s performance with the inverse of the price changes of the current Thirty Year Treasury bond, and, to meet this objective, The Juno Fund primarily purchases put 3 options on U.S. Treasury bond futures contracts and sells U.S. Treasury bond futures contracts. The Rydex OTC Fund strives to provide investment results before fees and expenses that closely correlate with the total return of the NASDAQ Composite Index, and to this extent The Rydex OTC Fund invests in securities included in the NASDAQ Composite Index and purchases call options and sells put options on stock indexes. In addition, The Nova Fund, The Ursa Fund, The Rydex OTC Fund, and The Rydex Precious Metals Fund each writes (sells) options on securities and stock indexes to further meet the investment objectives of the series, as described in the Trust s prospectus. T h e risks inherent in the use of options, futures contracts, and options on futures contracts include: (1) adverse changes in the value of such instruments; (2) imperfect correlation between the price of options and futures contracts and options thereon and movements in the price of the underlying securities, index, or futures contract; (3) the possible absences of a liquid secondary market for any particular instrument at any time; and (4) the possible need to defer closing out certain positions to avoid adverse tax consequences. 4 PART C PAGE PART C. OTHER INFORMATION ITEM 24. Financial Statements and Exhibits List all financial statements and exhibits filed as part of the Registration Statement. (a) Financial Statements: In Part A: Audited Financial Highlights of The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, and The Rydex U.S. Government Money Market Fund (collectively, the "Rydex Funds") for the periods from July 12, 1993, January 7, 1994, February 14, 1994, December 1, 1993, January 3, 1994, March 3, 1995, and December 3, 1993, respectively (the respective dates on which the Rydex Funds commenced operations), to June 30, 1995, and for the fiscal year ended June 30, 1996; Unaudited Financial Highlights of The Rydex Institutional Money Market Fund from July 11, 1996 (commencement of operations) to September 30, 1996. In Part B: Audited Financial Statements for Rydex Series Trust for the fiscal year ended June 30, 1996, including the Report of Deloitte & Touche LLP, independent auditors for Rydex Series Trust; Unaudited Financial Statements of The Rydex Institutional Money Market Fund, for the period from July 11, 1996 (commencement of operations) to September 30, 1996. In Part C: None. (b) Exhibits (1)(a) Certificate of Trust of Rydex Series Trust (the "Registrant" or the "Trust").4/ (1)(b) Declaration of Trust of the Registrant.4/ (2) By-laws of Registrant.4/ (3) Not applicable. (4) Specimen share certificate.4/ (5)(a) Investment Advisory Agreement between Registrant and PADCO Advisors, Inc.4/ (5)(b) Sub-Advisory Agreement between PADCO Advisors, Inc. and Loomis, Sayles & Company, L.P.4/ (6) Not applicable. (7) Not applicable. PAGE (8) Custody Agreement between Registrant and Star Bank, N.A.4/ (9)(a) Trustees and Officers Indemnification and Liability Insurance Policy.1/ (9)(b) Comprehensive Blanket Fidelity Bond Insurance Policy.1/ (9)(c) Service Agreement between Registrant and PADCO Service Company, Inc.4/ (9)(d) Portfolio Accounting Services Agreement between Registrant and PADCO Service Company, Inc.4/ (9)(e) F i delity Bond Allocation Agreement Among R e gistrant, PADCO Advisors, Inc., The Rydex Advisor Variable Annuity Account, PADCO Advisors II, Inc., and PADCO Service Company, Inc.4/ (10) Opinion and Consent of Jorden Burt Berenson & Johnson LLP, counsel to the Registrant.4/ (11) Consent of Deloitte & Touche LLP, independent auditors for the Registrant.4/ _________________________ 1/ I n c o rporated herein by reference to Post-Effective Amendment No. 24 to this Registration Statement, filed on October 27, 1995. 2/ I n c o rporated herein by reference to Post-Effective Amendment No. 25 to this Registration Statement, filed on March 1, 1996. 3/ I n c o rporated herein by reference to Post-Effective Amendment No. 26 to this Registration Statement, filed on September 11, 1996. 4/ Filed herewith. C-2 ITEM 24. Financial Statements and Exhibits (continued) (12) Not applicable. (13) Not applicable. (14) Not applicable. (15)(a) Plan of Distribution for The Rydex Institutional Money Market Fund.2/ (15)(b) Plan of Distribution for The Rydex High Yield Fund 3/ (15)(c) Forms of Shareholder Servicing Support Agreements between PADCO Financial Services, Inc. and Selling R e c ipients in connection with the Plan of Distribution for The Rydex Institutional Money Market Fund.2/ (15)(d) Form of Shareholder Servicing Support Agreement between PADCO Financial Services, Inc. and Selling R e c ipients in connection with the Plan of Distribution for The Rydex High Yield Fund.3/ (16) Not applicable. (17) Financial Data Schedules for Rydex Series Trust.4/ (18) Not applicable. ____________________________ 1/ I n c o rporated herein by reference to Post-Effective Amendment No. 24 to this Registration Statement, filed on October 27, 1995. 2/ I n c o rporated herein by reference to Post-Effective Amendment No. 25 to this Registration Statement, filed on March 1, 1996. 3/ I n c o rporated herein by reference to Post-Effective Amendment No. 26 to this Registration Statement, filed on September 11, 1996. 4/ Filed herewith. C-3 ITEM 25. Persons Controlled By or Under Common Control With Registrant The following persons are directly or indirectly controlled by or under the common control with the Registrant, a Delaware business trust:
Percentage of Voting Securities Owned and/or State of Organization Controlled By the and Relationship Controlling Person or (If Any) to Other Basis of Company the Registrant Common Control PADCO Advisors, a Maryland corporation, 80% of the voting Inc. a registered investment securities of the (the "Advisor") adviser, and the Advisor are owned by Registrant's investment Albert P. Viragh, Jr., adviser the Chairman of the Board of Directors, the President, and the Treasurer of the Advisor, and 100% of the voting securities are controlled by Albert P. Viragh, Jr. PADCO Service a Maryland corporation, 100% of the voting Company, Inc. a registered transfer securities of the (the "Servicer") agent, and the Servicer are owned by Registrant's Albert P. Viragh, Jr., shareholder and the Chairman of the transfer agent servicer Board of Directors, the President, and the Treasurer of the Servicer PADCO Financial a Maryland corporation, 100% of the voting Services, Inc. a registered broker- securities of the (the dealer, and the Distributor are owned by Distributor ) distributor of the Albert P. Viragh, Jr., shares of The Rydex the Chairman of the Institutional Money Board of Directors, the Market Fund and The President, and the Rydex High Yield Fund, Treasurer of the each a series of the Distributor Registrant C-4 PADCO Advisors a Maryland corporation 100% of the voting II, Inc. and a registered securities are owned by ("PADCO II") investment adviser Albert P. Viragh, Jr., (PADCO II is not the Chairman of the otherwise related to Board of Directors, the the Registrant) President, and the Treasurer of PADCO II Rydex Advisor a managed separate the investment advisers Variable Annuity account of Great for the Separate Account Account American Reserve and the Registrant are (the Separate Insurance Company, under the common control Account ) which is organized of Albert P. Viragh, under the laws of the Jr., the Chairman of the State of Texas and is Board of Trustees, advised by PADCO II President, and Treasurer of the Registrant
ITEM 26. Number of Holders of Securities
The following information is given as of the date indicated: Title of Class; Shares of Number of Record Holders Beneficial Interest, no par value as of October 22, 1996 The Nova Fund 1,412 The Rydex U.S. Government Money Market Fund 4,354 The Rydex Precious Metals Fund 1,212 The Ursa Fund 4,058 The Rydex U.S. Government Bond Fund 335 The Rydex OTC Fund 882 The Juno Fund 520 The Rydex Institutional Money Market Fund 22 The Rydex High Yield Fund 0
ITEM 27. Indemnification The Registrant is organized as a Delaware business trust and is operated pursuant to a Declaration of Trust, dated as of March 13, 1993 (the "Declaration of Trust"), that permits the Registrant to indemnify its trustees and officers under certain circumstances. Such indemnification, however, is subject to the limitations imposed by the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as C-5 amended. The Declaration of Trust of the Registrant provides that officers and trustees of the Trust shall be indemnified by the Trust against liabilities and expenses of defense in proceedings against them by reason of the fact that they each serve as an officer or trustee of the Trust or as an officer or trustee of another entity at the request of the entity. This indemnification is subject to the following conditions: (a) no trustee or officer of the Trust is indemnified against any liability to the Trust or its security h o lders which was the result of any willful m i s feasance, bad faith, gross negligence, or reckless disregard of his duties; (b) officers and trustees of the Trust are indemnified only for actions taken in good faith which the officers and trustees believed were in or not opposed to the best interests of the Trust; and (c) expenses of any suit or proceeding will be paid in advance only if the persons who will benefit by such advance undertake to repay the expenses unless it subsequently is determined that such persons are entitled to indemnification. The Declaration of Trust of the Registrant provides that if indemnification is not ordered by a court, indemnification may be authorized upon determination by shareholders, or by a majority vote of a quorum of the trustees who were not parties to the proceedings or, if this quorum is not obtainable, if directed by a quorum of disinterested trustees, or by independent legal counsel in a written opinion, that the persons to be indemnified have met the applicable standard. ITEM 28. Business and Other Connections of Investment Adviser Each of the directors of the Trust's investment adviser, PADCO Advisors, Inc. (the "Advisor"), Albert P. Viragh, Jr., the Chairman of the Board of Directors, President, and Treasurer of the Advisor, and Amanda C. Viragh, the Secretary of the Advisor, is an employee of the Advisor at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. Albert P. Viragh, Jr. also has served (and continues to serve) as: (i) the Chairman of the Board of Trustees and the President of the Trust since the Trust's organization as a Delaware business trust on March 13, 1993; (ii) the Chairman of the Board of Directors, the President, and the Treasurer of PADCO Service C o mpany, Inc. (the "Servicer"), the Trust's registered transfer agent and shareholder servicer, since the incorporation of the Servicer in the State of Maryland on October 6, 1993; (iii) the Chairman of the Board of Directors, C-6 the President, and the Treasurer of PADCO Advisors II, Inc. ("PADCO II"), a registered investment adviser, since the incorporation of PADCO II in the State of Maryland on July 5, 1994; and (iv) the Chairman of the Board of Directors, the President, and the Treasurer of PADCO Financial Services, Inc. (the Distributor ), The Rydex Institutional Money Market Fund s distributor, since the incorporation of the Distributor in the State of Maryland on March 21, 1996. Amanda C. Viragh also has served (and continues to serve) as the Secretary of the Advisor, the Servicer, and PADCO II and also as the Assistant Treasurer of the Servicer. C-7 ITEM 29. Principal Underwriter (a) PADCO Financial Services, Inc. serves as the principal underwriter for the securities of The Rydex Institutional Money Market Fund, a series of the Registrant, but does not c u r rently serve as the principal underwriter for the securities of any other series of the Registrant or any other investment company. (b) The following information is furnished with respect to the directors and officers of PADCO Financial Services, Inc., the principal underwriter for The Rydex Institutional Money Market Fund, a series of the Registrant:
Name and Principal Positions and Offices Positions and Offices Business Address* with Underwriter with Registrant Albert P. Viragh, Jr. Director, President, Chairman of the Board of and Treasurer Trustees and President Amanda C. Viragh Director none Victor J. Edgar Chief Operating Officer none and Chief Financial Officer Michael P. Byrum Secretary Assistant Secretary Sothara Chin Compliance Officer Compliance Officer * The principal business address for each of the aforementioned directors and officers of PADCO Financial Services, Inc., is 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852.
C-8 ITEM 30. Location of Accounts and Records All accounts, books, and records required to be maintained and preserved by Section 31(a) of the Investment Company Act of 1940, as amended, and Rules 31a-1 and 31a-2 thereunder, will be kept by the Registrant at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852. ITEM 31. Management Services T h e re are no management-related service contracts not discussed in Parts A and B. ITEM 32. Undertakings (a) The Registrant agrees to file a post-effective amendment using financial statements with respect to the Rydex High Yield Fund, which need not be certified, within four to six months from the effective date of the Rydex High Yield Fund's Securities Act of 1933 Registration Statement. (b) Insofar as indemnification for liability arising under the Securities Act of 1933, as amended (the "1933 Act"), may be permitted to trustees, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer, or controlling person of the Registrant in the successful defense of any action, suit, or p r o ceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, the Registrant, unless in the opinion of the R e g i strant's counsel the matter has been settled by controlling precedent, will submit to a court of appropriate jurisdiction the question whether such indemnification by the Registrant is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (c) The Registrant undertakes that, if requested to do so by the holders of at least 10% of its outstanding shares of the Trust, the Registrant will call a meeting of shareholders of the Trust for the purpose of voting upon the question of the removal of a trustee or trustees of the Registrant and to assist in communications with other shareholders as required C-9 by Section 16(c) of the Investment Company Act of 1940, as amended. C-10 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this post-effective amendment to its Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rockville in the State of Maryland on the 25th day of October, 1996. RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. Albert P. Viragh, Jr., Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Signatures Title Date /s/ Albert P. Viragh, Jr. Chairman of the October 25, 1996 Albert P. Viragh, Jr. Board of Trustees, President, and Trustee /s/ Timothy P. Hagan Vice President, October 25, 1996 Timothy P. Hagan Principal Financial Officer and Principal Accounting Officer Corey A. Colehour* Trustee October 25, 1996 Corey A. Colehour J. Kenneth Dalton* Trustee October 25, 1996 J. Kenneth Dalton Roger Somers* Trustee October 25,1996 Roger Somers *By: /s/ Albert P. Viragh, Jr. Albert P. Viragh, Jr. Attorney-in-Fact S-1 S-2 EXHIBITS PAGE EXHIBIT INDEX PAGE Exhibit Number Description of Exhibit (1)(a) Certificate of Trust of Rydex Series Trust (1)(b) Declaration of Trust of Rydex Series Trust (2) By-laws of Rydex Series Trust (4) Specimen share certificate of Rydex Series Trust (5)(a) Investment Advisory Agreement between Rydex Series Trust and PADCO Advisors, Inc. (5)(b) S u b-Advisory Agreement between PADCO Advisors, Inc. and Loomis, Sayles & Company, L.P. (8) Custody Agreement between Rydex Series Trust and Star Bank, N.A. (9)(c) Service Agreement between Rydex Series Trust and PADCO Service Company, Inc. (9)(d) Portfolio Accounting Services Agreement between Rydex Series Trust and PADCO Service Company, Inc. (9)(e) Fidelity Bond Allocation Agreement Among Rydex Series Trust, PADCO Advisors, Inc., T h e Rydex Advisor Variable Annuity Account, PADCO Advisors II, Inc., and PADCO Service Company, Inc. (10) O p inion and Consent of Jorden Burt Berenson & Johnson LLP, counsel to Rydex Series Trust (11) C o n sent of Deloitte & Touche LLP, independent auditors for Rydex Series Trust PAGE S-6 EX-99.1ACERT.OFTR 2 Exhibit (1)(a) Certificate of Trust of Rydex Series Trust PAGE State of Delaware Office of the Secretary of State I, WILLIAM T. QUILLEN, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF BUSINESS TRUST OF RYDEX SERIES TRUST FILED IN THIS OFFICE ON THE ELEVENTH DAY OF FEBRUARY, A.D. 1993, AT 4 O CLOCK P.M. [SEAL OF STATE OF DELAWARE] /S/ William T. Quillen William T. Quillen, Secretary of State AUTHENTICATION: *3812881 930435002 DATE: 03/09/1993 PAGE CERTIFICATE OF TRUST of Rydex Series Trust This Certificate of Trust, a business trust registered under the Investment Company Act of 1940, is filed in accordance with the provisions of the Delaware Business Trust Act (12 Del. C. Section 3801 et seg.) and sets forth the following: 1. The name of the trust is Rydex Series Trust 2. As required by 12 Del. C. Section 3807 and 3810(a)(1)b, the Rydex Series Trust business address of the registered office of the Trust and of the Registered agent of the Trust for service of process is: The Corporation Trust Company 1209 Orange Street Wilmington, Delaware 19801 3. This certificate shall be effective upon filing. 4. Notice is hereby given that the Trust is a series Trust. T h e debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series of the Trust shall be enforceable against the assets of such series only and not against the assets of the Trust generally. This certificate is executed this 10th day of February, 1993 in Bethesda, Maryland, upon the penalties of perjury and constitutes the oath or affirmation that the facts stated above are true to the undersigned trustees belief of knowledge. /s/ Daniel S. Ryczek Daniel S. Ryczek /s/ William L. Major William L. Major /s/ Albert P. Viragh, Jr. Albert P. Viragh, Jr. PAGE EX-99.1BDEC.OFTRU 3 Exhibit (1)(b) Declaration of Trust of Rydex Series Trust PAGE RYDEX SERIES TRUST DECLARATION OF TRUST DATED MARCH 13, 1993 PAGE TABLE OF CONTENTS Page ARTICLE I - NAME AND DEFINITIONS Section 1.01. Name 1 Section 1.02. Definitions 1 ARTICLE II - BENEFICIAL INTEREST Section 2.01. Shares of Beneficial Interest 2 Section 2.02. Issuance of Shares 2 Section 2.03. Register of Shares and Share Certificates 2 Section 2.04. Transfer of Shares 3 Section 2.05. Treasury Shares 3 Section 2.06. Establishment of Series 3 Section 2.07. Investment in the Trust 3 Section 2.08. Assets and Liabilities of Series 4 Section 2.09. No Preemptive Rights 4 Section 2.10. Personal Liability of Shareholders 4 Section 2.11. Assent to Trust Instrument 5 Section 2.12. Redemption of Shares (Added By Amendment) -- ARTICLE III - THE TRUSTEES Section 3.01. Management of the Trust 5 Section 3.02. Initial Trustees 5 Section 3.03. Term of Office of Trustees 5 Section 3.04. Vacancies and Appointment of Trustees 5 Section 3.05. Temporary Absence of Trustee 6 Section 3.06. Number of Trustees 6 Section 3.07. Effect of Death, Resignation, Etc., of a Trustee 6 Section 3.08. Ownership of Assets of the Trust 6 ARTICLE IV - POWERS OF THE TRUSTEES Section 4.01. Powers 6 Section 4.02. Issuance and Repurchase of Shares 9 Section 4.03. Trustees and Officers as Shareholders 9 Section 4.04. Action by the Trustees 9 Section 4.05. Chairman of the Trustees 9 Section 4.06. Principal Transactions 9 ARTICLE V - EXPENSES OF THE TRUST Section 5.01. Trustee Reimbursement 10 ARTICLE VI - INVESTMENT ADVISOR, PRINCIPAL UNDERWRITER, AND TRANSFER AGENT PAGE Section 6.01. Investment Advisor 10 Section 6.02. Principal Underwriter 10 Section 6.03. Transfer Agent 11 Section 6.04. Parties to Contract 11 Section 6.05. Provisions and Amendments 11 ARTICLE VII - SHAREHOLDERS' VOTING POWERS AND MEETINGS Section 7.01. Voting Powers 11 Section 7.02. Meetings 12 Section 7.03. Quorum and Required Vote 12 ARTICLE VIII - CUSTODIAN Section 8.01. Appointment and Duties 12 Section 8.02. Central Certificate System 13 ARTICLE IX - DISTRIBUTIONS AND REDEMPTIONS Section 9.01. Distributions 13 Section 9.02. Redemptions 14 Section 9.03. Determination of Net Asset Value and Valuation of Portfolio Assets 14 Section 9.04. Suspension of the Right of Redemption 15 Section 9.05. Redemption of Shares in Order to Qualify as Regulated Investment Company 15 ARTICLE X - LIMITATION OF LIABILITY AND INDEMNIFICATION Section 10.01. Limitation of Liability 15 Section 10.02. Indemnification 15 Section 10.03. Shareholders 16 PAGE ARTICLE XI - MISCELLANEOUS Section 11.01. Trust Not a Partnership 17 Section 11.02. Trustee's Good Faith Action; Expert Advice; No Bond or Surety 17 Section 11.03. Establishment of Record Dates 17 Section 11.04. Termination of Trust 17 Section 11.05. Reorganization 18 Section 11.06. Filing of Copies; References; Headings 18 Section 11.07. Applicable Law 19 Section 11.08 Amendments 19 Section 11.09 Fiscal Year 19 Section 11.10. Provisions in Conflict With Law 19 AMENDMENTS TO DECLARATION OF TRUST, dated November 2, 1993 AMENDMENT TO DECLARATION OF TRUST, dated December 12, 1995 PAGE RYDEX SERIES TRUST Dated March 13, 1993 DECLARATION OF TRUST (herein after "Trust Instrument") made March 13, 1993 by Albert P. Viragh, Jr. and Daniel L. O'Connor (the "Trustees"). WHEREAS, the Trustees desire to establish a business trust for the investment and reinvestment of funds contributed thereto; NOW, THEREFORE, the Trustees declare that all money and property contributed to the trust hereunder shall be held and managed in trust under this Trust Instrument as herein set forth below. ARTICLE I NAME AND DEFINITIONS Section 1.01. Name. The name of the trust created hereby is the "Rydex Series Trust." Section 1.02. Definitions. Wherever used herein, unless otherwise required by the context or specifically provided: (a) The term "Bylaws" means the Bylaws referred to in Article IV, Section 4.01(e) hereof, as from time to time amended; (b) The term "Commission" has the meaning given it in the 1940 Act (as defined below). The terms "Affiliated Person," "Assignment," "Interested Person," and "Principal Underwriter" shall have the meanings given them in the 1940 Act, as modified by or interpreted by any applicable order or orders of the Commission or any rules or regulations adopted o r interpretive releases of the Commission thereunder. "Majority Shareholder Vote" shall have the same meaning as the term "vote of a majority of the outstanding voting securities" is given in the 1940 Act, as modified by or interpreted by any applicable order or orders of the Commission or any rules or regulations adopted or interpretive releases of the Commission thereunder. (c) The term "Delaware Act" refers to Chapter 38 of Title 12 of the Delaware Code entitled "Treatment of Delaware Business Trusts," as it may be amended from time to time. (d) The term "Net Asset Value" means the net asset value of each Series (as defined below) of the Trust (as defined below) determined in the manner provided in Article IX, Section 9.03 hereof; (e) The term "Outstanding Shares" means those Shares (as defined below) shown from time to time in the books of the Trust or its Transfer Agent as then issued and outstanding, but shall not include Shares which have been redeemed or repurchased by the Trust and which are at the time held in the treasury of the Trust; (f) The term "Series" means a series of Shares of the Trust established in accordance with the provisions of Article II, Section 2.06 hereof; (g) The term "Shareholder" means a record owner of Outstanding Shares of the Trust; (h) The term "Shares" means the equal proportionate transferable units of beneficial interest into which the beneficial interest of each Series of the Trust or class thereof shall be divided and may include fractions of Shares as well as whole Shares; (i) The term "Trust" refers to the Rydex Series Trust and all Series of the Rydex Series Trust, and reference to the Trust, when applicable to one or more Series of the Trust, shall refer to any such Series; (j) The term "Trustees" means the person or persons who has or have signed this Trust Instrument, so long as he or they shall continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly qualified and serving as Trustees in accordance with the provisions of Article III hereof and reference herein to a Trustee or to the Trustees shall refer to the individual Trustees in their capacity as Trustees hereunder; (k) The term "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of one or more of the Trust or any Series, or the Trustees on behalf of the Trust or any Series. (l) The term "1940 Act" refers to the Investment Company Act of 1940, as amended from time to time. ARTICLE II BENEFICIAL INTEREST Section 2.01. Shares of Beneficial Interest. The beneficial interest in the Trust shall be divided into such 2 transferable Shares of one or more separate and distinct Series or classes of a Series as the Trustees shall from time to time create and establish. The number of Shares of each Series, and class thereof, authorized hereunder is unlimited. Each Share shall have no par value. All Shares issued hereunder, including without limitation, Shares issued in connection with a dividend in Shares or a split or reverse split of Shares, shall be fully paid and nonassessable. Section 2.02. Issuance of Shares. The Trustees in their discretion may, from time to time, without vote of the Shareholders, issue Shares, in addition to the then issued and outstanding Shares and Shares held in the treasury, to such p a r t y or parties and for such amount and type of consideration, subject to applicable law, including cash or securities, at such time or times and on such terms as the Trustees may deem appropriate, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with, the assumption of liabilities) and businesses. In connection with any issuance of Shares, the Trustees may issue fractional Shares and Shares held in the treasury. The Trustees from time to time may divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Contributions to the Trust may be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1,000th of a Share or integral multiples thereof. Section 2.03. Register of Shares and Share Certificates. A register shall be kept at the principal office of the Trust or an office of the Trust's transfer agent which shall contain the names and addresses of the Shareholders of each Series, the number of Shares of that Series (or any class or classes thereof) held by them respectively and a record of all transfers thereof. As to Shares for which no certificate has been issued, such register shall be conclusive as to who are the holders of the Shares and who shall be entitled to receive dividends or other distributions or otherwise to exercise or enjoy the rights of Shareholders. No Shareholder shall be e n titled to receive payment of any dividend or other distribution, nor to have notice given to him as herein or in the Bylaws provided, until he has given his address to the transfer agent or such other officer or agent of the Trustees as shall keep the said register for entry thereon. The Trustees, in their discretion, may authorize the issuance of share certificates and promulgate appropriate rules and regulations as to their use. Such certificates may be issuable for any purpose limited in the Trustees discretion. In the event that one or more certificates are issued, whether in the name of a shareholder or a nominee, such certificate or certificates shall constitute evidence of ownership of Shares for all purposes, including transfer, assignment or sale of 3 such Shares, subject to such limitations as the Trustees may, in their discretion, prescribe. Section 2.04. Transfer of Shares. E x cept as otherwise provided by the Trustees, Shares shall be transferable on the records of the Trust only by the record holder thereof of by his agent thereunto duly authorized in writing, upon delivery to the Trustees or the Trust's transfer agent of a duly executed instrument of transfer, together with a Share certificate, if one is outstanding, and such evidence of the genuineness of each such execution and authorization and of such other matters as may be required by the Trustees. Upon such delivery the transfer shall be recorded on the register of the Trust. Until such record is made, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereunder and neither the Trustees nor the Trust, nor any transfer agent or registrar nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer. Section 2.05. Treasury Shares. Shares held in the treasury shall, until reissued pursuant to Section 2.02 hereof, not confer any voting rights on the Trustees, nor shall such Shares be entitled to any dividends or other distributions declared with respect to the Shares. Section 2.06. Establishment of Series. The Trust created hereby shall consist of one or more Series and separate and distinct records shall be maintained by the Trust of each Series and the assets associated with any such Series shall be held and accounted for separately from the assets of the Trust or any other Series. The Trustees shall have full power and authority, in their sole discretion, and without obtaining any prior authorization or vote of the Shareholders of any Series of the Trust, to establish and designate and to change in any manner such Series of Shares or any classes of initial or additional Series and to fix such preferences, voting powers, rights and privileges of such Series or classes thereof as the Trustees may from time to time determine, to divide and combine the Shares or any Series or classes thereof into a greater or lesser number, to classify or reclassify any issued Shares or any Series or classes thereof into one or more Series or classes of Shares, and to take such other action with respect to the Shares as the Trustees may deem desirable. The establishment and designation of any Series shall be effective upon the adoption of a resolution by a majority of the Trustees setting forth such establishment and designation and the relative rights and preferences of the Shares of such Series. A Series may issue any number of Shares and need not issue shares. At any time that there are no Shares outstanding of any particular Series previously established and designated, the Trustees may by a majority 4 vote abolish that Series and the establishment and designation thereof. All references to Shares in this Trust Instrument shall be deemed to be Shares of any or all Series, or classed thereof, as the context may require. All provisions herein relating to the Trust shall apply equally to each Series of the Trust, and each class thereof, except as the context otherwise requires. Each Share of a Series of the Trust shall represent an equal beneficial interest in the net assets of such Series. Each holder of Shares of a Series shall be entitled to receive his pro rata share of distributions of income and capital gains, if any, made with respect to such Series. Upon redemption of his Shares, such Shareholder shall be paid solely out of the funds and property of such Series of the Trust. Section 2.07. Investment in the Trust. The Trustees shall accept investments in any Series of the Trust from such persons and on such terms as they may from time to time authorize. At the Trustees' discretion, such investments, subject to applicable law, may be in the form of cash or securities in which the affected Series is authorized to invest, valued as provided in Article IX, Section 9.03 hereof. I n v e s tments in a Series shall be credited to each Shareholder's account in the form of full Shares at the Net Asset Value per Share next determined after the investment is received; provided, however, that the Trustees may, in their sole discretion, (a) fix the Net Asset Value per Share of the initial capital contribution, (b) impose a sales charge upon investments in the Trust in such manner and at such time determined by the Trustees or (c) issue fractional Shares. Section 2.08. Assets and Liabilities of Series. All consideration received by the Trust for the issue or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be held and accounted for separately from the other assets of the Trust and of every other Series and may be referred to herein as "assets belonging to" that Series. The assets belonging to a particular Series shall belong to that Series for all purposes, and to no other Series, subject only to the rights of creditors of that Series. In addition, any assets, income, earnings, profits or funds, or payments and p r o ceeds with respect thereto, which are not readily identifiable as belonging to any particular Series shall be 5 allocated by the Trustees between and among one or more of the Series in such manner as the Trustees, in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes, and such assets, income, earnings, profits or funds, or payments and proceeds with respect thereto shall be assets belonging to that Series. The assets belonging to a particular Series shall be so recorded upon the books of the Trust, and shall be held by the Trustees in trust for the benefit of the holders of Shares of that Series. The assets belonging to each particular Series shall be charged with the liabilities of that Series and all expenses, costs, charges, and reserves attributable to that Series. Any general liabilities, expenses, costs, charges, or reserves of the Trust which are not readily identifiable as belonging to a particular Series shall be allocated and charged by the Trustees between or among any one or more of the Series in such manner as the Trustees, in their sole discretion, deem fair and equitable. Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes. Without limitation of the foregoing provisions of this Section 2.08, but subject to the right of the Trustees in their discretion to allocate general liabilities, expenses, costs, charges, or reserves as herein provided, the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to a particular Series s h all be enforceable against the assets of the Trust generally. Notice of this contractual limitation on inter- Series liabilities may, in the Trustee's sole discretion, be set forth in the certificate of trust of the Trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the Delaware Act, and upon the giving of such notice in the certificate of trust, the statutory provisions o f Section 3802 of setting forth such notice in the certificate of trust shall become applicable to the Trust and each Series. Any person extending credit to, contracting with or having any claim against any Series may look only to the assets of that Series to satisfy or enforce any debt, liability, obligation or expense incurred, contracted for or o t h erwise existing with respect to that Series. No Shareholder or former Shareholder of any Series shall have a claim on or any right to any assets allocated or belonging to any other Series. Section 2.09. No Preemptive Rights. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or the Trustees, whether of the same or other Series. Section 2.10. Personal Liability of Shareholders. E a c h Shareholder of the Trust and of each Series shall not be 6 personally liable for the debts, liabilities, obligations and expenses incurred by, contracted for, or otherwise existing with respect to, the Trust or by or on behalf of any Series. The Trustees shall have no power to bind any Shareholder personally or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay by way of subscription for any Shares or otherwise. Every note, bond, contract or other undertaking issued by or on behalf of the Trust or the Trustees relating to the Trust or to a Series shall include a recitation limiting the obligation represented thereby to the Trust or to one or more Series and its or their assets (but the omission of such a recitation shall not operate to bind any Shareholder or Trustee of the Trust). Section 2.11. Assent to Trust Instrument. E v e r y Shareholder, by virtue of having purchased a Share shall become a Shareholder and shall be held to have expressly assented and agreed to be bound by the terms hereof. ARTICLE III THE TRUSTEES Section 3.01. Management of the Trust. The Trustees shall have exclusive and absolute control over the Trust Property and over the business of the Trust to the same extent as if the Trustees were the sole owners of the Trust Property and business in their own right, but with such powers of delegation as may be permitted by this Trust Instrument. The Trustees shall have power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all states of the United States of America, in the District of Columbia, in any and all commonwealths, territories, dependencies, colonies, or possessions of the United States of America, and in any foreign jurisdiction and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Trust Instrument, the presumption shall be in favor of a grant of power to the Trustees. The enumeration of any specific power in this Trust Instrument shall not be construed as limiting the aforesaid power. The powers of the Trustees may be exercised without order of or resort to any court. 7 Except for the Trustees named herein or appointed to fill vacancies pursuant to Section 3.04 of this Article III, the Trustees shall be elected by the Shareholders owning of record a plurality of the Shares voting at a meeting of Shareholders. Such a meeting shall be held on a date fixed by the Trustees. In the event that less than a majority of the Trustees holding office have been elected by Shareholders, the Trustees then in office will call a Shareholders' meeting for the election of Trustees. Section 3.02. Initial Trustees. The initial Trustees shall be the persons named herein. On a date fixed by the Trustees, the Shareholders shall elect at least five (5) but not more than fifteen (15) Trustees, as specified by the Trustees pursuant to Section 3.06 of this Article III. Section 3.03. Term of Office of Trustees. T h e Trustees shall hold office during the lifetime of this Trust, and until its termination as herein provided, except that: (a) any Trustee may resign his trust by written instrument signed by him and delivered to the other Trustees, which shall take effect upon such delivery or upon such later date as is specified therein; (b) any Trustee may be removed at any time by written instrument, signed by at least two-thirds of the number of Trustees prior to such removal, specifying the date when such removal shall become effective; (c) any Trustee who requests in writing to be retired or who has died, become physically or mentally incapacitated by reason of disease or otherwise, or is otherwise unable to serve, may be retired by written instrument signed by a majority of the other Trustees, specifying the date of his retirement; and (d) a Trustee may be removed at any meeting of the Shareholders of the Trust by a vote of Shareholders owning at least two-thirds of the outstanding Shares. Section 3.04. Vacancies and Appointment of Trustees. In case of the declination to serve, death, resignation, retirement, removal, physical or mental incapacity by reason of disease or otherwise, or a Trustee is otherwise unable to serve, or an increase in the number of Trustees, a vacancy shall occur. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled, the other Trustees shall have all the powers hereunder and the certificate of the other Trustees of such vacancy shall be conclusive. In the case of an existing vacancy, the remaining Trustees shall fill such vacancy by appointing such other person as they in their discretion shall see fit consistent with the limitations under the 1940 Act. Such appointment shall be evidenced by a written instrument signed by a majority of the Trustees in office or by resolution of the Trustees, duly adopted, which shall be recorded in the minutes of a meeting of the Trustees, whereupon the appointment shall take effect. 8 An appointment of a Trustee may be made by the Trustees then in office in anticipation of a vacancy to occur by reason of retirement, resignation or increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at or after the effective date of s a id retirement, resignation or increase in number of Trustees. As soon as any Trustee appointed pursuant to this Section 3.04 shall have accepted this trust, the trust estate shall vest in the new Trustee or Trustees, together with the continuing Trustees, without any further act or conveyance, and he shall be deemed a Trustee hereunder. The power to appoint a Trustee pursuant to this Section 3.04 is subject to the provisions of Section 16(a) of the 1940 Act. Section 3.05. Temporary Absence of Trustee. Any Trustee may, by power of attorney, delegate his power for a period not exceeding six months at any one time to any other Trustee or Trustees, provided that in no case shall less than two Trustees personally exercise the other powers hereunder except as herein otherwise expressly provided. Section 3.06. Number of Trustees. T h e number of Trustees shall be at least five (5), and thereafter shall be such number as shall be fixed from time to time by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be more than fifteen (15). Section 3.07. Effect of Death, Resignation, Etc., of a Trustee. T h e declination to serve, death, resignation, retirement, removal, incapacity, or inability of the Trustees, or any one of them, shall not operate to terminate the Trust or to revoke any existing agency created pursuant to the terms of this Trust Instrument. Section 3.08. Ownership of Assets of the Trust. The assets of the Trust and of each Series shall be held separate and apart from any assets now or hereafter held in any capacity other than as Trustee hereunder by the Trustees or any successor Trustees. Legal title in all of the assets of the Trust and the right to conduct any business shall at all times be considered as vested in the Trustees on behalf of the Trust, except that the Trustees may cause legal title to any Trust Property to be held by, or in the name of, the Trust, or in the name of any person as nominee. No Shareholder shall be deemed to have a severable ownership in any individual asset of the Trust or of any Series or any right of partition or possession thereof, but each Shareholder shall have, except as otherwise provided for herein, a proportionate undivided beneficial interest in the Trust or Series. The Shares shall be personal property giving only the rights specifically set forth in this Trust Instrument. 9 ARTICLE IV POWERS OF THE TRUSTEES Section 4.01. Powers. The Trustees in all instances shall act as principals, and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts and instruments that they may consider necessary or appropriate in connection with the management of the Trust. The Trustees shall not in any way be bound or limited by present or future laws or customs in regard to trust investments, but shall have full authority and power to make any and all investments which they, in their sole discretion, shall deem proper to accomplish the purpose of this Trust without recourse to any court or other authority. Subject to any applicable limitation in this Trust Instrument or the Bylaws of the Trust, the Trustees shall have power and authority: (a) To invest and reinvest cash and other property, and to hold cash or other property uninvested, without in any event being bound or limited by any present or future law or custom in regard to investments by trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all the assets of the Trust; (b) To operate as and carry on the business of an investment company, and exercise all the powers necessary and appropriate to the conduct of such operations; (c) To borrow money and in this connection issue notes or other evidence of indebtedness; to secure borrowings by mortgaging, pledging or otherwise subjecting as security the Trust Property; to endorse, guarantee, or undertake the performance of an obligation or engagement of any other Person and to lend Trust Property; (d) To provide for the distribution of interests of the Trust either through a principal underwriter in the manner hereinafter provided for or by the Trust itself, or both, or otherwise pursuant to a plan of distribution of any kind; (e) To adopt Bylaws not inconsistent with this Trust Instrument providing for the conduct of the business of the Trust and to amend and repeal them to the extent that they do not reserve that right to the Shareholders; such Bylaws shall be deemed incorporated and included in this Trust Instrument; (f) To elect and remove such officers and appoint and terminate such agents as they consider appropriate; 10 (g) To employ one or more banks, trust companies or companies that are members of a national securities exchange or such other entities as the Commission may permit as custodians of any assets of the Trust subject to any conditions set forth in this Trust Instrument or in the Bylaws; (h) To retain one or more transfer agents and shareholder servicing agents, or both; (i) To set record dates in the manner provided herein or in the Bylaws; (j) To delegate such authority as they consider desirable to any officers of the Trust and to any investment advisor, manager, custodian, underwriter or other agent or independent contractor; (k) To sell or exchange any or all of the assets of the Trust, subject to the provisions of Article XI, Section 11.04(b) hereof; (l) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (m) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities; (n) To hold any security or property in a form not i n d icating any trust, whether in bearer, book entry, unregistered or other negotiable form; or either in the name of the Trust or in the name of a custodian or a nominee or n o minees, subject in either case to proper safeguards according to the usual practice of Delaware business trusts or investment companies; (o) To establish separate and distinct Series with separately defined investment objectives and policies and distinct investment purposes in accordance with the provisions of Article II hereof and to establish classes of such Series having relative rights, powers and duties as they may provide consistent with applicable law; (p) Subject to the provisions of Section 3804 of the Delaware Act, to allocate assets, liabilities and expenses of the Trust to a particular Series or to apportion the same 11 between or among two or more Series, provided that any liabilities or expenses incurred by a particular Series shall be payable solely out of the assets belonging to that Series as provided for in Article II hereof; (q) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or concern, any security of which is held in the Trust; to consent to any contract, lease, mortgage, purchase, or sale of property by such corporation or concern, and to pay calls or subscriptions with respect to any security held in the Trust; (r) To compromise, arbitrate, or otherwise adjust claims in favor of or against the Trust or any matter in controversy including, but not limited to, claims for taxes; (s) To make distributions of income and of capital gains to Shareholders in the manner hereinafter provided; (t) To establish, from time to time, a minimum investment for Shareholders in the Trust or in one or more Series or class, and to require the redemption of the Shares of any Shareholders whose investment is less than such minimum upon giving notice to such Shareholder; (u) T o establish one or more committees, to delegate any of the powers of the Trustees to said committees a n d to adopt a committee charter providing for such responsibilities, membership (including Trustees, officers or o t h e r agents of the Trust therein) and any other characteristics of said committees as the Trustees may deem proper. Notwithstanding the provisions of this Article IV, and in addition to such provisions or any other provision of this Trust Instrument or of the Bylaws, the Trustees may by resolution appoint a committee consisting of less than the whole number of Trustees then in office, which committee may be empowered to act for and bind the Trustees and the Trust, as if the acts of such committee were the acts of all the Trustees then in office, with respect to the institution, prosecution, dismissal, settlement, review or investigation of any action, suit or proceeding which shall be pending or threatened to be brought before any court, administrative agency or other adjudicatory body; (v) T o interpret the investment policies, practices, or limitations of any Series; (w) To establish a registered office and have a registered agent in the state of Delaware; and (x) In general to carry on any other business in connection with or incidental to any of the foregoing powers, 12 to do everything necessary, suitable, or proper for the accomplishment of any purpose or the attainment of any object or the furtherance of any power hereinbefore set forth, either alone or in association with others, and to do every other act or thing incidental or appurtenant to or growing out of or connected with the aforesaid business or purposes, objects or powers. The foregoing clauses shall be construed both as objects and power, and the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the general powers of the Trustees. Any action by one or more of the Trustees in their capacity as such hereunder shall be deemed an action on behalf of the Trust or the applicable Series, and not an action in an individual capacity. The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust. No one dealing with the Trustees shall be under any obligation to make any inquiry concerning the authority of the Trustees, or to see to the application of any payments made or property transferred to the Trustees or upon their order. Section 4.02. Issuance and Repurchase of Shares. The Trustees shall have the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of, and otherwise deal in Shares and, subject to the provisions set forth in Article II and Article IX, to apply to any such r e purchase, redemption, retirement, cancellation, or acquisition of Shares any funds or property of the Trust, or the particular Series of the Trust, with respect to which such Shares are issued. Section 4.03. Trustees and Officers as Shareholders. A n y Trustee, officer, or other agent of the Trust may acquire, own, and dispose of Shares to the same extent as if he were not a Trustee, officer, or agent; and the Trustees may issue and sell or cause to be issued and sold Shares to and buy such Shares from any such person or any firm or company in which he is interested, subject only to the general limitations herein contained as to the sale and purchase of such Shares; and all subject to any restrictions which may be contained in the Bylaws. Section 4.04. Action by the Trustees. The Trustees shall act by majority vote at a meeting duly called or by unanimous written consent without a meeting or by telephone meeting provided a quorum of Trustees participate in any such telephone meeting, unless the 1940 Act requires that a particular action be taken only at a meeting at which the 13 Trustees are present in person. At any meeting of the Trustees, a majority of the Trustees shall constitute a quorum. Meetings of the Trustees may be called orally or in writing by the Chairman or by any two (2) other Trustees. Notice of the time, date and place of all meetings of the Trustees shall be given by the party calling the meeting to each Trustee by telephone, telefax, or telegram sent to his home or business address at least twenty-four (24) hours in advance of the meeting or by written notice mailed to his home or business address at least seventy-two (72) hours in advance of the meeting. Notice need not be given to any Trustee who attends the meeting without objecting to the lack of notice or who executes a written waiver of notice with respect to the meeting. Any meeting conducted by telephone shall be deemed to take place at the principal office of the Trust, as determined by the Bylaws or by the Trustees. Subject to the requirements of the 1940 Act, the Trustees by majority vote may delegate to any one or more of their number their authority to approve particular matters or take particular actions on behalf of the Trust. Written consents or waivers of the Trustees may be executed in one or more counterparts. Execution of a written consent or waiver and delivery thereof to the Trust may be accomplished by telefax. Section 4.05. Chairman of the Trustees. T h e Trustees shall appoint one of their number to be Chairman of the Board of Trustees. The Chairman shall preside at all meetings of the Trustees, shall be responsible for the execution of policies established by the Trustees and the administration of the Trust, and may be (but is not required to be) the chief executive, financial, and/or accounting officer of the Trust. Section 4.06. Principal Transactions. Except to the extent prohibited by applicable law, the Trustees, on behalf of the Trust, may buy any securities from or sell any securities to, or lend any assets of the Trust to, any Trustees or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with any investment advisor, distributor or transfer agent for the Trust or with any Interested Person of such person; and the Trust may employ any such person, or firm or company in which such person is an Interested Person, as broker, legal counsel, registrar, investment advisor, distributor, transfer agent, dividend disbursing agent, or custodian, or in any other capacity upon customary terms. ARTICLE V EXPENSES OF THE TRUST Section 5.01. Trustee Reimbursement. S u bject to the provisions of Article II, Section 2.08 hereof, the Trustees 14 shall be reimbursed from the Trust estate or the assets belonging to the appropriate Series for their expenses and d i s bursements, including, without limitation, fees and expenses of Trustees who are not Interested Persons of the Trust, interest expense, taxes, fees and commissions of every kind, expenses of pricing Trust portfolio securities, expenses of issue, repurchase and redemption of shares, including expenses attributable to a program of periodic repurchases or redemptions, expenses of registering and qualifying the Trust and its Shares under Federal and State laws and regulations or under the laws of any foreign jurisdiction, charges of third parties, including investment advisors, managers, custodians, transfer agents, portfolio accounting and/or pricing agents, and registrars, expenses of preparing and setting up in type prospectuses and statements of additional information and other related Trust documents, expenses of printing and distributing prospectuses sent to existing Shareholders, auditing and legal expenses, reports to Shareholders, expenses of meetings of Shareholders and proxy solicitations therefor, insurance expenses, association membership dues and for such non-recurring items as may arise, including litigation to which the Trust (or a Trustee acting as such) is a party, and f o r all losses and liabilities by them incurred in administering the Trust, and for the payment of such expenses, disbursements, losses and liabilities the Trustees shall have a lien on the assets belonging to the appropriate Series, on the assets of each such Series, prior to any rights or interests of the Shareholders thereto. This section shall not p r e c lude the Trust from directly paying any of the aforementioned fees and expenses. ARTICLE VI INVESTMENT ADVISOR, PRINCIPAL UNDERWRITER, AND TRANSFER AGENT Section 6.01. Investment Advisor. The Trustees may in their discretion, from time to time, enter into an investment advisory or management contract or contracts with respect to the Trust or any Series whereby the other party or parties to such contract or contracts shall undertake to furnish the Trustees with such management, investment advisory, statistical and research facilities and services and such other facilities and services, if any, and all upon such terms and conditions, as the Trustees may in their discretion determine; provided, however, that the initial approval and entering into of such contract or contracts shall be subject to a Majority Shareholder Vote. Notwithstanding any other provision of this Trust Instrument, the Trustees may authorize any investment advisor (subject to such general or specific instructions as the Trustees from time to time may adopt) to effect purchases, sales or exchanges of portfolio securities, 15 other investment instruments of the Trust, or other Trust Property on behalf of the Trustees, or may authorize any officer, agent, or Trustee to effect such purchases, sales, or exchanges pursuant to recommendations of the investment advisor (and all without further action by the Trustees). Any such purchases, sales, and exchanges shall be deemed to have been authorized by all of the Trustees. The Trustees may authorize, subject to applicable requirements of the 1940 Act, including those relating to Shareholder approval, the investment advisor to employ, from time to time, one or more sub-advisors to perform such of the acts and services of the investment advisor, and upon such terms and conditions, as may be agreed upon between the investment advisor and sub-advisor. Any reference in this Trust Instrument to the investment advisor shall be deemed to include such sub-advisors, unless the context otherwise requires. Section 6.02. Principal Underwriter. The Trustees may in their discretion from time to time enter into an exclusive or non-exclusive underwriting contract or contracts providing for the sale of Shares, whereby the Trust may either agree to sell Shares to the other party to the contract or appoint such other party its sales agent for such Shares. In either case, the contract shall be on such terms and conditions, if any, as may be prescribed in the Bylaws, and such further terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Article VI, or of the Bylaws; and such contract may also provide for the repurchase or sale of Shares by such other party as principal or as agent of the Trust. Section 6.03. Transfer Agent. The Trustees may in their discretion from time to time enter into one or more transfer agency and shareholder service contracts whereby the other party or parties shall undertake to furnish the Trustees with transfer agency and shareholder services. The contract or contracts shall be on such terms and conditions as the Trustees may in their discretion determine not inconsistent with the provisions of this Trust Instrument or of the Bylaws. Section 6.04. Parties to Contract. Any contract of the character described in Sections 6.01, 6.02, and 6.03 of this Article VI or any contract of the character described in Article VIII hereof may be entered into with any corporation, firm, partnership, trust, or association, although one or more of the Trustees or officers of the Trust may be an officer, director, trustee, shareholder, or member of such other party to the contract, and no such contract shall be invalidated or rendered void or voidable by reason of the existence of any relationship, nor shall any person holding such relationship 16 be disqualified from voting on or executing the same in his capacity as Shareholder and/or Trustee, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was not inconsistent with the provisions of this Article VI or Article VIII hereof or of the Bylaws. The same person (including a firm, corporation, partnership, trust or association) may be the other party to contracts entered into pursuant to Sections 6.01, 6.02 and 6.03 of this Article VI or pursuant to Article VIII hereof, and any individual may be financially interested or otherwise affiliated with persons who are parties to any or all of the contracts mentioned in this Section 6.04. Section 6.05. Provisions and Amendments. A n y contract entered into pursuant to Sections 6.01 or 6.02 of this Article VI shall be consistent with and subject to the requirements of Section 15 of the 1940 Act or other applicable Act of Congress hereafter enacted with respect to its continuance in effect, its termination, and the method of authorization and approval of such contract or renewal thereof, and no amendment to any contract, entered into pursuant to Section 6.01 of this Article VI shall be effective unless assented to in a manner consistent with the requirements of said Section 15, as modified by any applicable rule, regulation or order of the Commission. ARTICLE VII SHAREHOLDERS' VOTING POWERS AND MEETINGS Section 7.01. Voting Powers. T h e Shareholders shall have power to vote only (i) for the election of Trustees as provided in Article III, Sections 3.01 and 3.02 hereof, (ii) for the removal of Trustees as provided in Article III, Section 3.03(d) hereof, (iii) with respect to any investment advisory or management contract as provided in Article VI, Sections 6.01 and 6.05 hereof, and (iv) with respect to such additional matters relating to the Trust as may be required by l a w, by this Trust Instrument, or the Bylaws or any registration of the Trust with the Commission or any State, or as the Trustees may consider desirable. O n a ny matter submitted to a vote of the S h areholders, all Shares shall be voted separately by individual Series, except: (i) when required by the 1940 Act, Shares shall be voted in the aggregate and not by individual Series; and (ii) when the Trustees have determined that the matter affects the interests of more than one Series, then the 17 Shareholders of all such affected Series shall be entitled to vote thereon. The Trustees also may determine that a matter affects only the interests of one (1) or more classes of a Series, in which case any such matter shall be voted on by such class or classes. Each whole Share shall be entitled to one (1) vote as to any matter on which it is entitled to vote, and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy or in any manner provided for in the Bylaws. A proxy may be given in writing. The Bylaws may provide that proxies may also, or may instead, be given by any electronic or telecommunications device or in any other manner. Notwithstanding anything else herein or in the Bylaws, in the event a proposal by anyone other than the officers or Trustees of the Trust is submitted to a vote of the Shareholders of one or more Series or of the Trust, or in the event of any proxy contest or proxy solicitation or proposal in opposition to any proposal by the officers or Trustees of the Trust, Shares may be voted only in person or by written proxy. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required or permitted by law, this Trust Instrument or any of the Bylaws of the Trust to be taken by Shareholders. Section 7.02. Meetings. The first Shareholders' meeting shall be held in order to elect Trustees as specified in Section 3.02 of Article III hereof at the principal office of the Trust or such other place as the Trustees may designate. Meetings may be held within or without the State of Delaware. Special meetings of the Shareholders of any Series may be called by the Trustees and shall be called by the Trustees upon the written request of Shareholders owning at least one- tenth of the Outstanding Shares entitled to vote. Whenever ten (10) or more Shareholders meeting the qualifications set forth in Section 16(c) of the 1940 Act, as the same may be amended from time to time, seek the opportunity of furnishing materials to the other Shareholders with a view to obtaining signatures on such a request for a meeting, the Trustees shall comply with the provisions of said Section 16(c) with respect to providing such Shareholders access to the list of the Shareholders of record of the Trust or the mailing of such materials to such Shareholders of record, subject any rights provided to the Trust or any Trustees provided by said Section 16(c). Notice determined by the Trustees, at least fifteen (15) days prior to any such meeting. Section 7.03. Quorum and Required Vote. O n e-third of Shares entitled to vote in person or by proxy shall be a quorum for the transaction of business at a Shareholders' meeting, except that where any provision of law or of this Trust Instrument permits or request that holders of any Series 18 shall vote as a Series (or that holders of a class shall vote as a class), then one-third of the aggregate number of Shares of that Series (or that class) entitled to vote shall be necessary to constitute a quorum for the transactions of business by that Series (or that class). Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Except when a larger vote is required by law or by any provision of this Trust Instrument of the Bylaws, a majority of the Shares voted in person or by proxy shall decide any questions and a plurality shall elect a Trustee, provided that where any provision of law or of this Trust Instrument permits or requires that the holders of any Series hall vote as a Series (or that the holders of any class shall vote as a class), then a majority of the Shares present in person or by proxy of that Series or, if required by law, a Majority Shareholder Vote of that Series (or class), voted on the matter in person or by proxy shall decide matter insofar as that Series (or class) is concerned. Shareholders may act by unanimous written consent. Actions taken by Series (or c l ass) may be consented to unanimously in writing by Shareholders of that Series. 19 ARTICLE VIII CUSTODIAN Section 8.01. Appointment and Duties. The Trustees at all times shall employ a bank, a company that is a member of a national securities exchange, or a trust company, each having capital, surplus and undivided profits of at least two million dollars ($2,000,000) as custodian with authority as its agent, but subject to such restrictions, limitations, and other requirements, if any, as may be contained in the Bylaws of the Trust: (1) to hold the securities owned by the Trust and deliver the same upon written order or oral order confirmed in writing; (2) to receive and receipt for any moneys due to the Trust and deposit the same in its own banking department or elsewhere as the Trustees may direct; and (3) to disburse such funds upon orders or vouchers; and the Trust also may employ such custodian as its agent: (4) to keep the books and accounts of the Trust or of any Series or class and furnish clerical and accounting services; and (5) to compute, if authorized to do so by the Trustees, the Net Asset Value of any Series, or class thereof, in accordance with the provisions hereof; all upon such basis of compensation as may be agreed upon between the Trustees and the custodian. The Trustees also may authorize the custodian to employ one or more sub-custodians from time to time to perform such of the acts and services of the custodian, and upon such terms and conditions, as may be agreed upon between the custodian and such sub-custodian and approved by the Trustees, provided that in every case such sub-custodian shall be a bank, a company that is a member of a national securities exchange, or a trust company organized under the laws of the United States or one of the states thereof and having capital, surplus and undivided profits of at least two million dollars ($2,000,000) or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act. Section 8.02. Central Certificate System. Subject to such rules, regulations, and orders as the Commission may adopt, 20 the Trustees may direct the custodian to deposit all or any part of the securities owned by the Trust in a system for the central handling of securities established by a national securities exchange or a national securities association registered with the Commission under the Securities Exchange Act of 1934, as amended, or such other person as may be permitted by the Commission, or otherwise in accordance with the 1940 Act, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities, provided that all such deposits shall be subject to withdrawal only upon the order of the Trust or its custodians, sub-custodians or other agents. ARTICLE IX DISTRIBUTIONS AND REDEMPTIONS Section 9.01. Distributions. (a) The Trustees from time to time may declare and pay dividends or other distributions with respect to any Series. The amount of such dividends or distributions and the payment of them and whether they are in cash or any other Trust Property shall be wholly in the discretion of the Trustees. (b) Dividends and other distributions may be paid or made to the Shareholders of record at the time of declaring a dividend or other distribution or among the Shareholders of record at such other date or time or dates or times as the Trustees shall determine, which dividends or distributions, at the election of the Trustees, may be paid pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine. The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans, or related plans as the Trustees shall deem appropriate. (c) Anything in this Trust Instrument to the contrary notwithstanding, the Trustees at any time may declare a n d distribute a stock dividend pro rata among the Shareholders of a particular Series, or class thereof, as of the record date of that Series fixed as provided in paragraph (b) of this Section 9.01. Section 9.02. Redemptions. In case any holder of record of Shares of a particular Series desires to dispose of his Shares or any portion thereof, he may deposit at the office of the transfer agent or other authorized agent of that Series a 21 written request or such other form of request as the Trustees from time to time may authorize, requesting that the Series purchase the shares in accordance with this Section 9.02; and the Shareholder so requesting shall be entitled to require the S e r ies to purchase, and the Series or the principal underwriter of the Series shall purchase his said Shares, but only at the Net Asset Value thereof (as described in Section 9.03 of this Article IX). The Series shall make payment for any shares to be redeemed, as aforesaid, in cash or property from the assets of that Series and payment for such Shares shall be made by the Series or the principal underwriter of the Series to the Shareholder of record within seven (7) days after the date upon which the request is effective. Upon redemption, shares shall become Treasury shares and may be re- issued from time to time. Section 9.03. Determination of Net Asset Value and Valuation of Portfolio Assets. The term "Net Asset Value" of any Series shall mean that amount by which the assets of that Series exceed its liabilities, all as determined by or under the direction of the Trustees. Such value shall be determined separately for each Series and shall be determined on such days and at such times as the Trustees may determine. Such determination shall be made with respect to securities for which market quotations are readily available, at the market value of such securities; and with respect to other securities and assets, at the fair value as determined in good faith by the Trustees; provided, however, that the Trustees, without S h areholder approval, may alter the method of valuing portfolio securities insofar as permitted under the 1940 Act and the rules, regulations, and interpretations thereof promulgated or issued by the Commission or insofar as permitted by any Order of the Commission applicable to the Series. The Trustees may delegate any of their powers and duties under this Section 9.03 with respect to valuation of assets and liabilities. The resulting amount, which shall represent the total Net Asset Value of the particular Series, shall be divided by the total number of shares of that Series outstanding at the time and the quotient so obtained shall be the Net Asset Value per Share of that Series. At any time the Trustees may cause the Net Asset Value per Share last determined to be determined again in similar manner and may fix the time when such redetermined value shall become effective. If, for any reason, the net income of any Series, determined at any time, is a negative amount, the Trustees shall have the power with respect to that Series: (i) to offset each Shareholder's pro rata share of such negative amount from the accrued dividend account of such Shareholder; or (ii) to reduce the number of Outstanding Shares of such Series by reducing the number of Shares in the account of each Shareholder by a pro rata portion of the number of full and fractional Shares which represents the amount of such excess 22 negative net income; or (iii) to cause to be recorded on the books of such Series an asset account in the amount of such negative net income (provided that the same shall thereupon become the property of such Series with respect to such Series and shall not be paid to any Shareholder), which account may be reduced by the amount, of dividends declared thereafter upon the Outstanding Shares of such Series on the day such negative net income is experienced, until such asset account is reduced to zero; or (iv) to combine the methods described in clauses (i) and (ii) and (iii) of the sentence; or (v) to take any other action they deem appropriate, in order to cause (or in order to assist in causing) the Net Asset Value per Share of such Series to remain at a constant amount per Outstanding Share immediately after each such determination and declaration. The Trustees also shall have the power not to declare a dividend out of net income for the purpose of causing the Net Asset Value per share to be increased. The Trustees shall not be required to adopt, but at any time may adopt, discontinue, or amend the practice of maintaining the Net Asset Value per Share of the Series at a constant amount. Section 9.04. Suspension of the Right of Redemption. T h e Trustees may declare a suspension of the right of redemption or postpone the date of payment as permitted under the 1940 Act. Such suspension shall take effect at such time as the Trustees shall specify but not later than the close of business on the business day next following the declaration of suspension, and thereafter there shall be no right of redemption or payment until the Trustees shall declare the suspension at an end. In the case of a suspension of the right of redemption, a Shareholder may either withdraw his request for redemption or receive payment based on the Net Asset Value per Share next determined after the termination of the suspension. In the event that any Series are divided into classes, the provisions of this Section 9.03, to the extent applicable as determined in the discretion of the Trustees and consistent with applicable law, may be equally applied to each such class. Section 9.05. Redemption of Shares in Order to Qualify as Regulated Investment Company. If the Trustees, at any time and in good faith, shall be of the opinion that direct or indirect o w nership of Shares of any Series has or may become concentrated in any Person to an extent which would disqualify any Series as a regulated investment company under the Internal Revenue Code, then the Trustees shall have the power (but not the obligation) by lot or other means deemed equitable by them (i) to call for redemption by any such person of a number, or principal amount, of Shares sufficient to maintain or bring the direct or indirect ownership of S h ares into conformity with the requirements for such qualification and (ii) to refuse to transfer or issue Shares 23 to any person whose acquisition of the Shares in question would result in such disqualification. The redemption shall be effected at the redemption price and in the manner provided in this Article IX. The holders of Shares, upon demand, shall disclose to the Trustees in writing such information with respect to direct and indirect ownership of Shares as the Trustees deem necessary to comply with the provisions of the Internal Revenue Code, or to comply with the requirements of any other taxing authority. ARTICLE X LIMITATION OF LIABILITY AND INDEMNIFICATION Section 10.01. Limitation of Liability. A Trustee, when acting in such capacity, shall not be personally liable to any person other than the Trust or a beneficial owner for any act, omission, or obligation of the Trust or any Trustee. A Trustee shall not be liable for any act or omission of any conduct whatsoever in his capacity as Trustee, provided that nothing contained herein or in the Delaware Act shall protect any Trustee against any liability to the Trust or to Shareholders to which he otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the office of Trustee hereunder. Section 10.02. Indemnification (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every Person who is, or has been, a Trustee or officer of the Trust (hereinafter referred to as a "Covered Person") shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit, or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; and (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits, or proceedings (civil, criminal, or other, including appeals), actual or threatened, while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties, and other liabilities. 24 (b) No indemnification shall be provided hereunder to a Covered Person: (i) who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful m i s feasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or (ii) in the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office: (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who neither are Interested Persons of the Trust nor are parties to the matter based upon a review of readily- available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily-available facts (as opposed to a full trial-type inquiry); provided, however, that any Shareholder, by appropriate legal proceedings, may challenge any such determination by the Trustees or by independent counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person and shall inure to the benefit of the heirs, executors, and administrators of such a person. N o t h ing contained herein shall affect any rights to indemnification to which Trust personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law. (d) Expenses in connection with the preparation and presentation of a defense to any claim, action, suit, or proceeding of the character described in paragraph (a) of this Section 10.02 may be paid by the Trust or Series from time to time prior to final disposition thereof upon receipt of any undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Trust or Series if it 25 u l t imately is determined that he is not entitled to indemnification under this Section 10.02; provided, however, that either (a) such Covered Person shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily- available facts (as opposed to a trial-type inquiry or full investigation), that there is a reason to believe that such Covered Person will be found entitled to indemnification under this Section 10.02. Section 10.03. Shareholders. I n case any Shareholder or former Shareholder of any Series shall be held to be personally liable solely by reason of his being or having been a Shareholder of such Series and not because of his acts or omissions or for some other reason, the Shareholder or former Shareholder (or his heirs, executors, administrators, or other legal representatives, or, in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, on behalf of the affected Series, shall assume, upon request by the Shareholder, the defense of any claim made against the Shareholder for any act or obligation of the Series and satisfy any judgment thereon from the assets of the Series. ARTICLE XI MISCELLANEOUS Section 11.01. Trust Not a Partnership. It is hereby expressly declared that a trust and not a partnership is created hereby. No Trustee hereunder shall have any power to bind personally either the Trust's officers or any Shareholder. All persons extending credit to, contracting with, or having any claim against the Trust or the Trustees shall look only to the assets of the appropriate Series or (if the Trustees shall have yet to have established the Series) the Trust for payment under such credit, contract, or claim; and neither the Shareholders nor the Trustees, nor any of their agents, whether past, present, or future, shall be personally liable therefore. Nothing in this Trust Instrument shall protect a Trustee against any liability to which the Trustee otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the office of Trustee hereunder. 26 Section 11.02. Trustee's Good Faith Action; Expert Advice; No Bond or Surety. The exercise by the Trustees of their powers and discretions hereunder in good faith and with reasonable care under the circumstances then prevailing shall b e binding upon everyone interested. Subject to the provisions of Article X hereof and to Section 11.01 of this Article XI, the Trustees shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of the Trust Instrument, and, subject to the provisions of Article X hereof and Section 11.01 of this Article XI, shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is obtained. Section 11.03. Establishment of Record Dates. The Trustees may close the Share transfer books of the Trust for a period not exceeding sixty (60) days preceding the date of any meeting of Shareholders, or the date for the payment of any dividends or other distributions, or the date for the allotment of rights, or the date when any change or conversion or exchange of Shares shall go into effect; or in lieu of closing the stock transfer books as aforesaid, the Trustees may fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of Shareholders, or the date for payment of any dividend or other distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares shall go into effect, as a record date for the determination of the Shareholders entitled to notice of, and to vote at, any such meeting, or entitled to receive payment of any such dividend or other distribution, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion, or exchange of Shares, a n d , in such case, such Shareholders and only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting, or to receive payment of such dividend or other distribution, or to receive such allotment or rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any Shares on the books of the Trust after any such date fixed as aforesaid. Section 11.04. Termination of Trust (a) This Trust shall continue without limitation of time but subject to the provisions of paragraph (b) of this Section 11.04. (b) The Trustees, subject to a Majority Shareholder Vote of each Series affected by the matter, or, if applicable, 27 to a Majority Shareholder Vote of the Trust, and subject to a vote of a majority of the Trustees, may: (i) sell and convey all or substantially all of the assets of the Trust or any affected Series to another trust, partnership, association, or corporation, or to a separate series of shares thereof, organized under the laws of a n y state, which trust, partnership, association, or corporation is an open-end management investment company as defined in the 1940 Act, or is a series thereof, for adequate c o nsideration which may include the assumption of all outstanding obligations, taxes, and other liabilities, accrued or contingent, of the Trust or any affected Series, and which may include shares of beneficial interest, stock, or other ownership interests of such trust, partnership, association, or corporation or of a series thereof; or (ii) at any time, sell and convert into money all of the assets of the Trust or any affected Series. U p on making reasonable provision, in the determination of the Trustees, for the payment of all such liabilities in either (i) or (ii) of this Section 11.04(b), by such assumption or otherwise, the Trustees shall distribute the remaining proceeds or assets (as the case may be) of each Series (or class) ratably among the holders of Shares of that Series then outstanding. (c) Upon completion of the distribution of the remaining proceeds or the remaining assets as provided in paragraph (b) of this Section 11.04, the Trust or any affected Series shall terminate and the Trustees and the Trust shall be discharged of any and all further liabilities and duties hereunder and the right, title, and interest of all parties with respect to the Trust or Series shall be canceled and discharged. Upon termination of the Trust, following completion of winding up of the Trust's business, the Trustees shall cause a certificate of cancellation of the Trust's certificate of trust to be filed in accordance with the Delaware Act, which certificate of cancellation may be signed by any one Trustee. Section 11.05. Reorganization. Notwithstanding anything else herein, the Trustees, in order to change the form of organization of the Trust, may, without prior Shareholder approval, (i) cause the Trust to merge or consolidate with or into one (1) or more trusts, partnerships, associations, or corporations so long as the surviving or resulting entity is an open-end management investment company under the 1940 Act, or is a series thereof, that will succeed to or assume the Trust's registration under that Act and which is formed, 28 o r g a n ized, or existing under the laws of a state, commonwealth, territory, possession, or colony of the United States or (ii) cause the Trust to incorporate under the laws o f S tate of Delaware. Any agreement of merger or consolidation or certificate of merger may be signed by a majority of Trustees and facsimile signature conveyed by electronic or telecommunication means shall be valid. Pursuant to and in accordance with the provisions of Section 3815(f) of the Delaware Act, and notwithstanding anything to the contrary contained in this Trust Instrument, an agreement of merger or consolidation approved by the Trustees in accordance with this Section 11.05 may effect any amendment to the Trust Instrument or effect the adoption of a new trust instrument of the Trust if the Trust is the surviving or resulting trust in the merger or consolidation. Section 11.06. Filing of Copies; References; Headings. T h e original or a copy of this Trust Instrument and the original or a copy of each amendment hereof or Trust Instrument supplemental hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer or Trustee of the Trust as to whether or not any such amendments or supplements have been made and as to any matters in connection with the Trust hereunder, and, with the same effect as if it were the original, may rely on a copy certified by an officer or Trustee of the Trust to be a copy of this Trust Instrument or of any such amendment or supplemental Trust Instrument, and references to this Trust Instrument, and all expressions such as or similar to "herein," "hereof," and "hereunder" shall be deemed to refer to this Trust Instrument as amended or affected by any such supplemental Trust Instrument. All expressions such as or similar to "his," "he," and "him" shall be deemed to include the feminine and neuter, as well as masculine, genders. Headings are placed herein for convenience of reference only and, in case of any conflict, the text of this Trust Instrument, rather than the headings, shall control. This Trust Instrument may be executed in any number of counterparts each of which shall be deemed an original. Section 11.07. Applicable Law. The trust set forth in this instrument is made in the State of Delaware, and the Trust and this Trust Instrument, and the rights and obligations of the Trustees and Shareholders hereunder, are to be governed by and construed and administered according to the Delaware Act and the laws of said State; provided, however, that there shall not be applicable to the trust, the Trust, the Trustees or this Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or common) of the State of Delaware (other 29 than the Delaware Act) pertaining to trusts which relate to or regulate (i) the filing with any court or governmental body or agency of trustee accounts or schedules of trustee fees and charges, (ii) affirmative requirements to post bonds for trustees, officers, agents, or employees of a trust, (iii) the necessity for obtaining court or other governmental approval concerning the acquisition, holding, or disposition of real or personal property, (iv) fees or other sums payable to trustees, officers, agents, or employees of a trust, (v) the a l location of receipts and expenditures to income and principal, (vi) restrictions or limitations on the permissible nature, amount, or concentration of trust investments or requirements relating to the titling, storage, or other manner of holding of trust assets, or (vii) the establishment of f i d u c iary or other standards or responsibilities or limitations on the acts or powers of trustees, which are i n c o n sistent with the limitations or liabilities or authorities and powers of the Trustees set forth or referenced in this Trust Instrument. The Trust shall be of the type commonly called a "business trust," and, without limiting the provisions hereof, the Trust may exercise all powers or privileges afforded to trusts or actions that may be engaged in by trusts under the Delaware Act, and the absence of a specific reference herein to any such power, privilege, or action shall not imply that the Trust may not exercise such power or privilege or take such actions. Section 11.08. Amendments. Except as specifically provided herein, the Trustees, without shareholder vote, may amend or otherwise supplement this Trust Instrument by making an amendment, a Trust Instrument supplemental hereto, or an amended and restated trust instrument. Shareholders shall have the right to vote (i) on any amendment which would affect their right to vote granted in Section 7.01 of Article VII hereof, (ii) on any amendment to this Section 11.08, (iii) on any amendment as may be required by law or by the Trust's registration statement filed with the Commission, and (iv) on any amendment submitted to the Shareholders by the Trustees. Any amendment required or permitted to be submitted to Shareholders which, as the Trustees determine, shall affect the Shareholders of one or more Series shall be authorized by vote of the Shareholders of each Series affected and no vote of Shareholders of a Series not affected shall be required. Notwithstanding anything else herein, any amendment to Article X hereof shall not limit the rights to indemnification or insurance provided therein with respect to action or omission of Covered Persons prior to such amendment. Section 11.09. Fiscal Year. The fiscal year of the Trust shall end on a specified date as set forth in the Bylaws, provided, however, that the Trustees, without Shareholder approval, may change the fiscal year of the Trust. 30 Section 11.10. Provisions in Conflict With Law. T h e provisions of this Trust Instrument are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, with the regulated investment company provisions of the Internal Revenue Code, or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Trust Instrument; provided, however, that such determination shall not affect any of the remaining provisions of this Trust Instrument or render invalid or improper any action taken or omitted prior to such determination. If any provision of this Trust Instrument shall be held invalid or improper, unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provisions in any other jurisdiction or any other provision of this Trust Instrument in any jurisdiction. IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees of the Trust, have executed this instrument this 13th day of March, 1993. /s/ Albert P. Viragh, Jr. A l b ert P. Viragh, Jr., as Trustee and not individually /s/ Daniel L. O Connor Daniel L. O'Connor, as Trustee and not individually 31 RYDEX SERIES TRUST AMENDMENTS TO DECLARATION OF TRUST The following resolutions amending the Declaration of Trust of Rydex Series Trust were passed by the Board of Trustees on November 2, 1993: RESOLVED, that Article III, Section 3.02, Initial Trustees, of the Trust s Declaration of T r u s t , dated March 11, 1993 (the Trust Declaration ), be, and hereby is, amended to read as follows: The initial Trustees shall be the persons named herein. On a date fixed by the Trustees, the Shareholders shall elect at least three (3) but not more than fifteen ( 1 5 ) Trustees, as specified by the Trustees pursuant to Section 3.06 of this Article. FURTHER RESOLVED, that Article III, Section 3.06, Number of Trustees, of the Trust Declaration be, and hereby is, amended to read as follows: The number of Trustees shall be at least three (3), and thereafter shall be such number as shall be fixed from time to time by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be more than fifteen (15). By: /s/ Amanda C. Viragh Amanda C. Viragh Secretary PAGE RYDEX SERIES TRUST AMENDMENT TO DECLARATION OF TRUST The following resolutions amending the Declaration of Trust of Rydex Series Trust were passed by the Board of Trustees on December 12, 1995: WHEREAS, Section 3802(c), "Contributions by beneficial owners," of the Delaware Business Trust Act, provides as follows: A governing instrument may provide that the interest of any beneficial owner who fails to make any contribution that he is obligated to make shall be subject to s p ecific penalties for, or specified consequences of, such failure. Such penalty or consequence may take the form of reducing or eliminating the defaulting beneficial owner's proportionate interest in the business trust, subordinating his beneficial interest to that of nondefaulting beneficial owners, a forced s a le of his beneficial interest, forfeiture of his beneficial interest, the lending by other beneficial owners of the amount necessary to meet his commitment, a fixing of the value of his beneficial interest by appraisal or by formula, and redemption or sale of his beneficial interest at such value, or any other penalty or consequence. WHEREAS, the Trustees have determined that the a u tomatic redemption by the Trust ("Automatic Redemptions") of all shares of the Trust ("Shares") in any Trust shareholder ("Shareholder") account, (i) for a Shareholder who has engaged a registered investment advisor with discretionary authority over the Shareholder s account in which there are fewer than $15,000 worth of Shares, and (ii) for any other Shareholder account in which there are fewer than $25,000 worth of Shares, is in the economic best interest of the Trust and also is necessary to reduce disproportionately burdensome expenses in servicing Shareholder accounts. PAGE NOW, THEREFORE, BE IT RESOLVED, that Article II, "Beneficial Interest," of the Trust's Declaration of Trust, dated March 11, 1993, and as amended November 2, 1993 (the "Trust Declaration"), be, and hereby is, amended by adding a new Section 2.12, entitled "Redemption of Shares," to Article II of the Trust Declaration, which new Section 2.12 shall read as follows: The Trust, pursuant to a resolution of the Trustees and without the vote or consent of the Shareholders of the Trust, shall have the right to redeem at net asset v a lue all Shares in any Shareholder account, the value of which is less than a reasonable minimum amount specified in that resolution. In no event shall an involuntary redemption be exercised with respect to Shareholder accounts that are at least as large as the Trust's minimum initial investment amount at the time of t h e redemption. Minimum initial investment amounts may be different for a Shareholder who has engaged a registered i n vestment advisor with discretionary authority over the Shareholder s account and for any other Shareholder. The resolution of the Trustees shall set forth that the redemption of Shares in such accounts has been determined to be in the economic best interest of the Trust or to be necessary to reduce disproportionately burdensome expenses in servicing Shareholder accounts. The resolution of the Trustees also shall provide that prior notice of at least sixty (60) days shall be given to a Shareholder before redemption of his or her Shares, and that the Shareholder shall have the reasonable period of time specified in the resolution of the Trustees to avoid the redemption by increasing the Shareholder's account to at l e a s t the amount specified in the resolution of the Trustees. Shareholders shall be bound by and/or compelled to accept such a redemption; provided, that the terms and conditions set forth in this Trust Instrument have been fulfilled. 2 By: /s/ Robert M. Steele Robert M. Steele Secretary 3 4 EX-99.2BYLAWS 4 Exhibit (2) By-Laws of Rydex Series Trust PAGE BYLAWS of RYDEX SERIES TRUST These Bylaws of Rydex Series Trust (the "Trust"), a D e l a ware business trust, are subject to the Trust's Declaration of Trust, dated March 13, 1993, as from time to t i m e amended, supplemented, or restated (the "Trust Instrument"). Capitalized terms used herein which are defined in the Trust Instrument are used as therein defined. ARTICLE I PRINCIPAL OFFICE The principal office of the Trust shall be located in Bethesda, Maryland or such other location as the Trustees, from time to time, may determine. The Trust may establish and maintain such other offices and places of business as the Trustees, from time to time, may determine. ARTICLE II OFFICERS AND THEIR ELECTION Section 1. Officers. The officers of the Trust shall be President, a Treasurer, a Secretary, and such other officers as the Trustees from time to time may elect. The Trustees may delegate to any officer or committee the power to appoint any subordinate officers or agents. It shall not be necessary for any Trustee or officer to be a holder of Shares in the Trust. Section 2. Election of Officers. The Treasurer and Secretary shall be chosen by the Trustees. The President shall be chosen by and from the Trustees. Two (2) or more offices may be held by a single person except the offices or President and Secretary. Subject to the provisions of Section 13 hereof, the President, the Treasurer, and the Secretary shall each hold office until their successors are chosen and qualified and all other officers shall hold office at the pleasure of the Trustees. Section 3. Resignations. Any officer of the Trust may resign, notwithstanding Section 2 hereof, by filing a written r e s ignation with the President, the Trustees, or the Secretary, which resignation shall take effect on being so filed or at such time as may be therein specified. ARTICLE III POWERS AND DUTIES OF OFFICERS AND TRUSTEES PAGE Section 1. Management of the Trust; General. The business and affairs of the Trust shall be managed by, or under the direction of, the Trustees, and the Trustees shall have all p o w e r s necessary and desirable to carry out their responsibilities, so far as such powers are not inconsistent with the laws of the State of Delaware, the Trust Instrument, or with these Bylaws. Section 2. Executive and Other Committees. The Trustees may elect from their own number an executive committee, which shall have any or all the powers of the Trustees while the Trustees are not in session. The Trustees also may elect from their own number other committees from time to time. The number composing such committees and the powers conferred upon the same are to be determined by vote of a majority of the Trustees. All members of such committees shall hold such offices at the pleasure of the Trustees. The Trustees may abolish any such committee at any time. Any committee to which the Trustees delegate any of their powers or duties shall keep records of its meetings and shall report its actions to the Trustees. The Trustees shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. Section 3. Compensation. Each Trustee and each committee member may receive such compensation for his services and reimbursement for his expenses as may be fixed from time to time by resolution of the Trustees. Section 4. Chairman of the Trustees. T h e Trustees shall appoint from among their number a Chairman who shall serve as such at the pleasure of the Trustees. When present, he shall preside at all meetings of the Shareholders and the Trustees, and he may appoint, subject to the approval of the Trustees, a Trustee to preside at such meetings in his absence. He shall perform such other duties as the Trustees from time to time may designate. Section 5. President. The President shall be the chief executive officer of the Trust and, subject to the direction of the Trustees, shall have general administration of the business and policies of the Trust. Except as the Trustees otherwise may order, the President shall have the power to grant, issue, execute, or sign such powers of attorney, proxies, agreements, or other documents as may be deemed advisable or necessary in the furtherance of the interest of the Trust or any Series thereof. He also shall have the power to employ attorneys, accountants, and other advisers and agents and counsel for the Trust. The President shall perform such duties additional to all of the foregoing as the Trustees from time to time may designate. 2 Section 6. Treasurer. T h e Treasurer shall be the principal financial and accounting officer of the Trust. He shall deliver all funds and securities of the Trust which may come into his hands to such company as the Trustees shall employ as Custodian in accordance with the Trust Instrument and applicable provisions of law. He shall make annual reports regarding the business and condition of the Trust, which reports shall be preserved in Trust records, and he shall furnish such other reports regarding the business and condition of the Trust as the Trustees from time to time may require. The Treasurer shall perform such additional duties as the Trustees from time to time may designate. Section 7. Secretary. The Secretary shall record in books kept for the purpose all votes and proceedings of the Trustees and the Shareholders at their respective meetings. He shall have the custody of the seal of the Trust. The Secretary shall perform such additional duties as the Trustees from time to time may designate. Section 8. Vice President. Any Vice President of the Trust shall perform such duties as the Trustees or the President from time to time may designate. At the request or in the absence or disability of the President, the Vice President (or, if there are two (2) or more Vice Presidents, then the senior of the Vice Presidents present and able to act) may perform all the duties of the President and, when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 9. Assistant Treasurer. A n y A s sistant Treasurer of the Trust shall perform such duties as the Trustees or the Treasurer from time to time may designate, and, in the absence of the Treasurer, the senior Assistant Treasurer, present and able to act, may perform all the duties of the Treasurer. Section 10. Assistant Secretary. A n y A s sistant Secretary of the Trust shall perform such duties as the Trustees or the Secretary from time to time may designate, and, in the absence of the Secretary, the senior Assistant Secretary, present and able to act, may perform all the duties of the Secretary. Section 11. Subordinate Officers. The Trustees from time to time may appoint such other officers or agents as the Trustees may deem advisable, each of whom shall have such title, hold office for such period, have such authority, and perform such duties as the Trustees may determine. The Trustees from time to time may delegate to one (1) or more officers or committees of Trustees the power to appoint any 3 such subordinate officers or agents and to prescribe their respective terms of office, authorities, and duties. Section 12. Surety Bonds. The Trustees may require any officer or agent of the Trust to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended ("the 1940 Act") and the rules and regulations of the Securities and Exchange Commission ("Commission")) to the Trust in such sum and with such surety or sureties as the Trustees may determine, conditioned upon the faithful performance of such officer's or agent's duties to the Trust including responsibility for negligence and for the accounting of any of the Trust's property, funds, or securities that may come into such officer's or agent's hands. Section 13. Removal. Any officer of the Trust may be removed from office whenever in the judgment of the Trustees the best interest of the Trust will be served thereby, by the vote of a majority of the Trustees given at any regular meeting or any special meeting of the Trustees. In addition, any officer or agent appointed in accordance with the provisions of Section 11 hereof may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Trustees. Section 14. Renumeration. T h e salaries or other compensation, if any, of the officers of the Trust shall be fixed from time to time by resolution of the Trustees. ARTICLE IV SHAREHOLDERS' MEETING Section 1. Special Meetings. A special meeting of the Shareholders shall be called by the Secretary whenever (i) ordered by the Trustees or (ii) requested in writing by the holder or holders of at least ten percent (10%) of the Outstanding Shares entitled to vote. If the Secretary, when so ordered or requested, refuses or neglects for more than thirty (30) days to call such special meeting, the Trustees or the Shareholders so requesting, in the name of the Secretary, may call the meeting by giving notice thereof in the manner required when notice is given by the Secretary. If the meeting is a meeting of the Shareholders of one (1) or more Series or classes of Shares, but not a meeting of all Shareholders of the Trust, then only special meetings of the Shareholders of such one (1) or more Series or Classes shall be called and only the Shareholders of such one (1) or more Series or Classes shall be entitled to notice of and to vote at such meeting. 4 Section 2. Notices. Except as above provided, notices of any meeting of the Shareholders shall be given by the Secretary by delivering or mailing, postage prepaid, to each Shareholder entitled to vote at said meeting, written or printed notification of such meeting at least fifteen (15) days before the meeting, to such address as may be registered with the Trust by the Shareholder. Notice of any Shareholder meeting need not be given to any Shareholder if a written waiver of notice, executed before or after such meeting, is filed with the record of such meeting, or to any Shareholder who shall attend such meeting in person or by proxy. Notice of adjournment of a Shareholders' meeting to another time or place need not be given, if such time and place are announced at the meeting and reasonable notice is given to persons present at the meeting and the adjourned meeting is held within a reasonable time after the date set for the original meeting. Section 3. Voting-Proxies. Subject to the provisions of the Trust Instrument, Shareholders entitled to vote may vote either in person or by proxy, provided that either (i) an instrument authorizing such proxy to act is executed by the Shareholder in writing and dated not more than eleven (11) months before the meeting, unless this instrument specifically provides for a longer period or (ii) the Trustees adopt by resolution an electronic, telephonic, computerized, or other alternative to execution of a written instrument authorizing the proxy to act, which authorization is received no more than eleven (11) months before the meeting. Proxies shall be delivered to the Secretary of the Trust or other persons responsible for recording the proceedings before being voted. A proxy with respect to Shares held in the name of two (2) or more persons shall be valid if executed by one (1) of them unless at or prior to exercise of such proxy the Trust receives specific written notice to the contrary from any one (1) of them. Unless otherwise specifically limited by their terms, proxies shall entitle the holder thereof to vote at any adjournment of a meeting. A proxy purporting to be exercised by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of providing invalidity shall rest on the challenger. At all meetings of the Shareholders, unless the voting is conducted by inspectors, all questions relating to the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided by the Chairman of the meeting. Except as otherwise provided herein or in the Trust Instrument, as these By-laws or such Trust Instrument may be amended or supplemented from time to time, all matters relating to the giving, voting, or validity or proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations 5 thereunder, as if the Trust were a Delaware corporation and the Shareholders were shareholders of a Delaware corporation. Section 4. Place of Meeting. All special meetings of the Shareholders shall be held at the principal place of business of the Trust or at such other place in the United States as the Trustees may designate. Section 5. Action Without a Meeting. Any action to be taken by Shareholders may be taken without a meeting if all Shareholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of meetings of Shareholders of the Trust. Such consent shall be treated for all purposes as a vote at a meeting of the Trustees held at the principal place of business of the Trust. ARTICLE V TRUSTEES' MEETINGS Section 1. Special Meetings. Special meetings of the Trustees may be called orally or in writing by the Chairman of the Board of Trustees or any two (2) other Trustees. Section 2. Regular Meetings. Regular meetings of the Trustees may be held at such places and at such times as the Trustees from time to time may determine; each Trustee present at such determination shall be deemed a party calling the meeting and no call or notice will be required to such Trustee p r o v i ded that any Trustee who is absent when such d e t e rmination is made shall be given notice of the determination by the Chairman or any two (2) other Trustees, as provided for in Section 4.04 of the Trust Instrument. Section 3. Quorum. A majority of the Trustees shall constitute a quorum for the transaction of business and an action of a majority of the quorum shall constitute action of the Trustees. Section 4. Notice. Except as otherwise provided, notice of any special meeting of the Trustees shall be given by the party calling the meeting to each Trustee, as provided for in Section 4.04 of the Trust Instrument. A written notice may be mailed, postage prepaid, addressed to him at his address as registered on the books of the Trust or, if not so registered, at his last known address. Section 5. Place of Meeting. All special meetings of the Trustees shall be held at the principal place of business of the Trust or such other place as the Trustees may designate. Any meeting may adjourn to any place. 6 Section 6. Special Action. When all the Trustees shall be present at any meeting, however called or wherever held, or shall assent to the holding of the meeting without notice, or shall sign a written assent thereto filed with the record of such meeting, the acts of such meeting shall be valid as if such meeting had been regularly held. Section 7. Action By Consent. Any action by the Trustees may be taken without a meeting if a written consent thereto is signed by all the Trustees and filed with the records of the Trustees' meeting. Such consent shall be treated, for all purposes, as a vote at a meeting of the Trustees held at the principal place of business of the Trustees. Section 8. Participation in Meetings By Conference Telephone. Trustees may participate in a meeting of Trustees by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. Any meeting conducted by telephone shall be deemed to take place at and from the principal office of the Trust. ARTICLE VI SHARES OF BENEFICIAL INTEREST Section 1. Beneficial Interest. T h e b eneficial interest in the Trust at all times shall be divided into such transferable Shares of one (1) or more separate and distinct Series, or classes thereof, as the Trustees from time to time shall create and establish. The number of Shares is unlimited, and each Share of each Series or class thereof shall be without par value and shall represent an equal proportionate interest with each other Share in the Series, none having priority or preference over another, except to the extent that such priorities or preferences are established with respect to one (1) or more classes of shares consistent with applicable law and any rule or order to the Commission. Section 2. Transfer of Shares. The Shares of the Trust shall be transferable, so as to affect the rights of the Trust, only by transfer recorded on the books of the Trust, in person or by attorney. Section 3. Equitable Interest Not Recognized. The Trust shall be entitled to treat the holder of record of any Share or Shares of beneficial interest as the holder in fact thereof, and shall not be bound to recognize any equitable or other claim or interest in such Share or Shares on the part of any other person except as otherwise may be expressly provided by law. 7 Section 4. Share Certificate. Each Shareholder shall be entitled to a certificate or certificates which shall certify the number of Shares owned by him in the respective Series. Each certificate shall be signed by the President or a Vice President and counter-signed by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer and shall be sealed with the Trust Seal. The signatures may be either manual or facsimile signatures and the seal may be either facsimile or any other form. If certificates are not requested by the Shareholder, his Shares will be held on deposit by the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, such certificate may be issued by the Trust with the same effect as if he or she were such officer at the time of the certificate's issue. In lieu of issuing certificates for Shares, the Trustees or the transfer or shareholder services agent either may issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such Shares, who in either case shall be deemed, for all purposes hereunder, to be holders of certificates for such Shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. Section 5. Loss of Certificate. In the case of the alleged loss or destruction or the mutilation of a Share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees may prescribe. Section 6. Discontinuance of Issuance of Certificates. The Trustees at any time may discontinue the issuance of Share certificates and may require, by written notice to each Shareholder, the surrender of Share certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of Shares in the Trust. ARTICLE VII OWNERSHIP OF ASSETS OF THE TRUST The Trustees, acting for and on behalf of the Trust, shall be deemed to hold legal and beneficial ownership of any income earned on securities held by the Trust issued by any business entity formed, organized or existing under the laws o f any jurisdiction other than a state, commonwealth, possession, territory, or colony of the United States or the laws of the United States. ARTICLE VIII 8 INSPECTION OF BOOKS The Trustees from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Trust or any of them shall be open to the inspection of the Shareholders; and no Shareholder shall have any right to inspect any account or book or document of the Trust except as conferred by law or otherwise by the Trustees or by resolution of the Shareholders. ARTICLE IX INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES The Trust may purchase and maintain insurance on behalf of any Covered Person or employee of the Trust, including any Covered Person or employee of the Trust who is or was serving at the request of the Trust as a Trustee, o f f i c er, or employee of a corporation, partnership, association, joint venture, trust, or other enterprise, against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Trustees would have the power to indemnify him against such liability. The Trust may not acquire or obtain a contract for insurance that protects or purports to protect any Trustee or officer of the Trust against any liability to the Trust or its Shareholders to which he otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. ARTICLE X SEAL The seal of the Trust shall be circular in form bearing the inscription: "RYDEX SERIES TRUST THE STATE OF DELAWARE" The form of the seal shall be subject to alteration by the Trustees and the seal may be used by causing the seal or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any officer or Trustee of the Trust shall have authority to affix the seal of the Trust to any document, instrument, or other paper executed and delivered by or on 9 behalf of the Trust; however, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and the seal's absence shall not impair the validity of, any document, instrument, or other paper executed by or on behalf of the Trust. ARTICLE XI FISCAL YEAR The fiscal year of the Trust shall end on such date as the Trustees from time to time shall determine. ARTICLE XII AMENDMENTS These Bylaws may be amended at any meeting of the Trustees of the Trust by a majority vote. ARTICLE XIII REPORT TO SHAREHOLDERS The Trustees at least semi-annually shall submit to the Shareholders a written financial report of the Trust including financial statements which shall be certified at least annually by independent public accountants. ARTICLE XIV HEADINGS Headings are placed in these Bylaws for convenience of reference only and, in case of any conflict, the text of these Bylaws rather than the headings shall control. 10 11 EX-99.4SPECSHCERT 5 Exhibit (4) Specimen Share Certificate of Rydex Series Trust PAGE INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE NUMBER [LOGO] SHARES RYDEX SERIES TRUST AUTHORIZED TO ISSUE 100 SHARES - PAR VALUE $.01 PER SHARE [SPECIMEN COMMON STOCK] THIS CERTIFIES THAT __________________________________ is the registered holder of ___________________________________ Shares of the capital stock of the above named corporation, fully paid and non-assessable, transferable only on the books of the Corporation by the holder hereof in person or by Attorney upon surrender of this Certificate properly endorsed. In Witness Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and its Corporate Seal to be hereunto affixed this ________ day of _________________________________ A.D. 19____. ______________________________ ____________________________ Secretary President PAGE The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in UNIF GIFT MIN ACT- Custodian common (Cust) (Minor) TEN ENT - as tenants by u n der Uniform Gifts to Minors the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common Act.............. (State) Additional abbreviations may also be used though not in the above list. For Value Received, _____ hereby sell, assign and t r a n s f e r u n t o _ _ _ _ ______________________________________________________ _______________________________________________________ Shares r e p r esented by the within Certificate and do hereby irrevocably constitute and appoint ___________________________________________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated ____________________ 19____. In presence of ______________________ NOTICE THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. PAGE EX-99.5AINVADVAGR 6 Exhibit (5)(a) Investment Advisory Agreement between Rydex Series Trust and PADCO Advisors, Inc. PAGE Amendments, Dated September 25, 1996, to Investment Management Contract Between Rydex Series Trust and PADCO Advisors, Inc., Dated May 14, 1993, and as Previously Amended November 2, 1993, December 13, 1994, and March 8, 1996 PAGE Amendments to INVESTMENT MANAGEMENT CONTRACT between RYDEX SERIES TRUST and PADCO ADVISORS, INC. Amendment to Include The Rydex High Yield Fund Under the Management Contract and to Set the Manager's Compensation Thereunder. The following amendment is made to Section 4 of the Investment Management Contract between Rydex Series Trust (the "Trust") and PADCO Advisors, Inc. (the "Manager"), dated September 25, 1996, and as amended on November 2, 1993, and as further amended on December 13, 1994, and as further amended on March 8, 1996 (the "Contract"), and is hereby incorporated into and made a part of the Contract: Section 4 of the Contract is amended, effective September 25, 1996, to read as follows: " A s compensation for the services to be rendered and charges and expenses to be assumed and paid by the Manager as provided in Section 2, the Funds shall pay the Manager an annual fee based on the average daily net value of the r e s pective Funds in accordance with the following schedule: The Nova Fund 0.75% (75/100's of one percent) The Rydex U.S. Government Money Market Fund 0.50% (50/100's of one percent) The Rydex Precious Metals Fund 0.75% (75/100's of one percent) The Ursa Fund 0.90% (90/100's of one percent) The Rydex U.S. Government Bond Fund 0.50% (50/100's of one percent) The Rydex OTC PAGE Fund 0.75% (75/100's of one percent) The Juno Fund 0.90% (90/100's of one percent) The Rydex Institutional Money Market Fund 0.55% (55/100's of one percent) The Rydex High Yield Fund 0.75% (75/100's of one percent) The fee will be paid monthly not later than the fifth (5th) business day of the month following the month for which services have been provided. In the event of termination of this Contract, the fee shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month, and such fee shall be payable on the date of termination of this Contract with respect to each such Fund. For purposes of calculating the Manager's fee, the value of the net assets of each respective Fund shall be determined in the same manner as such Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in such Fund's c u rrent Prospectus and Statement of Additional Information." Amendment to Grant Authority to the Manager to Engage Sub- Advisers for The Rydex High Yield Fund and Any Series of the Trust that May Be Created in the Future. The following a m e n dments are made to the Contract and are hereby incorporated into and made a part of the Contract: Sections 9 through 12 of the Contract are redesignated 10 through 13, respectively. A new Section 9 is added to the Contract as follows: 9. In providing the services and assuming the obligations set forth herein, in connection with The Rydex High Yield Fund, or any other Fund that the Trust may create in the future, the Manager may, at its expense, employ one or more sub-advisers, or may enter into such service agreements as the Manager deems appropriate in connection with the performance of the Manager's duties and 2 obligations hereunder. Reference herein to t h e duties and responsibilities of the Manager shall include any sub-adviser employed by the Manager to the extent that the Manager shall delegate such duties and responsibilities to such sub-adviser. Any agreement between the Manager and a sub- adviser shall be subject to the approval of t h e Trust's Board of Trustees and the shareholders of any Fund affected thereby, as required by the Investment Company Act of 1940, as amended, and any such sub-adviser s h all at all times be subject to the direction of the Board of Trustees of the Trust or any officers of the Trust acting pursuant to the oversight by the Board of Trustees of any such sub-adviser in order to assure continuing quality of performance by said sub-adviser. 3 In witness whereof, the parties hereto have caused these Amendments to be executed in their names and on their behalf and through their duly-authorized officers as of the 25th day of September, 1996. RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President PADCO ADVISORS, INC. /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President 4 Amendments, Dated March 8, 1996, to Investment Management Contract Between Rydex Series Trust and PADCO Advisors, Inc., Dated May 14, 1993, and as Previously Amended November 2, 1993, and December 13, 1994 Amendments to INVESTMENT MANAGEMENT CONTRACT between RYDEX SERIES TRUST and PADCO ADVISORS, INC. The following Amendments are made to Section 4 and Section 11 of the Investment Management Contract between Rydex Series Trust (the "Trust") and PADCO Advisors, Inc. (the "Manager"), dated March 8, 1996, and as amended on November 2, 1993 (the "Contract"), and as further amended on December 13, 1994, and is hereby incorporated into and made a part of the Contract: Section 4 of the Contract is amended, effective March 8, 1996, to read as follows: "As compensation for the services to be rendered and charges and expenses to be assumed and paid by the Manager as provided in Section 2, the Funds shall pay the Manager an annual fee based on the average d a i ly net value of the respective Funds in accordance with the following schedule: The Nova Fund 0.75% (75/100's of one percent) The Rydex U.S. Government Money Market Fund 0.50% (50/100's of one percent) The Rydex Precious Metals Fund 0.75% (75/100's of one percent) The Ursa Fund 0.90% (90/100's of one percent) The Rydex U.S. Government Bond Fund 0.50% (50/100's of one percent) The Rydex OTC Fund 0.75% (75/100's of one percent) The Juno Fund 0.90% (90/100's of one percent) The Rydex Institutional Money Market Fund 0.55% (55/100's of one percent) The fee will be paid monthly not later than the fifth (5th) business day of the month following the month for which services have been provided. In the event of termination of this Contract, the fee shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month, and such fee shall be payable on the date of termination of this Contract with respect to each s u ch Fund. For purposes of calculating the Manager's fee, the value of the net assets of each respective Fund shall be determined in the same manner as such Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in such Fund's current Prospectus and Statement of Additional Information." Section 11 of the Contract is amended, effective March 8, 1996, to read as follows: "All notices or other communications r e q u ired or permitted to be given hereunder shall be in writing and shall be delivered or sent by prepaid, first-class letter posted to the following addresses, or to such other address as shall be designated in a notice given in accordance with this section, and such notice shall be deemed to have been given at the time of delivery of, if sent by post, five (5) week days after posting by airmail: If to the Trust: Rydex Series Trust 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President If to the Manager: PADCO Advisors, Inc. 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President" 2 In witness whereof, the parties hereto have caused these Amendments to be executed in their names and on their behalf and through their duly-authorized officers as of the 8th day of March, 1996. RYDEX SERIES TRUST /s/ Albert P. Viragh Jr. By: Albert P. Viragh, Jr. Title: President PADCO ADVISORS, INC. /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President 3 Amendment, Dated December 13, 1994, to Investment Management Contract Between Rydex Series Trust and PADCO Advisors, Inc., Dated May 14, 1993, and as Previously Amended November 2, 1993 Amendment to INVESTMENT MANAGEMENT CONTRACT between RYDEX SERIES TRUST and PADCO ADVISORS, INC. The following Amendment is made to Section 4 of the Investment Management Contract between Rydex Series Trust (the "Trust") and PADCO Advisors, Inc. (the "Manager"), dated May 14, 1993, and as amended on November 2, 1993 (the "Contract"), and is hereby incorporated into and made a part of the Contract: Section 4 of the Contract is amended, effective December 13, 1994, to read as follows: "As compensation for the services to be rendered and charges and expenses to be assumed and paid by the Manager as provided in Section 2, the Funds shall pay the Manager an annual fee based on the average d a i ly net value of the respective Funds in accordance with the following schedule: Nova Fund 0.75% (75/100's of one percent) Rydex U.S. Government Money Market 0.50% (50/100's of one percent) Rydex Precious Metals Fund 0.75% (75/100's of one percent) The Ursa Fund 0.90% (90/100's of one percent) Rydex U.S. Government Bond Fund 0.50% (50/100's of one percent) Rydex OTC Fund 0.75% (75/100's of one percent) The Ursa Bond Fund 0.90% (90/100's of one percent) The fee will be paid monthly not later than the fifth (5th) business day of the month following the month for which services have been provided. In the event of termination of this Contract, the fee shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month, and such fee shall be payable on the date of termination of this Contract with respect to each s u ch Fund. For purposes of calculating the Manager's fee, the value of the net assets of each respective Fund shall be determined in the same manner as such Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in such Fund's current Prospectus and Statement of Additional Information." In witness whereof, the parties hereto have caused this Amendment to be executed in their names and on their behalf and through their duly-authorized officers as of the 13th day of December, 1994. RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: Chairman PADCO ADVISORS, INC. /s/ Albert P. Viragh,Jr. By: Albert P. Viragh, Jr. Title: President Amendment, Dated November 2, 1993, to Investment Management Contract Between Rydex Series Trust and PADCO Advisors, Inc., Dated May 14, 1993 Amendment to MANAGEMENT CONTRACT between RYDEX SERIES TRUST and PADCO ADVISORS, INC. The following Amendment is made to the Preamble to the Management Contract between Rydex Series Trust (the "Trust") and PADCO Advisors, Inc. (the "Manager"), dated May 14, 1993 (the "Contract"), and is hereby incorporated into and made a part of the Contract: The Preamble to the Contract is amended, effective November 2, 1993, to read as follows: "This Management Contract (the "Contract"), dated as of the 14th day of May, 1993, is entered into by and between the Rydex Series Trust (the "Trust") and PADCO Advisors, Inc. (the "Manager"). The Trust wishes to engage the Manager, and the Manager wishes to be engaged, to manage the Trust's investment portfolios (hereinafter referred to individually as the "Fund" and collectively as the "Funds," as appropriate)." The following Amendment is made to Section 4 of the Contract and is hereby incorporated into and made a part of the Contract: Section 4 of the Contract is amended, effective November 2, 1993, to read as follows: "As compensation for the services to be rendered and charges and expenses to be assumed and paid by the Manager as provided in Section 2, the Funds shall pay the Manager an annual fee based on the average d a i ly net value of the respective Funds in accordance with the following schedule: Nova Fund 0.75% (75/100's of one percent) Rydex U.S. Government Money Market 0.50% (50/100's of one percent) Rydex Precious Metals Fund 0.75% (75/100's of one percent) The Ursa Fund 0.90% (90/100's of one percent) Rydex U.S. Government Bond Fund 0.50% (50/100's of one percent) Rydex OTC Fund 0.75% (75/100's of one percent) The fee will be paid monthly not later than the fifth (5th) business day of the month following the month for which services have been provided. In the event of termination of this Contract, the fee shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month, and such fee shall be payable on the date of termination of this Contract with respect to each such Fund. For purposes of calculating the Manager's fee, the value of the net assets of each respective Fund shall be determined in the same manner as such Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in such Fund's current Prospectus and Statement of Additional Information." In witness whereof, the parties hereto have caused these Amendments to be executed in their names and on their behalf and through their duly-authorized officers as of the 2nd day of November, 1993. RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: Chairman PADCO ADVISORS, INC. /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President 2 Management Contract Between Rydex Series Trust and PADCO Advisors, Inc., Dated May 14, 1993 PAGE MANAGEMENT CONTRACT BETWEEN RYDEX SERIES TRUST AND PADCO ADVISORS, INC. This Management Contract (the Contract ), dated as of the 7th day of May, 1993, is entered into by and between The Rydex Series Trust (the Trust ) and PADCO Advisors, Inc. (the Manager ). A. The Trust has engaged Money Management Associates (the Administrator ) to render or make available to the Trust, at the Trust s expense, all services needed for m a nagement and operation of the Trust except for the management of the Trust s investment portfolios (hereinafter referred to individually as the Fund and collectively as the Funds as appropriate). B. The Trust wishes to engage the Manager, and the Manager wishes to be engaged, to manage the Funds investment portfolios. WITNESSETH: That in consideration of the mutual covenants hereinafter contained, it is agreed as follows: 1. The Trust hereby employs the Manager to manage the investment and reinvestment of the assets of the Funds comprising the Trust in accordance with the investment o b j e ctives and policies as set forth in the Trusts registration statement filed pursuant to the Investment Company Act of 1940 and the Securities Act of 1933 (the Registration Statement ) and subject to the direction and control of the officers and Board of Trustees of the Trust, for the period and on the terms set forth in this Contract. The Manager hereby accepts such employment and agrees to render the services and to assume the obligations herein set forth, for the compensation herein provided. 2. The Manager assumes and shall pay all expenses in c o n nection with the management of the investment and reinvestment of the portfolio assets of the Fund, except that the Fund assumes and shall pay all broker s commissions and transfer taxes chargeable to the Fund in connection with securities transactions to which the Fund is a party. PAGE 3. In connection with the investment and reinvestment of the assets of the Fund, the Manager is authorized on behalf of the Fund, to place orders for the execution of the Fund s portfolio transactions in accordance with the applicable policies of the Fund as set forth in the Trust s Registration Statement, as such Registration Statement may be amended from time to time. The Manager shall place orders for the purchase or sale of securities either directly with the issuer or with a broker or dealer selected by the Manager. In placing the Fund s securities trades, it is recognized that the Manager will give primary consideration to securing the most favorable price and efficient execution, so that the Fund s total cost or proceeds in each transaction will be the most favorable under all circumstances. Within the framework of this policy, t h e Manager may consider the financial responsibility, research and investment information, and other services provided by brokers or dealers who may effect or be a party to any such transaction or other transactions to which other clients of the Manager may be a party. It is understood that it is desirable for the Fund that the Manager have access to investment and market research and securities and economic analyses provided by brokers and others. It is also understood that brokers providing such services may execute brokerage transactions at a higher cost to the Fund than might result from the allocation of brokerage to other brokers on the basis seeking the most favorable price and efficient execution. Therefore, the purchase and sale of securities for the Fund may be made with brokers who provide such research and analysis, subject to review by the Trust s Board of Trustees from time to time with respect to the extent and continuation of this practice to determine whether the Fund benefits, directly or indirectly, from such practice. It is understood by both parties that the Manager may select broker-dealers for their execution of the Fund s portfolio transactions who provide research and analysis as the Manager m a y lawfully and appropriately use in its investment management and advisory capacities, whether or not such research and analysis also may be useful to the Manager in connection with its services to other clients. On occasions when the Manager deems the purchase or sale of a security to be in the best interests of the Fund, as well as of other clients, the Manager to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price of lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Manager in the manner it considers to be the most equitable and 2 consistent with its fiduciary obligations to the Fund and to such other clients. 4. As compensation for the services to be rendered and the charges and expenses to be assumed and paid by the Manager as provided in Section 2, the Fund shall pay the Manager an annual fee based on the average daily net asset value of the Fund in accordance with the following schedule: Nova Fund . . . . . . . . . . .0.75% (75/100's of one percent) The fee will be paid monthly not later than the fifth (5th) business day of the month following the month for which services have been provided. In the event of termination of this Contract, the fee shall be computed on the basis of the period ending on the last business day on which this Contract is in effect subject to a pro rata adjustment based on the number of days elapsed in the current month as a percentage of the total number of days in such month, and such fee shall be payable on the date of termination of this Contract with respect to such Fund. For purposes of calculating the Manager s fee, the value of the net assets of the Fund shall be determined in the same manner as the Fund uses to compute t h e value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in such Fund s current Prospectus and Statement of Additional Information. 5. Subject to and in accordance with the Bylaws and Declaration of Trust of the Trust and the Bylaws and Articles o f Incorporation of the Manager respectively, and the Investment Company Act of 1940, trustees, officers, agents and shareholders of the Fund are or may be interested in the Manager or its affiliates (or any successor thereof) as shareholders or officers, directors, agents, or otherwise, and directors, officers, agents or shareholders of the Manager or its affiliates are or may be interested in the Fund as trustees, officers, agents, shareholders or otherwise, and the Manager or its affiliates may be interested in the Fund and such relationships shall be governed by said governing instruments and the applicable provisions of the Investment Company Act of 1940. The Manager shall notify the Trust of any change in ownership or control of PADCO Advisors, Inc. that causes an assignment of this Contract (as the term assignment is defined in the Investment Company Act of 1940 and the rules and regulations promulgated thereunder) within a reasonable time after such change. 6. During the term of this Contract, the Trust agrees: (A) to provide the Manager with copies of all prospectuses, s t atements of additional information, proxy statements, 3 r e gistration statements, reports to shareholders, sales literature, and other material prepared for distribution to shareholders of the Trust or the public that refer in any way to the Manager not later than the date such material is first distributed to the public, or sooner if practicable, and the Trust shall not use such material, or shall discontinue use of such material, if the Manager reasonably objects in writing within five (5) business days (or within such other time as may be mutually agreed) after the Manager s receipt thereof; (B) to provide the Manager with true and correct copies of each amendment or supplement to the Trust s Registration S t a t ement (including any prospectus and statement of additional information included therein), Bylaws and Declaration of Trust not later than sooner if practicable; and (C) to provide the Manager with (i) written notice of any resolutions, policies, restrictions or procedures adopted by the Trust s Board of Trustees which affect the Manager s investment management responsibilities hereunder, and (ii) a list of every natural person or entity deemed by the Trust to be an affiliated person or promoter of or principal underwriter for the Trust or an affiliated person of such person, as such terms are defined or used in Sections 2(a)(3), 2(a)(29), 2(a)(30) and 17 of the Investment Company Act of 1940, and the Trust shall promptly notify the Manager of any additions or deletions to such list. 7. This Contract shall become effective with respect to such Fund on the date first above written, and continue in effect until the first meeting of the shareholders of such Fund occurring subsequent to the date hereof (but in no event longer than two years from the date hereof), and if approved at such shareholders meeting, until two years from the date hereof, and thereafter only so long as such continuance is approved with respect to such Fund at least annually by a vote of a majority of the Trust s Board of Trustees, including the votes of a majority of the Trustees who are not parties to such contract or interested persons of any such party, cast in person at a meeting called for the purpose of voting such approval. Provided, however, that (a) this Contract may be terminated without penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of such Fund, on sixty-days (60) days prior written notice to the Manager, (b) this Contract shall automatically terminate in the event of its assignment (within the meaning of the Investment Company Act of 1940), and (c) this Contact may be terminated by the Manager on sixty-days (60) prior written notice to the Trust. Any notice under this Contract shall be given as provided in Section 11 below. As used in this Contract, the terms interested persons and vote of a majority of the outstanding securities shall have the respective meanings set forth in 4 Section 2(a)(19) and Section 2(a)(42) of the Investment Company Act of 1940. 8. The services of the Manager to the Trust hereunder are not to be deemed exclusive, and the Manager and each of its affiliates shall be free to render similar services to others so long as its services hereunder are not impaired thereby. The Manager shall for purposes herein be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust. 9. No provisions of this Contract shall be deemed to protect the Manager against any liability to the Trust or its shareholders to which it otherwise would be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations under this contract. Nor shall any provisions hereof be deemed to protect any trustee or officer of the Trust against any such liability to which he might otherwise be subject by reason of any willful misfeasance, bad faith or gross negligence in the performance of his duties or the reckless disregard of his obligations. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of its obligations or duties hereunder, the Manager shall not be subject to liability to the Trust, the Fund or to any shareholder of the Fund for any act or omission in the course of or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security or other property by the Fund. The Manager shall not be required to do or refrain from doing or concur in anything which (by act or omission to act) may impose any liability on it. Any person, even though also an officer, director, partner, employee or agent of the Manager, who may be or become an officer, trustee, employee or agent of the Trust, shall be deemed when rendering services to the Trust or acting on any business of the Trust to be rendering such services to or acting solely for the Trust and not as the Manager s officer, director, partner, employee or agent or as one under the Manager s control or direction even though paid by the Manager. The Manager shall not be required to take any legal action on behalf of the Trust unless fully indemnified to the Manager s reasonable satisfaction for all costs and liabilities likely to be incurred or suffered by it. If the Trust requires the Manager to take any action which in the Manager s opinion may make the Manager liable for payment of monies or liable in any other way, the Manager shall be and k e p t indemnified in any reasonable amount and form satisfactory to it as a prerequisite to taking such action. If any provision of this Contract shall be held or made 5 invalid by a court decision, statute, rule or otherwise, the remainder of this Contract shall not be affected thereby. 10. The Trust represents and warrants that it is duly registered with the Securities and Exchange Commission under the Investment Company Act of 1940 as an open-end management investment company, and that all required action has been taken by the Trust under the Securities Act of 1933 and the Investment Company Act of 1940 to permit the public offering of, and to consummate the sale of, the shares of beneficial interest in the Trust pursuant to its current prospectus. 11. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered or sent by prepaid, first-class letter posted to the following addresses, or to such other address as shall be designated in a notice given in accordance with this section, and such notice shall be deemed to have been given at the time of delivery of, if sent by post, five (5) week days after posting by airmail. If to the Trust: Rydex Series Trust 4922 Fairmont Avenue Bethesda, MD 20814 If to the Manager: PADCO Advisors, Inc. 4922 Fairmont Avenue Bethesda, MD 20814 12. This Contract shall be governed by and construed in accordance with the laws of the State of Maryland applicable to contracts between Maryland residents to be entered into and performed entirely within the state of Maryland. IN WITNESS WHEREOF, the parties hereto have caused this Contract to be executed on the date first above written. WITNESS: RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. By: President WITNESS: PADCO ADVISORS, INC. 6 /s/ Albert P. Viragh, Jr. By: President 7 8 EX-99.5BSUBADVAGR 7 Exhibit (5)(b) Sub-Advisory Agreement between PADCO Advisors, Inc. and Loomis, Sayles & Company, L.P. PAGE SUB-ADVISORY AGREEMENT between PADCO ADVISORS, INC. and LOOMIS, SAYLES & COMPANY, L.P. This Agreement is made as of the twenty-fifth day of September, 1996, by and between PADCO ADVISORS, INC., a M a r y land corporation, with offices at 6116 Executive B o u l evard, Suite 400, Rockville, Maryland 20852 (the "Advisor"), and LOOMIS, SAYLES & COMPANY, L.P., a Delaware limited partnership, with offices at 2001 Pennsylvania Avenue, N.W., Suite 200, Washington, D. C. 20016 (the "Sub-Advisor"). WHEREAS, Rydex Series Trust (the "Trust"), is a Delaware business trust that is registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the trustees of the Trust (the "Trustees") approved the creation of the Rydex High Yield Fund (the "Fund") as a series of the Trust on September 25, 1996; WHEREAS, the Advisor is a registered investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"); WHEREAS, the Advisor has been appointed as the investment adviser to the Fund in accordance with the 1940 Act and the Advisers Act; WHEREAS, the Sub-Advisor is registered as an investment adviser under the Advisers Act and engages in the business of providing investment advisory services; and WHEREAS, the Trustees have authorized the Advisor to appoint the Sub-Advisor, subject to the requirements of the 1940 Act and the Advisers Act, as a sub-adviser with respect to that portion of the assets of the Trust designated as "The Rydex High Yield Fund" on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for other good and valuable consideration, the receipt, sufficiency, and adequacy o f which are hereby acknowledged, the parties hereto, intending to be legally bound, agree and promise as follows: Section 1. Investment Advisory Services PAGE (a) The Advisor hereby retains the Sub-Advisor, and the Sub-Advisor hereby accepts engagement by the Advisor, to supervise and manage on a fully-discretionary basis the cash, securities and other assets of the Fund that the Advisor from time to time shall place under the supervision of the Sub- Advisor (such cash, securities, and other assets initially and as same shall thereafter be increased or decreased by the investment performance thereof and by additions thereto and withdrawals therefrom by the Advisor shall hereinafter be referred to as the "assets" of the Fund). (b) All activities by the Sub-Advisor on behalf of the Advisor and the Fund shall be in accordance with the investment objectives, policies, and restrictions set forth in the 1940 Act and in the Fund's prospectus and statement of a d d itional information, as amended from time to time (hereinafter collectively referred to as the "Prospectus") and as interpreted from time to time by the Board of Trustees of the Trust and by the Advisor. All activities of the Sub- Advisor on behalf of the Advisor and the Fund shall also be subject to the due diligence oversight and direction of the Advisor. (c) Subject to the supervision of the Advisor, the Sub-Advisor shall have the sole and exclusive responsibility to select members of securities exchanges, brokers, dealers, a n d futures commission merchants for the execution of transactions of the Fund and, when applicable, shall negotiate commissions in connection therewith. All such selections shall be made in accordance with the Fund's policies and restrictions regarding brokerage allocation set forth in the Prospectus. (d) In carrying out its obligations to manage the investments and reinvestments of the assets of the Fund, the Sub-Advisor shall: 1. obtain and evaluate pertinent economic, statistical, financial, and other information affecting the economy generally and individual companies or industries the securities of which are included in the assets of the Fund or are under consideration for inclusion therein; 2. formulate and implement a continuous investment program for the Fund consistent with the investment objectives and related investment policies and restrictions for such Fund as set forth in the Prospectus; and 2 3. take such steps as are necessary to implement the aforementioned investment p r ogram by placing orders for the purchase and sale of securities by the Fund. (e) In connection with the purchase and sale of securities by the Fund, the Sub-Advisor shall arrange for the transmission to the Advisor and the Fund's custodian on a daily basis such confirmation, trade tickets, and other documents as may be necessary to enable the Advisor and the F u n d 's custodian, respectively, to perform their administrative responsibilities with respect to the Fund. With respect to Fund securities to be purchased or sold through the Depository Trust Company, the Sub-Advisor shall arrange for the automatic transmission of the "identification" or "I.D." confirmation of the trade to the Fund's custodian. (f) In connection with the placement of orders for the execution of the Fund's securities transactions, the Sub- Advisor shall create and maintain all necessary records of the Fund as are required of an investment adviser of a registered investment company, including, but not limited to, records required by the 1940 Act and the Advisers Act. All such records pertaining to the Fund shall be the property of the Fund and shall be available for inspection and use by the Securities and Exchange Commission (the "Commission"), any other regulatory authority having appropriate jurisdiction, the Fund, the Advisor, or any person retained by the Fund or t h e Advisor. When applicable, such records shall be maintained by the Sub-Advisor for the period and in the place required by Rule 3la-2 under the 1940 Act. (g) The Sub-Advisor shall render such reports to the Advisor and/or to the Board of Trustees of the Trust concerning the investment activity and composition of the assets of the Fund in such form and at such intervals as the Advisor or the Board of Trustees from time to time reasonably may require. (h) In acting under this Agreement, the Sub-Advisor shall be an independent contractor and not an agent of the Advisor or the Fund. Section 2. Expenses (a) The Sub-Advisor shall assume and pay all of its own costs and expenses, including those for furnishing such office space, office equipment, office personnel, and office services as the Sub-Advisor may require in the performance of the Sub-Advisor's duties under this Agreement. 3 (b) Pursuant to the terms of the Prospectus, the Fund shall bear all expenses of the Fund's organization and registration, and the Fund and Advisor shall bear all of their respective expenses of their operations and businesses not expressly assumed or agreed to be paid by the Sub-Advisor under this Agreement. In particular, but without limiting the generality of the foregoing, the Fund shall pay any fees due to the Advisor, all interest, Federal, state, and local taxes, g o v e r nmental charges or duties, fees, brokerage and commissions of every kind arising hereunder or in connection herewith, expenses of transactions with shareholders of the Fund, expenses of offering interests in the Fund for sale, i n surance, association membership dues, all charges of custodians (including fees as custodian and for keeping books, performing Fund valuations, and rendering other services to the Fund), independent auditors, and legal counsel, expenses of preparing, printing, and distributing all prospectuses, proxy materials, reports and notices to shareholders of the Fund, and all other costs incident to the Fund's existence. 4 Section 3. Use of Services of Others The Sub-Advisor, at the Sub-Advisor's expense, except as set forth in Section 2 hereof, may employ, retain, or otherwise avail itself of the services or facilities of other persons or organizations for the purpose of providing the Sub- Advisor with such statistical or factual information, such advice regarding economic factors and trends, or such other information, advice, or assistance as the Sub-Advisor may deem necessary, appropriate, or convenient for the discharge of the Sub-Advisor's obligations hereunder or otherwise helpful to the Trust and the Fund. Section 4. Sub-Advisory Fees In consideration of the Sub-Advisor's services to the Fund hereunder, the Sub-Advisor shall be entitled to a sub- advisory fee, payable monthly, at the annual rate of 0.375% of the average daily net assets of the Fund during the month (the "Sub-Advisory Fee"). The Sub-Advisory Fee shall be accrued for each calendar day and the sum of the daily Sub-Advisory Fee accruals shall be paid monthly to the Sub-Advisor on or before the fifth business day of the next succeeding month. The daily fee accruals will be computed on the basis of the valuations of the total net assets of the Fund as of the close of business each day. The Sub-Advisory Fee shall be payable solely by the Advisor, and the Fund shall not be liable to the Sub-Advisor for any unpaid Sub-Advisory Fee. Section 5. Limitation of Liability of Sub-Advisor (a) T h e Sub-Advisor shall be liable for losses resulting from its own acts or omissions caused by the Sub- Advisor's willful misfeasance, bad faith, or gross negligence in the performance of the Sub-Advisor's duties hereunder or the Sub-Advisor's reckless disregard of the Sub-Advisor's duties under this Agreement, and nothing herein shall protect the Sub-Advisor against any such liability to the shareholders of the Fund or to the Advisor. The Sub-Advisor shall not be liable to the Fund or to any shareholder of the Fund or to the Advisor for any claim or loss arising out of any investment by the Fund or other act or omission in the performance of the Sub-Advisor s duties under this Agreement, or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Fund's assets maintained with custodians or securities depositories in foreign countries, or from any political acts of any foreign governments to which such assets might be exposed, or for any tax of any kind, including, without limitation, any statutory, governmental, state, provincial, regional, local, or municipal imposition, duty, contribution, or levy imposed by any government or governmental agency upon 5 or with respect to such assets or income earned with respect thereto (collectively, "Taxation"). Notwithstanding the foregoing sentence, the Sub-Advisor shall be liable for taxes or tax penalties incurred by the Fund for any failure of the Fund to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, as a direct result of portfolio transactions effected by the Sub-Advisor other than in accordance with information provided by the Advisor in connection with the redemptions and purchases of Fund shares; provided, however, that the Sub- Advisor shall be liable only for such taxes and tax penalties if and to the extent that these taxes and tax penalties arise from the Sub-Advisor s willful malfeasance, bad faith, gross negligence, or reckless disregard of the Sub-Advisor s obligations and duties. (b) In the event that the Sub-Advisor is assessed any Taxation in respect of the assets, income, or activities of the Fund, the Advisor and the Fund jointly will indemnify the Sub-Advisor for all such amounts wherever imposed, together with all penalties, charges, costs, and interest relating thereto and all expenditures, including reasonable attorney's fees, incurred by the Sub-Advisor in connection with the defense or settlement of any such assessment. The Advisor shall undertake and control the defense or settlement of any such assessment, including the selection of counsel or other professional advisers; provided, that the selection of such counsel and advisers and the settlement of any assessment shall be subject to the approval of the Advisor and the Fund, which approvals shall not be unreasonably withheld. The Advisor and the Fund shall have the right to retain separate counsel and assume the defense or settlement on behalf of the Advisor and the Fund, as the case may be, of any such assessment if representation of the Advisor and the Fund by counsel selected by the Sub-Advisor would be inappropriate due to actual or potential conflicts of interest. Section 6. Services to Other Clients and the Fund (a) Subject to compliance with the 1940 Act, nothing contained in this Agreement shall be deemed to prohibit the Sub-Advisor or any of the Sub-Advisor's affiliated persons from acting, and being separately compensated for acting, in one or more capacities on behalf of the Fund. The Advisor and the Fund understand that the Sub-Advisor may act as investment manager or in other capacities on behalf of other customers, including entities registered under the 1940 Act. While information, recommendations, and actions which the Sub- Advisor supplies to and does on behalf of the Fund shall, in t h e Sub-Advisor's judgment, be appropriate under the circumstances in light of the investment objectives and policies of the Fund, as set forth in the Prospectus delivered 6 to the Sub-Advisor from time to time, it is understood and agreed that said information, recommendations, and actions may be different from the information, recommendations, and actions that the Sub-Advisor or the Sub-Advisor's affiliated persons supply to or do on behalf of other clients. The Sub- Advisor and the Sub-Advisor's affiliated persons shall supply information, recommendations, and any other services to the Fund and to any other client in an impartial and fair manner in order to seek good results for all clients involved. As used herein, the term "affiliated person" shall have the meaning assigned to this term in the 1940 Act and the rules thereunder. (b) On occasions when the Sub-Advisor deems the purchase or sale of a security to be in the best interest of the Fund as well as other customers of the Sub-Advisor, the Sub-Advisor, to the extent permitted by applicable law, may aggregate the securities to be so sold or purchased in order to obtain the best execution or lower brokerage commissions, if any. The Sub-Advisor also on occasion may purchase or sell a particular security for one or more customers in different amounts. On either occasion, and to the extent permitted by a p plicable law and regulations, the allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Sub-Advisor in the manner that the Sub-Advisor considers to be the most equitable and consistent with the Sub-Advisor's fiduciary obligations to the Fund and to such other customers. (c) The Sub-Advisor agrees to use the same skill and care in providing services to the Fund as the Sub-Advisor uses in providing services to other similar accounts for which the Sub-Advisor has investment responsibility. The Sub-Advisor will conform with all applicable rules and regulations of the Commission. Section 7. Reports to the Sub-Advisor The Advisor shall furnish to the Sub-Advisor the Prospectus, proxy statements, reports, and other information relating to the business and affairs of the Fund as the Sub- Advisor, at any time or from time to time, reasonably may require in order to discharge the Sub-Advisor's duties under this Agreement. Section 8. Term of Agreement Provided that this Agreement shall have first been approved by the Board of Trustees of the Trust, including a majority of the members thereof who are not "interested persons" (as that term is defined at Section 2(a)(19) of the 1940 Act) of either party, by a vote cast in person at a 7 meeting called for the purpose of voting such approval, then this Agreement shall be effective on the date hereof. Unless earlier terminated as hereinafter provided, this Agreement shall continue in effect until approved by a majority vote of the voting securities of the Fund, at a meeting to take place not more than one year after the effective date of the Fund's registration statement relating to the Fund. Thereafter, this Agreement shall continue in effect from year to year, subject to approval annually by the Board of Trustees of the Trust or by vote of a majority of the voting securities of the Fund and also, in either event, by the vote, cast in person at a meeting called for the purpose of voting on such approval, of a majority of the Trustees of the Trust who are not parties to this Agreement or "interested persons" (as that term is defined at Section 2(a)(19) of the 1940 Act) of any such person. Section 9. Termination of Agreement; Assignment (a) This Agreement may be terminated by either party hereto without the payment of any penalty, upon ninety (90) days' prior notice in writing to the other party and to the Fund, or upon sixty (60) days' written notice by the Fund to the two parties; provided, that, in the case of termination by the Fund, such action shall have been authorized by resolution of a majority of the Board of Trustees of the Trust or by vote of a majority of the voting securities of the Fund. In addition, this Agreement shall terminate upon the later of: (i) the termination of the Advisor's agreement to provide investment advisory services to the Fund; or (ii) notice to the Sub-Advisor that the Advisor's agreement to provide investment advisory services to the Fund has terminated. (b) This Agreement shall automatically terminate in the event of this Agreement's "assignment" (as that term is defined at Section 2(a)(4) of the 1940 Act). (c) Termination of this Agreement for any reason shall not affect rights of the parties that have accrued prior thereto. Section 10. Notices (a) The Sub-Advisor agrees promptly to notify the Advisor of the occurrence of any of the following events: 1. any change in the Fund's portfolio manager; 2. the Sub-Advisor fails to be registered as an investment adviser under the Advisers Act or under the laws of any 8 jurisdiction in which the Sub-Advisor is r e q u ired to be registered as an investment adviser in order to perform the Sub-Advisor's obligations under this Agreement; 3. the Sub-Advisor is the subject of any action, suit, proceeding, inquiry, or investigation at law or in equity, before or by any court, public board, or body, involving the affairs of the Fund; or 4. any change in control of the Sub- Advisor. (b) Any notice given hereunder shall be in writing and may be served by being sent by telex, facsimile, or other electronic transmission or sent by registered mail or by courier to the address set forth below for the party for which the notice is intended. A notice served by mail shall be deemed to have been served seven (7) days after mailing and in the case of telex, facsimile, or other electronic transmission twelve (12) hours after dispatch thereof. Addresses for notice may be changed by written notice to the other party. If to the Advisor: Albert P. Viragh, Jr. PADCO Advisors, Inc. 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Tel. No. 301-468-8520 Fax No. 301-468-8588 With a copy to: Albert P. Viragh, Jr., President Rydex Series Trust 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Tel. No. 301-468-8520 Fax No. 301-468-8588 If to the Sub-Advisor: Steven J. Doherty, Vice President Loomis, Sayles & Company, L.P. Suite 200 2001 Pennsylvania Avenue, N.W. 9 Washington, D. C. 20016 Tel. No. 202-862-0040 Fax No. 202-293-8264 10 Section 11. Governing Law This Agreement shall be governed by and subject to the requirements of the laws of the State of Maryland without reference to the choice of law provisions thereof. Section 12. Applicable Provisions of Law This Agreement shall be subject to all applicable p r o visions of law, including, without limitation, the applicable provisions of the 1940 Act, and to the extent that any provisions herein contained conflict with any such applicable provisions of law, the latter shall control. Section 13. Counterparts This Agreement may be entered into in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. Section 14. Entire Agreement This Agreement contains the entire understanding and agreement of the parties with respect to the Fund. Section 15. Headings The headings in the sections of this Agreement are inserted for convenience of reference only and shall not constitute a part hereof. Section 16. Severability Should any portion of this Agreement for any reason be held to be void in law or in equity, the Agreement shall be construed insofar as is possible as if such portion had never been contained herein. Section 17. Limitation of Liability The Declaration of Trust establishing the Trust, dated March 13, 1993, as amended on November 2, 1993, and as further amended on December 12, 1995 (the "Declaration"), a copy of which Declaration, together with all amendments thereto, is on file in the office of the Trust, provides that the name "Rydex Series Trust" refers to the "Trustees" under the Declaration c o llectively as "Trustees," but not as individuals or personally; and no Trustee, shareholder, officer, employee, or agent of the Trust shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim, in connection with 11 the affairs of the Fund or any Fund thereof, but only the assets belonging to the Fund, or to the particular portfolio with which the obligee or claimant dealt, shall be liable. IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of the day and year first above written. PADCO ADVISORS, INC. By: /s/ Albert P. Viragh. Albert P. Viragh, President PADCO Advisors, Inc. LOOMIS, SAYLES & COMPANY, L.P. By: /s/ Steven J. Doherty Steven J. Doherty, Vice President Loomis, Sayles & Company, L.P. By: /s/ Stephanie S. Lord Stephanie S. Lord, Vice President Loomis, Sayles & Company, L.P. Accepted and Agreed: RYDEX SERIES TRUST on behalf of THE RYDEX HIGH YIELD FUND By: /s/ Albert P. Viragh Jr. Albert P. Viragh, Jr., President Rydex Series Trust 12 13 EX-99.8CUSTAGRMT 8 Exhibit (8) Custody Agreement between Rydex Series Trust and Star Bank, N.A. PAGE CUSTODY AGREEMENT Agreement made as of the 30th day of November , 1993, between Rydex Series Trust (the Trust ), a business trust organized under the laws of Delaware and having its office at 4641 Montgomery Avenue, Suite 400, Bethesda, Maryland 20814 acting for and on behalf of all mutual fund portfolios as are currently authorized and issued by the Trust or may be authorized and issued by the Trust subsequent to the date of this Agreement (the Fund ), which is operated and maintained by the Trust for the benefit of the holders of shares of the Funds, and Star Bank, N.A. (The Custodian ), a national banking association having its principal office and place of business at Star Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, which Agreement provides for the furnishing of custodian services to the Funds. W I T N E S S E T H : that for and in consideration of the mutual promises hereinafter set forth the Trust, on behalf of the Funds, and the Custodian agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: 1. Authorized Person shall be deemed to include the Chairman, President, Secretary, and the Vice President, or any other person, whether or not any such person is an officer or employee of the Trust, duly PAGE authorized by the Board of Trustees of the Trust to give Oral Instructions on behalf of the Funds and listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time, subject in each case to any limitations on the authority of such person as set forth in Appendix A or any such Certificate. 2. Book-Entry System shall mean the Federal Reserve/Treasury book-entry system for United States and federal agency securities, its successor or successors and its nominee or nominees, provided the Custodian has received a certified copy of a resolution of Board of Trustees of the Trust specifically approving deposits in the Book-Entry System. 3. Certificate shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to the Custodian which is signed on behalf of the Funds by an Officer of the Trust and is actually received by the Custodian. 4. Depository shall mean The Depository Trust Company ( DTC ), a clearing agency registered with the Securities and Exchange Commission, its successor or successors and its nominee or nominees. The term Depository shall further mean and include any other person or clearing agency authorized to act as a depository under the Investment Company Act of 1940, its successor or successors and its nominee or nominees, provided that the Custodian has received a certified copy of a resolution of the Board of Trustees of the Trust specifically approving such other person or clearing agency as a depository. 2 5. Dividend and Transfer Agent shall mean the dividend and transfer agent active, from time to time, in such capacity pursuant to a written agreement with the Fund, changes in which the Trust shall immediately report to the Custodian in writing. 6. Money Market Security shall be deemed to include, without limitation, debt obligations issued or guaranteed as to principal and/or i n t erest by the government of the United States or agencies or i n s trumentalities thereof, commercial paper, obligations (including certificates of deposit, bankers acceptances, repurchase and reverse repurchase agreements with respect to the same) and bank time deposits of domestic banks that are members of Federal Deposit Insurance Trust, and short-term corporate obligations where the purchase and sale of such securities normally require settlement in federal funds or their equivalent on the same day as such purchase or sale. 7. Officers shall be deemed to include the Chairman, the President, the Secretary, and Vice President of the Trust listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time. 8. Oral Instructions shall mean oral instructions actually received by the Custodian from an Authorized Person (or from a person which the Custodian reasonably believes in good faith to be an Authorized Person) and confirmed by Written Instructions from Authorized Persons in such manner so that such Written Instructions are received by the Custodian on the next business day. 3 9. Prospectus or Prospectuses shall mean the Funds currently effective prospectus and statements of additional information, as filed with and declared effective by the Securities and Exchange Commission. 10. Security or Securities shall mean Money Market Securities, common or preferred stocks, options, futures, gold, silver, bonds, d e b e ntures, corporate debt securities, notes, mortgages or other obligations, and any certificates, receipts, warrants or other instruments representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interest therein, or any property or assets. 11. Written Instructions shall mean communication actually received by the Custodian from one Authorized Person or from one person which the Custodian reasonably believes in good faith to be an Authorized Person in writing, telex or any other data transmission system whereby the receiver of such communication is able to verify by codes or otherwise with a reasonable degree of certainty the authenticity of the senders of such communication. ARTICLE II APPOINTMENT OF CUSTODIAN 1. The Trust, acting for and on behalf of the Funds, hereby constitutes and appoints the Custodian as custodian of all the Securities and monies at any time owned by the Funds during the period of this Agreement ( Fund Assets ). 4 2. The Custodian hereby accepts appointments as such Custodian and agrees to perform the duties thereof as hereinafter set forth. ARTICLE III DOCUMENTS TO BE FURNISHED BY THE TRUST The trust hereby agrees to furnish to the Custodian the following documents: 1. A copy of its Declaration of Trust (the Declaration of Trust ) certified by its Secretary. 2. A copy of its By-Laws certified by its Secretary. 3. A copy of the resolution of its Board of Trustees appointing the Custodian certified by its Secretary. 4. A copy of the most recent Prospectuses of the Trust. 5. A Certificate of the President and Secretary setting forth the names and signatures of the present Officers of the Trust. ARTICLE IV CUSTODY OF CASH AND SECURITIES 1. The Trust will deliver or cause to be delivered to the Custodian all Fund Assets, including cash received for the issuance of its shares, at any time during the period of this Agreement. The Custodian will not be responsible for such Fund Assets until actually received by it. Upon such receipt, the Custodian shall hold in safekeeping and physically segregate at all times from the property of any other persons, firms or 5 corporations all Fund Assets received by it from or for the account of the Funds. Any credits from third parties that are made to the Funds account by the Custodian may be reversed if the monies for them are not finally collected within 90 days from the day the credits are made. The Custodian is hereby authorized by the Trust, acting on behalf of the Funds, to actually deposit any Fund Assets in the Book-Entry System or in a D e pository, provided, however, that the Custodian shall always be accountable to the Trust for the Fund Assets so deposited. Funds Assets deposited in the Book-Entry System or the Depository will be represented in accounts which include only assets held by the Custodian for customers, including but not limited to accounts in which the Custodian acts in a fiduciary or representative capacity. 2. The Custodian shall credit to a separate account or accounts in the name of each respective Fund all monies received by it for the account of such Fund, and shall disburse the same only: (a) In payment for Securities purchased for the account of such Fund, as provided in Article V; (b) In payment of dividends or distributions, as provided in Article VI hereof; (c) In payment of original issue or other taxes, as provided in Article VII hereof; (d) In payment for shares of such Fund redeemed by it, as provided in Article VII hereof; 6 (e) Pursuant to Certificates (i) directing payment and setting forth the name and address of the person to whom the payment is to be made, the amount of such payment and the purpose for which payment is to be made (the Custodian not being required to question such direction) or (ii) if reserve requirements are established for the Fund by law or by valid regulation, directing the Custodian to deposit a specified amount of collected funds in the form of U.S. dollars at a specified Federal Reserve bank and stating the purpose of such deposit; or (f) In reimbursement of the expenses and liabilities of the Custodian, as provided in paragraph 10 of Article IX hereof. 3. Promptly after the close of business on each day the funds are open and valuing their portfolios, the Custodian shall furnish the Trust with a detailed statement of monies held for the Fund under this Agreement and with confirmations and a summary of all transfers to or from the account of the Funds during said day. Where Securities are transferred to the account of the Fund without physical delivery, the Custodian shall also identify as belonging to the Funds a quantity of Securities in a fungible bulk of Securities registered in the name of the Custodian (or its nominee) or shown on the Custodian s account on the books of the Book-Entry System or the Depository. At least monthly and from time to time, the Custodian shall furnish the Trust with a detailed statement of the Securities held for the Funds under this Agreement. 7 4. All Securities held for the Funds, which are issued or issuable only in bearer form, except such Securities as are held in the Book-Entry System, shall be held by the Custodian in that form; all other Securities held for the Funds may be registered nominee of the Custodian as the Custodian may from time to time determine, or in the name of the Book-Entry System or the Depository or their successor or successors, or their nominee or nominees. The Trust agrees to furnish to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of its registered nominee or in the name of the Book-Entry System or the Depository, any Securities which it may hold for the account of the Funds and which may from time to time be registered in the name of the Funds. The Custodian shall hold all such Securities which are not held in the Book-Entry System by the Depository or a Sub-Custodian in a separate account or accounts in the name of the Funds segregated at all times from those of any other fund maintained and operated by the Trust and from those of any other person or persons. 5. Unless otherwise instructed to the contrary by a Certificate, the Custodian shall with respect to all Securities held for the Funds in accordance with this Agreement: (a) Collect all income due or payable to the Funds with respect to each Fund s Assets; (b) Present for payment and collect the amount payable upon all Securities which may mature or be called, redeemed, or retired, or otherwise become payable; 8 (c) S u r r e nder Securities in temporary form to definitive Securities; (d) E x e c u te, as Custodian, any necessary declarations or certificates of ownership under the Federal income tax laws or the laws or regulations of any other taxing authority, including any foreign taxing authority, now or hereafter in effect; and (e) Hold directly, or through the Book-Entry System or the Depository with respect to Securities therein deposited, for the account of the Funds all rights and similar securities issued with respect to any Securities held by the Custodian hereunder. 6. Upon receipt of a Certificate and not otherwise, the Custodian directly or through the use of the Book-Entry System or the Depository shall: (a) Execute and deliver to such persons as may be designated in such Certificate proxies, consents, authorizations, and any other instruments whereby the authority or the Fund as owner of any Securities may be exercised; (b) Deliver any Securities held for the Funds in exchange for other Securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege; 9 (c) Deliver any Securities held for the account of the Funds to any protective committee, reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and received and hold under the terms of this Agreement such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery; and (d) Make such transfers or exchanges of the assets of the Funds and take such other steps as shall be stated in said Certificate to be for the purpose of effectuating any duly authorized plan of l i quidation, reorganization, merger, consolidation or recapitalization of the Funds. 7. The Custodian shall promptly deliver to the Trust all notices, proxy material and executed but unvoted proxies pertaining to shareholder meetings of Securities held by the Funds. The Custodian shall not vote or authorize the voting of any Securities or give any consent, waiver or approval with respect thereto unless so directed by a Certificate or Written Instruction. 8. The Custodian shall promptly deliver to the Trust all material received by the Custodian and pertaining to Securities held by the Funds with respect to tender or exchange offers, calls for redemption or purchase, expiration of rights, name changes, stock splits and stock dividends, or any other activity involving ownership rights in such Securities. 10 ARTICLE V PURCHASE AND SALE OF INVESTMENTS OF THE FUND 1. Promptly after each purchase of Securities by the Funds, the Trust shall deliver to the Custodian (i) with respect to each purchase of Securities which are not Money Market Securities, a Certificate or Written Instructions, and (ii) with respect to each purchase of Money Market Securities, Written Instructions, a Certificate or Oral Instructions, specifying with respect to each purchase: (a) The name of the issuer and the title of the Securities, (b) the principal amount purchased and accrued interest, if any, (c) the date of purchase and settlement, (d) the purchase price per unit, (e) the total amount payable upon such purchase and (f) the name of the person from whom or the broker through whom the purchase was made. The Custodian shall upon receipt of Securities purchased by or for the Funds, pay out of the monies held for the account of the Funds the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Certificate, Written Instructions or Oral Instructions. 2. Promptly after each sale of Securities by the Trust for the account of the Fund, the Trust shall deliver to the Custodian (i) with respect to each sale of Securities which are not Money Market Securities, a Certificate or Written Instructions, and (ii) with respect to each sale of Money Market Securities, Written Instructions, a Certificate or Oral Instructions, specifying with respect to each such sale: (a) the name of the issuer and the title of the Security, (b) the principal amount sold, 11 and accrued interest, if any, (c) the date of sale, (d) the sale price per unit, (e) the total amount payable to the Funds upon such sale and (f) the name of the broker through whom or the person to whom the sale was made. The Custodian shall deliver the Securities upon receipt of the total amount payable to the Funds upon such sale, provided that the same conforms to the total amount payable as set forth in such Certificate, Written Instructions or Oral Instructions. Subject to the foregoing, the Custodian may accept payment in such form as shall be satisfactory to it, and may deliver Securities and arrange for payment in accordance with the customs prevailing among dealers in Securities. 3. Promptly after the time as of which the Trust, on behalf of a Fund, either - (a) writes an option on Securities or writes a covered put option in respect of a Security, or (b) notifies the Custodian that its obligations in respect of any put or call option, as described in the Trust s Prospectus, r e quire that the Fund deposit Securities or additional Securities with the Custodian, specifying the type and value of Securities required to be so deposited, or (c) notifies the Custodian that its obligations in respect of any other Security, as described in each Fund s respective Prospectus, require that the Fund deposit Securities or additional Securities with the Custodian, specifying the type and value of Securities required to be so deposited, the 12 Custodian will cause to be segregated or identified as deposited, pursuant to the Fund s obligations as set forth in such Prospectus, Securities of such kinds and having such aggregate values as are required to meet the Fund s obligations in respect thereof. The Trust will provide to the Custodian, as of the end of each trading day, the market value of each Fund s option liability if any and the market value of its portfolio of common stocks. 4. On contractual settlement date, the account of each respective Fund will be charged for all purchases settling on that day, regardless of whether or not delivery is made. On contractual settlement date, sale proceeds will likewise be credited to the account of such Fund irrespective of delivery. In the case of sale fails , the Custodian may request the assistance of the Funds in making delivery of the failed Security. ARTICLE VI PAYMENT OF DIVIDENDS OR DISTRIBUTIONS 1. The Trust shall furnish to the Custodian a copy of the resolution of the Board of Trustees, certified by the Secretary, either (i) setting forth the date of the declaration of any dividend or distribution in respect of shares of the Funds, the date of payment thereof, the record date as of which Funds shareholders entitled to payment shall be determined, the amount payable per share to Funds shareholders of record as of that date and the total amount to be paid by the Dividend and Transfer 13 Agent of the Funds on the payment date, or (ii) authorizing the declaration of dividends and distributions in respect of shares of the Funds on a daily basis and authorizing the Custodian to rely on Written Instructions or a Certificate setting forth the date of the declaration of any such dividend or distribution, the date of payment thereof, the record date as of which Funds shareholders entitled to payment shall be determined, the amount payable per share to Funds shareholders of record as of that date and the total amount to be paid by the Dividend and Transfer Agent on the payment date. 2. Upon the payment date specified in such resolution, Written Instructions or Certificate, as the case may be, the Custodian shall arrange for such payments to be made by the Dividend and Transfer Agent out of monies held for the account of the Funds. ARTICLE VII SALE AND REDEMPTION OF SHARES OF THE FUND 1. The Custodian shall receive and credit to the account of each Fund such payments for shares of such Fund issued or sold from time to time as are received from the distributor for the Fund s shares, from the Dividend and Transfer Agent of the Fund, or from the Trust. 2. Upon receipt of Written Instructions, the Custodian shall arrange for payment of redemption proceeds to be made by the Dividend and Transfer Agent out of the monies held for the account of the respective Fund in the total amount specified in the Written Instructions. 14 3. Notwithstanding the above provisions regarding the redemption of any shares of the Fund, whenever shares of the Funds are redeemed pursuant to any check redemption privilege which may from time to time be offered by the Funds, the Custodian, unless otherwise subsequently instructed by Written Instructions shall, upon receipt of any Written Instructions setting forth that the redemption is in good form for redemption in accordance with the check redemption procedure, honor the check presented as part of such check redemption privilege out of the money held in the account of the Funds for such purposes. ARTICLE VIII INDEBTEDNESS In connection with any borrowings, the Trust on behalf of the Funds, will cause to be delivered to the Custodian by a bank or broker (including the Custodian, if the borrowing is from the Custodian), requiring Securities as collateral for such borrowings, a notice or undertaking in the form currently employed by any such bank or broker setting forth the amount which such bank or broker will loan to the Funds against delivery of a stated amount of collateral. The trust shall promptly deliver to the Custodian a Certificate specifying with respect to each such borrowing: (a) the name of the bank or broker; (b) the amount and terms of the borrowing, which may be set forth by incorporating by reference an attached promissory note, duly endorsed by the Trust, acting on behalf of the Fund, or other loan agreement; (c) the date and time, if known, on which is to be entered into; (d) the date on which the loan becomes due and payable; (e) the total amount payable to the Fund on the borrowing date; (f) the market value of 15 Securities collateralizing the loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities; and (g) a statement that such loan is in conformance with the Investment Company Act of 1940 and the Fund s then current Prospectus. The Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral and the executed promissory note, if any, against delivery by the lending bank or broker of the total amount of the loan payable provided that the same conforms to the total amount payable as set forth in the Certificate. The Custodian may, at the option of the lending bank or broker, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank or broker, by virtue of any promissory note or loan agreement. The Custodian shall deliver in the manner directed by the Trust from time to time such Securities as additional collateral as may be specified in a Certificate to collateralized further any transaction described in this paragraph. The Trust shall cause all Securities released from collateral status to be returned directly to the Custodian and the Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Trust fails to specify in a Certificate or Written Instructions the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by the Custodian, the Custodian shall not be under any obligation to deliver any Securities. The Custodian may require such reasonable conditions with respect to such collateral and its dealings with third- party lenders as it may deem appropriate. 16 ARTICLE IX CONCERNING THE CUSTODIAN 1. Except as otherwise provided herein, the Custodian shall not be liable for any loss or damage, including counsel fees, resulting from its action or omission to act or otherwise, except for any such loss or damage arising out of its negligence or willful misconduct. The Trust, on behalf of the Funds and only from Fund Assets (or insurance purchased by the Trust with respect to its liabilities on behalf of the Funds hereunder), shall defend, indemnify and hold harmless the Custodian and its Trustees, Officers, Employees and Agents with respect to any loss, claim, liability or cost (including reasonable attorneys fees) arising or alleged to arise from or relating to the Trust s duties with respect to the Funds hereunder or any other action or inaction of the Trust or its Trustees, Officers, Employees or Agents as to the Funds, except such as may arise from the negligent action, omission or willful misconduct of the Custodian, its Trustees, Officers, Employees or Agents. The Custodian shall defend, indemnify and hold harmless the Trust and its Trustees, Officers, Employees or Agents with respect to any loss, claim, liability or cost (including reasonable attorneys fees) arising or alleged to arise from or relating to the Custodian s duties with respect to the Funds hereunder or any other action or inaction of the Custodian or its Trustees, Officers, Employees, Agents, nominees or Sub-Custodians as to the Funds, except such as may arise from the negligent action, omission or willful misconduct of the Trust, its Trustees, Officers, Employees or Agents. The Custodian may, with respect to questions of law apply for and obtain the advice and opinion of counsel to the Trust at the expense of the Funds, or of its own 17 counsel at its own expense, and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with the advice or opinion of counsel to the Trust, and shall be similarly protected with respect to anything done or omitted by it in good faith in conformity with advice or opinion of its counsel, unless counsel to the Funds shall, within a reasonable time after being notified of legal advice received by the Custodian, have a differing interpretation of such question of law. The Custodian shall be liable to the Trust for any proximate loss or damage resulting from the use of the Book-Entry System or any Depository arising by reason of any negligence, misfeasance or misconduct on the part of the Custodian or any of its employees, agents, nominees or Sub-Custodians but not for any special, incidental, consequential, or punitive damages; provided, however, that nothing contained herein shall preclude recovery by the Trust, on behalf of the Funds, of principal and of interest to the date of recovery on, Securities incorrectly omitted from the Fund s account or penalties imposed on the Trust, in connection with the Funds, for any failures to deliver Securities. In any case in which one party hereto may be asked to indemnify the other or hold the other harmless, the party from whom indemnification is sought (the Indemnifying Party ) shall be advised of all pertinent facts concerning the situation in question, and the party claiming a right to indemnification (the Indemnified Party ) will use reasonable care to identify and notify the Indemnifying Party promptly concerning any situation which presents or appears to present a claim for indemnification against the Indemnifying Party. The Indemnifying Party shall have the option to defend the Indemnified Party against any claim which may be the 18 subject of the indemnification, and in the event the Indemnifying Party so elects, such defense shall be conducted by counsel chosen by the Indemnifying Party and satisfactory to the Indemnified Party and the Indemnifying Party will so notify the Indemnified Party and thereupon such Indemnifying Party shall take over the complete defense of the claim and the Indemnifying Party shall sustain no further legal or other expenses in such situation for which indemnification has been sought under this paragraph, except the expenses of any additional counsel retained by the Indemnified Party. In no case shall any party claiming the right to indemnification confess any claim or make any compromise in any case in which the other party has been asked to indemnify such party (unless such confession or compromise is made with such other party s prior written consent). The obligations of the parties hereto under this paragraph shall survive the termination of this Agreement. 2. W i t hout limiting the generality of the foregoing, the Custodian, acting in the capacity of Custodian hereunder, shall be under no obligation to inquire into, and shall not be liable for: (a) The validity of the issue of any Securities purchased by or for the account of the Funds, the legality of the purchase thereof, or the propriety of the amount paid therefor; (b) The legality of the sale of any Securities by or for the account of the Funds, or the propriety of the amount for which the same are sold; 19 (c) The legality of the issue or sale of any shares of the Funds, or the sufficiency of the amount to be received therefor; (d) The legality of the redemption of any shares of the Funds, or the propriety of the amount to be paid therefor; (e) The legality of the declaration or payment of any dividend by the Trust in respect of shares of the Funds; (f) The legality of any borrowing by the Trust on behalf of the Funds using Securities as collateral; (g) The sufficiency of any deposit made pursuant to a Certificate described in clause (ii) of paragraph 2(e) of Article IV hereof. 3. The Custodian shall not be liable for any money or collected funds in U.S. dollars deposited in a Federal Reserve Bank in accordance with a Certificate described in clause (ii) of paragraph 2(e) of Article IV hereof, nor be liable for or considered to be the Custodian of any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by it on behalf of the Funds until the Custodian actually receives and collects such money directly or by the final crediting of the account representing the Fund s interest at the Book-Entry System or Depository. 4. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount due to the Funds from the Dividend and Transfer Agent of the Funds nor to take any action to effect 20 payment or distribution by the Dividend and Transfer Agent of the Funds of any amount paid by the Custodian to the Dividend and Transfer Agent of the Funds in accordance with this Agreement. 5. Income due or payable to the Funds with respect to Funds Assets will be credited to the account of the Funds as follows: (a) Dividends will be credited on the first business day following payable date irrespective of collection. (b) Interest on fixed rate municipal bonds and debt securities issued or guaranteed as to principal and/or interest by the g o v ernment of the United States or agencies or instrumentalities thereof (excluding securities issued by the Government National Mortgage Association) will be credited on payable date irrespective of collection. (c) Interest on fixed rate corporate debt securities will be credited on the first business day following payable date irrespective of collection. 6. Notwithstanding paragraph 5 of this Article IX, the Custodian shall not be under any duty or obligation to take action to effect collection of any amount, if the Securities upon which such amount is payable are in default, or if payment is refused after due demand or presentation, unless and until (i) it shall be directed to take such action by a Certificate and (ii) it shall be assured to its satisfaction of reimbursement of its costs and expenses in connection with any such action or, at the Custodian s option, prepayment. 21 7. The Custodian may appoint one or more financial or banking institutions, as Depository or Depositories or as Sub-Custodian or Sub- Custodians, including, but not limited to, banking institutions located in foreign countries, of Securities and monies at any time owned by the Fund, upon terms and conditions approved in a Certificate. Current Depository(s) and Sub-Custodian(s) are noted in Appendix B. The Custodian shall not be relieved of any obligation or liability under this Agreement in connection with the appointment or activities of such Depositories or Sub-Custodians. 8. The Custodian shall not be under any duty or obligation to ascertain whether any Securities at any time delivered to or held by it for the account of the Funds are such as properly may be held by the Funds under the provisions of the Declarations of Trust and the Trust s By-Laws. 9. The Custodian shall treat all records and other information relating to the Trust, the Funds and the Funds Assets as confidential and shall not disclose any such records or information to any other person unless (a) the Trust shall have consented thereto in writing or (b) such disclosure is compelled by law. 10. The Custodian shall be entitled to receive and the Trust agrees to pay to the Custodian, for the Fund s account from Fund Assets only, such compensation as shall be determined pursuant to Appendix C attached hereto, or as shall be determined pursuant to amendments to such Appendix approved by the Custodian and the Trust, on behalf of the Funds. The Custodian shall be entitled to charge against any money held by it for the accounts of the Funds the amount of any loss, damage, liability or expense, including counsel fees, for which it shall be entitled to reimbursement 22 under the provisions of this Agreement as determined by agreement of the Custodian and the Trust or by the final order of any court or arbitrator having jurisdiction and as to which all rights of appeal shall have expired. The expenses which the Custodian may charge against the accounts of the Funds include, but are not limited to, the expenses of Sub- Custodians incurred in settling transactions involving the purchase and sale of Securities of the Fund. 11. The Custodian shall be entitled to rely upon any Certificate if such reliance is made in good faith. The Custodian shall be entitled to rely upon any Oral Instructions and any Written Instructions actually received by the Custodian pursuant to Article IV or V hereof. The Trust agrees to forward to the Custodian Written Instructions from Authorized Persons confirming Oral Instructions in such manner so that such Written Instructions are received by the Custodian, whether by hand delivery, telex or otherwise, on the first business day following the day on which such Oral Instructions are given to the Custodian. The Trust agrees that the fact that such confirming instructions are not received by the Custodian shall in no way affect the validity of the transactions or enforceability of the transactions hereby authorized by the Trust. The Trust agrees that the Custodian shall incur no liability to the Funds in acting upon Oral Instructions given to the Custodian hereunder concerning such transactions. 12. The Custodian will (a) set up and maintain proper books of account and complete records of all transactions in the accounts maintained by the Custodian hereunder in such manner as will meet the obligations of the Funds under the Investment Company Act of 1940, with particular 23 attention to Section 31 thereof and Rules 31 a-1 and 31 a-2 thereunder, and (b) preserve for the periods prescribed by applicable Federal statute or regulation all records required to be so preserved. The books and records of the Custodian shall be open to inspection and audit at reasonable times and with prior notice by Officers and auditors employed by the Trust. 13. The Custodian and its Sub-Custodians shall promptly send to the Trust, for the account of the Funds, any report received on the systems of internal accounting control of the Book-Entry System or the Depository and with such reports on their own systems of internal accounting control as the Trust may reasonably request from time to time. 14. The Custodian performs only the services of a custodian and shall have no responsibility for the management, investment or reinvestment of the Securities from time to time owned by the Funds. The Custodian is not a selling agent for shares of the Funds and performance of its duties as a custodial agent shall not be deemed to be a recommendation to the Custodian s depositors or others of shares of the Funds as an investment. ARTICLE X TERMINATION 1. Either of the parties hereto may terminate this Agreement for any reason by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice. If such notice is given by the Trust, on behalf of the Fund, it shall be accompanied by a copy of a resolution of the Board of Trustees of the Trust, certified by the 24 Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. In the event such notice is given by the Custodian, the Trust shall, on or before the termination date, deliver to the Custodian a copy of a resolution of its Board of Trustees, certified by the Secretary, designating a successor custodian or custodians to act on behalf of the Funds. In the absence of such designation by the Trust, the Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon the date set forth in such notice this Agreement shall terminate, and the Custodian, provided that it has received a notice of acceptance by the successor custodian, shall deliver, on that date, directly to the successor custodian all Securities and monies then owned by the Funds and held by it as Custodian. Upon termination of this Agreement the Trust shall pay to the Custodian on behalf of the Funds such compensation as may be due as of the date of such termination. The Trust agrees on behalf of the Funds that the Custodian shall be reimbursed for its reasonable costs in connection with the termination of this Agreement. 2. If a successor custodian is not designated by the Trust, on behalf of the Funds, or by the Custodian in accordance with the preceding paragraph, or the designated successor cannot or will not serve, the Trust shall upon the delivery by the Custodian to the Trust of all Securities (other than Securities held in the Book-Entry System which cannot be delivered to the Trust) and monies then owned by the Funds, other than monies deposited with a Federal Reserve Bank pursuant to a Certificate 25 described in clause (ii) of paragraph 2(e) of Article IV, be deemed to be the custodian for the Funds, and the Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement other than the duty with respect to Securities held in the Book-Entry System which cannot be delivered to the Trust to hold such Securities hereunder in accordance with this Agreement. ARTICLE XI MISCELLANEOUS 1. Appendix A sets forth the names and the signatures of all Authorized Persons. The Trust agrees to furnish to the Custodian, on behalf of the Funds, a new Appendix A in form similar to the attached Appendix A, if any present Authorized Person ceases to be an Authorized Person or if any other additional Authorized Persons are elected or appointed. Until such new Appendix A shall be received, the Custodian shall be fully protected in acting under the provisions of this Agreement upon Oral Instructions or signatures of the present Authorized Persons as set forth in the last delivered Appendix A. 2. No recourse under any obligation of this Agreement or for any claim based thereon shall be had against any organizer, shareholder, Officer, Trustee, past, present or future as such, of the Trust or of any such predecessor or successor, whether by virtue of any constitution, statute or rule of law or equity, or by the enforcement of any assessment of penalty or otherwise; it being expressly agreed and understood that this Agreement and the obligations thereunder are enforceable solely against Fund Assets, and that no such personal liability whatever shall attach to, 26 or is or shall be incurred by, the organizers, shareholders, Officers, Trustees of the Trust or of any predecessor or successor, or any of them as such, because of the obligations contained in this Agreement or implied therefrom and that any and all such liability is hereby expressly waived and released by the Custodian as a condition of, and as a consideration for, the execution of this Agreement. 3. The obligations set forth in this Agreement as having been made by the Trust have been made by the Trustees of the Trust, acting as such Trustees for and on behalf of the Funds, pursuant to the authority vested in them under the laws of the State of Delaware, the Declaration of Trust and the By-Laws of the Trust. This Agreement has been executed by Officers of the Trust as Officers, and not individually, and the obligations contained herein are not binding upon any of the Trustees, Officers, Agents or holders of shares, personally, but bind only the Trust and then only to the extent of Fund Assets. 4. Such provisions of the Prospectuses of the Funds and any other documents (including advertising material) specifically mentioning the Custodian (other than merely by name and address) shall be reviewed with the Custodian by the Trust. 5. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Custodian, shall be sufficiently given if addressed to the Custodian and mailed or delivered to it at its offices at Star Bank Center, 425 Walnut Street, M.L. 5127, 27 Cincinnati, Ohio 45202, attention: Mutual Fund Custody Department, or at such other place as the Custodian may from time to time designate in writing. 6. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Trust shall be sufficiently given when delivered to the Trust or on the second business day following the time such notice is deposited in the U.S. mail postage prepaid and addressed to the Trust at its office at 4641 Montgomery Avenue, Suite 400, Bethesda, Maryland 20814 or at such other place as the Trust may from time to time designate in writing. 7. This Agreement with the exception of Appendices A & B may not be amended or modified in any manner except by a written agreement executed by both parties with the same formality as this Agreement, and authorized and approved by a resolution of the Board of Trustees of the Trust. 8. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust or by the Custodian, and no attempted assignment by the Trust or the Custodian shall be effective without the written consent of the other party hereto. 9. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective Officers, thereunto duly authorized as of the day and year first above written. ATTEST: Rydex Series Trust Timothy P. Hagan By: /s/ Albert P. Viragh, Jr. ATTEST: Star Bank, N.A. _______________________ By:/s/ Lynnette C. Gibson 29 APPENDIX A Authorized Persons Specimen Signatures Chairman: Albert P. Viragh, Jr. /s/ Albert P. Viragh, Jr. President: Albert P. Viragh, Jr. /s/ Albert P. Viragh, Jr. Secretary: Amanda C. Viragh /s/ Amanda C. Viragh Vice President: Timothy P. Hagan /s/ Timothy P. Hagan Adviser Employees: James Terry Apple /s/ James Terry Apple Michael P. Byrum /s/ Michael P. Byrum PAGE APPENDIX B T h e following Depository(s) and Sub-Custodian(s) are employed currently by Star Bank, N.A. for securities processing and control... The Depository Trust Company (New York) 7 Hanover Square New York, NY 10004 The Federal Reserve Bank Cincinnati and Cleveland Branches Bankers Trust Company 16 Wall Street New York, NY 10005 PAGE SCHEDULE C STAR BANK, N.A. CUSTODY TRANSACTION FEE SCHEDULE Star Bank, N.A. as Custodian, will receive monthly compensation for services according to the terms of the following schedule: I. Portfolio Transaction Fees: a) For each repurchase agreement trans- action $7.00 b) For each portfolio transaction processed through DTC or Federal Reserve 11.00 c) For each portfolio transaction processed through our New York custodian 25.00 d) For each GNMA/Amortized Security Purchase 25.00 e) For each GNMA Prin/Int Paydowns, GNMA Sales 8.00 f) For each option/future contract written, exercise 25.00 g) For each Cedel/Euroclear transaction 100.00 h) For each Disbursement (Fund expenses only) 5.00 A transaction is a purchase/sale of a security, free receipt/free delivery (excludes initial conversion), maturity, tender or exchange. PAGE II. Monthly Base Fee - Per Fund: $400.00 III. Out-of-Pocket Expenses Star Bank shall be reimbursed for all out-of-pocket expenses including, but not limited to postage, insurance and long distance telephone charges. IV. IRA Documents Per shareholder/year to hold each IRA document 8.00 V. Earnings Credits On a monthly basis any earnings credits generated from uninvested custody balances will be first applied against any cash management service fees and then to custody transaction fees (as referenced in item #1 above). Earnings credits are based on the average yield of the 91-day U.S. Treasury Bill for the preceding thirteen weeks less the 10% reserve. PAGE EX-99.9ACSERVAGRMT 9 Exhibit (9)(c) Service Agreement between Rydex Series Trust and PADCO Service Company, Inc. PAGE Amendments, Dated September 25, 1996, to Service Agreement Between Rydex Series Trust and PADCO Service Company, Inc., Dated September 19, 1995 PAGE Amendments to SERVICE AGREEMENT between RYDEX SERIES TRUST and PADCO SERVICE COMPANY, INC. Amendments to Delete Provisions Relating to Schedule IV and Services Provided Thereunder. The following Amendments are made to the Service Agreement between Rydex Series Trust (the "Trust") and PADCO Service Company, Inc. (the "Servicer"), dated September 19, 1995, and as amended on March 8, 1996 (the "Service Agreement"), in contemplation of the Trust entering into a separate Portfolio Accounting Services Agreement with the Servicer, and these Amendments are hereby incorporated into and made a part of the Service Agreement: The following fourth WHEREAS clause of the Service Agreement is deleted in its entirety, effective September 25, 1996: WHEREAS, the Trust desires to appoint the Servicer as the Trust's accounting services agent: (i) to perform certain accounting and recordkeeping functions required of a duly-registered investment company; (ii) to file certain financial reports; (iii) to maintain and preserve certain books, accounts, and records as the basis for such reports; and (iv) to perform certain daily functions in connection with such accounts and records; and the Servicer is willing to perform s u c h functions upon the terms and conditions herein set forth; Section 1 of the Service Agreement is amended, effective September 25, 1996, to delete that portion of the introductory language to that Section referring to Schedule IV of the Agreement, and shall read as follows: In consideration of the compensation to be paid by the Trust to the Servicer PAGE pursuant to Section 4 of this Agreement, the Servicer will: The following Section 1.d. of the Service Agreement is deleted in its entirety, effective September 25, 1996: d. Provide the Trust with certain accounting and recordkeeping services, including, without limitation, those services described on Schedule IV, a t tached hereto. The Servicer will maintain sufficient trained personnel and equipment and supplies to perform such services in conformity with the Controlling Documents and such other reasonable standards of performance as the Trust may from time to time specify, and otherwise in an accurate, timely, and efficient manner. The first paragraph of Section 4 of the Service Agreement is amended to delete that portion of the language of that Section referring to Schedule IV of the Agreement, and shall read as follows: A s consideration for the services provided hereunder, the Trust will pay the Servicer a fee on the last day of each month in which this Agreement is in effect, at the following annual rates based on the average daily net assets (the "Assets") of each of the Trust's series for such month: Schedule IV to the Service Agreement is deleted in its entirety, effective September 25, 1996. Amendment to Grant Authority to the Servicer to Engage Sub- Servicers. The following amendment is made to the Service Agreement between the Trust and the Servicer, and are hereby incorporated into and made a part of the Service Agreement: Paragraphs 11 through 16 are redesignated 12 through 17, respectively. A new paragraph 11 is added and shall read as follows: 11. Authority to Engage Sub-Servicers. In providing the services and assuming the obligations set forth herein, the Servicer may, at its expense, employ one or more sub-servicers, or may enter into such service agreements as the Servicer deems appropriate in connection with the performance of the Servicer s duties and obligations hereunder. Reference herein to the duties and responsibilities of the 2 Servicer shall include any sub-servicer employed by the to the extent that the Servicer shall delegate such duties and responsibilities to such sub-servicer. Amendment to Include the Rydex High Yield Fund Under This Agreement. The following Amendment is made to Section 4 of the Service Agreement between the Trust and the Servicer, and is hereby incorporated into and made a part of the Service Agreement: Section 4 of the Service Agreement is amended, effective September 25, 1996, to read as follows: "As consideration for the services provided hereunder, the Trust will pay the Servicer a fee on the last day of each month in which this Agreement is in effect, at the following annual rates based on the average daily net assets (the "Assets") of each of the Trust's series for such month: The Nova Fund 0.25% of Assets The Rydex U.S. Government Money Market Fund 0.20% of Assets The Rydex Precious Metals Fund 0.20% of Assets The Ursa Fund 0.25% of Assets The Rydex U.S. Government Bond Fund 0.20% of Assets The Rydex OTC Fund 0.20% of Assets The Juno Fund 0.25% of Assets The Rydex Institutional Money Market Fund 3 0.20% of Assets The Rydex High Yield Fund 0.20% of Assets In the event that this Agreement commences on a date other than on the beginning of any calendar month, or if this Agreement terminates on a date other than the end of any calendar month, the fees payable hereunder by the Trust shall be proportionately reduced according to the number of days during such month that services were not rendered hereunder by the Servicer." In witness whereof, the parties hereto have caused this Amendment to be executed in their names and on their behalf and through their duly-authorized officers as of the 25th day of September, 1996. RYDEX SERIES TRUST /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President PADCO SERVICE COMPANY, INC. /s/ Albert P. Viragh, Jr. By: Albert P. Viragh, Jr. Title: President 4 Amended and Restated Service Agreement Between Rydex Series Trust and PADCO Service Company, Inc., Dated September 25, 1996 PAGE AMENDED AND RESTATED SERVICE AGREEMENT THIS AMENDED AND RESTATED SERVICE AGREEMENT (the "Agreement"), dated as of September 25, 1996, is entered into by and between RYDEX SERIES TRUST, a Delaware business trust (the "Trust"), and PADCO SERVICE COMPANY, INC., a Maryland corporation (the "Servicer"). W I T N E S S E T H: WHEREAS, the Trust is an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Servicer is registered as a transfer agent under the Securities Exchange Act of 1934, as amended; and WHEREAS, the Trust wishes to have the Servicer perform general administrative, shareholder, dividend disbursement, transfer agent, and registrar and other services for the Trust and to act in such capacity in the manner set forth in this Agreement, and the Servicer is willing to act in such capacity in accordance with the provisions of this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the receipt, sufficiency, and adequacy o f which are hereby acknowledged, the parties hereto, intending to be legally bound, agree and promise as follows: 1. Services To Be Provided. In consideration of the compensation to be paid by the Trust to the Servicer pursuant to Section 4 of this Agreement, the Servicer will: a. Manage, supervise, and conduct the affairs and business of the Trust and matters incidental thereto. In the performance of its duties, the Servicer will comply with the Trust's Prospectus and its Statement of Additional Information, as the same may be amended from time to time, all as delivered to the Servicer (collectively, the "Controlling Documents"). The Servicer will also use its best efforts to safeguard and promote the welfare of the Trust and to comply with other policies which the Board of Trustees of the Trust (the "Board") may from time to time specify. The Servicer will furnish or provide to the Trust general administrative services as the Trust may reasonably require in the conduct of its affairs and business, including, without limitation, the services described on Schedule I attached hereto. b. Provide the Trust with all required shareholder a n d dividend disbursement services, including, without limitation, those services described on Schedule II, attached hereto. The Servicer will maintain sufficient trained personnel and equipment and supplies to perform such services in conformity with the Controlling Documents and such other reasonable standards of performance as the Trust may from time to time specify, and otherwise in an accurate, timely, and efficient manner. 2 c. Provide the Trust with all required stock transfer agent and registrar services, including, without limitation, those services described on Schedule III attached hereto. The Servicer will maintain sufficient trained personnel and equipment and supplies to perform such services in conformity with the Controlling Documents and such other reasonable standards of performance as the Trust may from time to time specify, and otherwise in an accurate, timely, and efficient manner. 2. Obligations of the Trust. The Trust will have the following obligations under this Agreement: a. The Trust shall keep the Servicer continuously and fully informed as to the composition of the Trust's investment portfolio and the nature of all of the Trust's assets and liabilities, and shall cause the investment managers of the Trust's series to cooperate with the Servicer in all matters so as to enable the Servicer to perform the Servicer's functions under this Agreement. b. The Trust shall furnish the Servicer with any materials or information which the Servicer may reasonably request to enable the Servicer to perform the Servicer's functions under this Agreement. c. The Trust shall turn over to the Servicer the accounts and records previously maintained by or for the 3 Trust. The Servicer shall be entitled to rely exclusively on the completeness and correctness of the accounts and records turned over to the Servicer by the Trust; provided, that such reliance is made in good faith, and the Trust shall indemnify and hold the Servicer harmless of and from any and all e x penses (including, without limitation, attorneys' and accountants' fees), damages, claims, suits, liabilities, actions, demands, and losses whatsoever arising out of or in connection with any error, omission, inaccuracy, or other deficiency of such accounts and records or in connection with the failure of the Trust to provide any portion of such accounts and records or to provide any information to the Servicer necessary or appropriate to perform the Servicer's f u n ctions hereunder; and provided, further, that such accounts, records, and other information shall belong to the Trust and be considered confidential, and shall not be disclosed to other than Federal and state regulators without permission from the Trust. 3. Payment of Fees and Expenses. a. The Servicer will pay all of the fees and expenses incurred by the Servicer in providing the Trust with the services and facilities described in this Agreement, except as otherwise provided herein. b. N o twithstanding any other provision of this Agreement, the Trust will pay, or reimburse the Servicer for 4 the payment of, all fees and expenses incurred by the Servicer not directly related to the Servicer's providing the Trust with the services and facilities described in this Agreement, including, but not limited to, the following described fees a n d expenses of the Trust (hereinafter called "Direct Expenses") whether or not billed to the Trust, the Servicer, or any related entity: (i) f e es and expenses relating to investment advisory services; (ii) fees and expenses of custodian and depositories and banking services fees and costs; (iii) fees and expenses of outside legal counsel and any legal counsel directly employed by the Trust; (iv) fees and expenses of independent auditors and i n c o me tax preparation and expenses of o b t aining quotations for the purpose of calculating the value of the Trust's assets; (v) fees and expenses of consultants; (vi) interest charges; (vii) all Federal, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); (viii) costs of stock certificates and other expenses of issuing and redeeming shares of the Trust ("Shares"); (ix) c o s t s incidental to or associated with shareholder meetings; (x) fees and expenses of registering or qualifying s h ares for sale under Federal and state securities laws; (xi) costs (including postage) of printing and m a iling prospectuses, confirmations, proxy statements, and other reports and notices to shareholders and to governmental agencies; 5 (xii) premiums on all insurance and bonds and other expenses of fidelity and liability i n surance and bonding covering the Trust; (xiii) fees and expenses of the disinterested Trustees and expenses incidental to the meetings of the Board; (xiv) fees and expenses paid to any securities pricing organization; (xv) dues and expenses associated with membership in the Investment Company Institute and the Mutual Fund Education Alliance; (xvi) costs for incoming telephone WATS lines; and (xvii) organizational costs. 4. Compensation. As consideration for the services provided hereunder, the Trust will pay the Servicer a fee on the last day of each month in which this Agreement is in effect, at the following annual rates based on the average daily net assets (the "Assets") of each of the Trust's series for such month: The Nova Fund 0.25% of Assets The Rydex U.S. Government Money Market Fund 0.20% of Assets The Rydex Precious Metals Fund 0.20% of Assets 6 The Ursa Fund 0.25% of Assets The Rydex U.S. Government Bond Fund 0.20% of Assets The Rydex OTC Fund 0.20% of Assets The Juno Fund 0.25% of Assets The Rydex Institutional Money Market Fund 0.20% of Assets The Rydex High Yield Fund 0.20% of Assets In the event that this Agreement commences on a date other than on the beginning of any calendar month, or if this Agreement terminates on a date other than the end of any calendar month, the fees payable hereunder by the Trust shall be proportionately reduced according to the number of days during such month that services were not rendered hereunder by the Servicer. 7 5. Reports to the Board of Trustees. The Servicer will consult with the Board at such times as the Board reasonably requests with respect to the services provided hereunder, and the Servicer will cause its officers to attend such meetings with the Board, and to furnish such oral or written reports to the Board, as the Board may reasonably request. In addition, the Servicer agrees to provide to the Board such reports and other information as the Board may reasonably request in order to enable the Board to perform a review of the Servicer's performance under this Agreement. 6. Term of Agreement. This Agreement is effective on the date hereof. This Agreement will remain in full force and effect until September 19, 1996, unless terminated earlier in accordance with its terms, and thereafter from year to year; provided, that: (a) such continuance is approved by (i) either a vote of the majority of the Trustees or a vote of a "majority of the outstanding voting securities" (as defined in the 1940 Act) of the Trust and (ii) a majority of the Trustees who are not "interested persons" (as defined at Section 2(a)(19) of the 1940 Act); and (b) the following findings are made by a majority of the Trustees who are not "interested persons" (as defined at Section 2(a)(19) of the 1940 Act): (i) that this Agreement is in the best interests of the Trust; (ii) that the 8 services to be performed pursuant to this Agreement are services required for the operation of the Trust; (iii) that the Servicer can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) that the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. 7. Termination. This Agreement may be terminated, without the payment of any penalty, by either party hereto upon at least sixty (60) days' written notice to the other party. Any termination by the Trust will be pursuant to a vote of a majority of the Trustees. 8. Standard of Care. a. Except as provided by law, the Servicer will be under no liability or obligation to anyone with respect to any failure on the part of the Board or any investment manager to perform any of their obligations under the Controlling Documents, or for any error or omission whatsoever on the part of the Board or any investment manager. b. The Servicer will not be liable for any error of judgment or mistake of law or for any loss caused by the Trust in connection with the matters to which this Agreement 9 relates; provided, however, that the Servicer has acted in the premises with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of any enterprise of a like character and with like aims, and in accordance with such other requirements of law; provided, further, however, that nothing in this Agreement will protect the Servicer against any liability to the Trust to which the Servicer would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of the Servicer's duties hereunder or by reason of t h e S ervicer's reckless disregard of the Servicer's obligations and duties hereunder. 9. Other Activities of the Servicer. Subject to the provisions of Section 5 of this Agreement, with respect to advance notice of the Servicer's taking on of new clients or ventures of material significance, nothing herein contained will limit or restrict the right of the Servicer to engage in any other business or to render services of any kind to any other corporation, firm, individual, or association. 10. Scope of Authority. a. Shares purchased by the Servicer on behalf of shareholders of the Trust ("Shareholders") will be registered 10 with the Servicer, as the Trust's transfer agent, in the Servicer's name or in the name of the Servicer's nominee. The Shareholder will be the beneficial owner of Shares purchased and held by the Servicer in accordance with the Shareholder's instructions and the Shareholder may exercise all rights of a Shareholder of the Trust. b. Neither the Servicer nor any of the Servicer's officers, employees, agents, or assigns are authorized to make any representations concerning the Trust or the Shares, except for those representations contained in the Trust's then- current prospectus for such Shares, copies of which will be supplied by the Trust to the Servicer, or in such supplemental literature or advertising as may be authorized by the Trust in writing. 11. Authority to Engage Sub-Servicers. In providing the services and assuming the obligations set forth herein, the Servicer may, at the sole expense of the Servicer, employ one or more sub-servicers, or may enter into such service agreements as the Servicer deems appropriate in connection with the performance of the Servicer s duties and obligations hereunder. Reference herein to the duties and responsibilities of the Servicer shall include the duties and responsibilities of any sub-servicers employed by the Servicer to the extent that the Servicer shall delegate such duties and responsibilities to such sub-servicer. 11 12. Indemnification. a. The Trust shall indemnify the Servicer and hold the Servicer harmless from and against all actions, suits, and claims, whether groundless or otherwise, arising directly or indirectly our of or in connection with the Servicer's performance under this Agreement and from and against any and a l l l osses, damages, costs, charges, attorneys' and a c c ountant's fees, payments, expenses, and liabilities incurred by the Servicer in connection with any such action, suit, or claim unless caused by the Servicer's breach of this Agreement, negligence, or willful misconduct. The Servicer shall not be under any obligation to prosecute or to defend any action, suit, or claim arising out of or in connection with the Servicer's performance under this Agreement, which, in the opinion of the Servicer's counsel, may involve the Servicer in expense or liability, and the Trust shall, so often as reasonably requested, furnish the Servicer with satisfactory indemnity against such expense or liability, and upon request of the Servicer, the Trust shall assume the entire defense of any action, suit, or claim subject to the foregoing indemnity; provided, however, that the Servicer shall give the Trust notice of any such action, suit, or claim brought against the Servicer. b. The Servicer shall indemnify the Trust and hold the Trust harmless from all claims and liabilities (including reasonable attorneys' and accountants' expenses) incurred or 12 assessed against the Trust arising from the Servicer's negligence, wilful misconduct, or breach of this Agreement. 13. Notices. a. Communications to the Servicer from the Trust or the Board shall be addressed to: Rydex Series Trust 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President b. Communications from the Servicer to the Trust shall be addressed to: PADCO Service Company, Inc. 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President c. In the event of a change of address, communications will be addressed to such new address as designated in a written notice from the Trust or the Servicer, as the case may be. All communications addressed in the above manner and by registered mail or delivered by hand will be sufficient under this Agreement. 14. Law Governing. This Agreement is governed by the laws of the State of Maryland (without reference to such state's conflict of law rules). 13 15. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 16. Binding Effect and Assignment. This Agreement shall be binding upon the parties hereto a n d their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of the Servicer, or by the Servicer without the written consent of the Trust, in each case authorized or approved by a resolution of the Trust's Trustees. 14 17. Amendment, Modification, and Waiver. No term or provision of this Agreement may be amended, modified, or waived without the affirmative vote or action by written consent of the Servicer and the Trust effected in accordance with the 1940 Act and Section 6 of this Agreement. IN WITNESS WHEREOF, the Servicer and the Trust have executed this Agreement as of the date first written above. RYDEX SERIES TRUST By: /s/ Albert P. Viragh, Jr. Name: Albert P. Viragh, Jr. Title: President PADCO SERVICE COMPANY, INC. By: /s/ Albert P. Viragh, Jr. Name: Albert P. Viragh, Jr. Title: President 15 Schedule I General Administrative Services The Servicer agrees to provide the Trust with all required general administrative services, including, without limitation, the following: 1. Office space, equipment, and personnel. 2. Clerical and general back office services. 3. Bookkeeping, internal accounting, secretarial, and other general administrative services. 4. P r eparation of all reports, prospectuses, statements of additional information, proxy statements, and all other materials required to be filed or furnished by the Trust under Federal and state securities laws. 5. Maintaining ledgers and determining net asset values. I-1 Schedule II Shareholder and Dividend Disbursement Services The Servicer agrees to provide the Trust and the Shareholders with all required shareholder and dividend disbursement services ("Services"), including, without limitation, the following: 1. The Servicer shall provide the following services to the Shareholders of the Trust: a. A g g regating and processing purchases and redemption requests for Trust Shares from Shareholders. b. Processing dividend payments from the Trust on behalf of Shareholders. c. Providing information periodically to Shareholders showing their positions in Shares. d. Arranging for bank wires. e. Responding to Shareholder inquiries relating to the services performed by the Servicer. f. Providing subaccounting with respect to Shares beneficially owned by Shareholders. g. As required by law, forwarding shareholder communications from the Trust (such as proxies, shareholder reports, annual and semi-annual f i n ancial statements, and dividend, disbursement, and tax notices) to Shareholders. h. Providing such other similar services as the Trust may reasonably request to the extent the Servicer is permitted to do so under applicable statues, rules, or regulations. i. Provide to Shareholders a schedule of any fees that the Servicer may charge directly to the Shareholders for such Services. 2. The Servicer shall also provide the following additional Services: a. Maintain all records required by law relating to transactions in Shares and, upon request by the Trust, promptly make such of these records available to the Trust as the Trust may II-1 reasonably request in connection with the operations of the Trust. b. Promptly notify the Trust if the Servicer experiences any difficulty in maintaining the records described in this Schedule II to the Agreement in an accurate and complete manner. c. Furnish the Trust or any designee of the Trust ("Designee") with such information relating to the Servicer's performance under this Agreement as the Trust or the Designee may reasonably r e quest (including, without limitation, periodic certifications confirming the provision to Shareholders of the Services described herein), and shall otherwise cooperate with the Trust and the Trust's Designees (including, without limitation, any auditors designated by the Trust), in connection with the preparation of reports to the Board of Trustees concerning this Agreement and the monies paid or payable by the Trust pursuant hereto, as well as any other reports or filings that may be required by law. II-2 Schedule III Transfer Agent and Registrar Services The Servicer agrees to provide the Trust with all required transfer agent and registrar services, including, without limitation, the following: 1. Maintaining all shareholder accounts, including processing of new accounts. 2. Posting address changes and other file maintenance for shareholder accounts. 3. Posting all transactions to the shareholder file, including: - Direct purchases - Wire order purchases - Direct redemptions - Wire order redemptions - Draft redemptions - Direct exchanges - Transfers 4. Quality control reviewing of every transaction b e f o r e the mailing of confirmations, checks, and/or certificates to shareholders. 5. Issuing all checks and shipping and replacing lost checks. 6. Mailing confirmations, checks, and/or certificates resulting from transaction requests of shareholders. 7. Performing other mailings, including: - Semi-annual and annual reports - I.R.S. Form 1099/year-end shareholder reporting - Systematic withdrawal plan payments - Daily confirmations 8. Answering all service-related telephone inquiries from shareholders, including: - G e neral and policy inquiries (research and resolve problems) - Trust yield inquiries - T a k ing shareholder processing requests and account maintenance changes by telephone - Submitting pending requests to correspondence III-1 - Monitoring online statistical performance of shares - Developing reports on telephone activity III-2 III-3 EX-99.9ADPTACCAGR 10 Exhibit (9)(d) Portfolio Accounting Services Agreement Between Rydex Series Trust and PADCO Service Company, Inc. PAGE ACCOUNTING SERVICES AGREEMENT between RYDEX SERIES TRUST and PADCO SERVICE COMPANY, INC. This Agreement, dated the twenty-fifth day of September, 1996, made by and between the RYDEX SERIES TRUST (the "Trust"), a business trust established under the laws of the State of Delaware on February 10, 1993, and organized as an open-end management investment company, and PADCO Service Company, Inc. (the "Agent"), a company incorporated under the laws of the State of Maryland on October 6, 1993. W I T N E S S E T H: WHEREAS, the Trust is registered with the Securities and E x c hange Commission (the "Commission") as an open-end management investment company pursuant to the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"); WHEREAS, the Agent is registered with the Commission as a transfer agent under the Securities Exchange Act of 1934, as amended; WHEREAS, the Agreement and Declaration of Trust of the Trust (the Trust Declaration ) authorizes the Trustees of the Trust to create an unlimited number of series of shares of the Trust; WHEREAS, the Board of Trustees of the Trust , pursuant to Article IV, Section 4.01(o), "Board of Trustees; Powers," of the Trust Declaration, have created the following series of shares of the Trust: The Nova Fund, The Ursa Fund, The OTC Fund, The Precious Metals Fund, The Juno Fund, The U.S. Government Bond Fund, The U.S. Government Money Market Fund, The Rydex Institutional Money Market Fund, and The Rydex High Yield Fund (collectively, the "Rydex Funds"); WHEREAS, the Trust desires to appoint the Agent as the Trust's Accounting Services Agent and as the Accounting Services Agent for each of the Rydex Funds and desires to have the Agent, as said Accounting Services Agent, to perform certain accounting and recordkeeping functions required of a duly-registered investment company; to file certain financial reports; to maintain and preserve certain books, accounts, and records as the basis for such reports; and to perform certain daily functions in connection with such accounts and records; and PAGE WHEREAS, the Agent is willing to perform such functions upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the receipt, sufficiency, and adequacy o f which are hereby acknowledged, the parties hereto, intending to be legally bound, agree and promise as follows: 1. Accounts and Records of the Trust a. The Trust shall provide to the Agent the necessary and appropriate documents, information, instructions, accounts, and records maintained or to be maintained by or for the Trust. The Agent shall be entitled to rely exclusively on the completeness and correctness of the accounts and records provided to the Agent by the Trust; provided, that such reliance is made in good faith, and the Trust shall indemnify and hold the Agent harmless of and from any and all expenses (including, without limitation, attorneys' and accountants fees), damages, claims, suits, liabilities, actions, demands, and losses whatsoever arising out of or in connection with any error, omission, inaccuracy, or other deficiency of such accounts and records or in connection with the failure of the Trust to provide any portion of such accounts and records or t o provide any information to the Agent necessary or appropriate to perform the Agent's functions hereunder. b. Accounts, records, and other information shall belong to the Trust and shall be considered confidential. Accounts, records, and other information will not be disclosed to other than Federal and state regulators without permission from the Trust. 2 2. Maintenance of Accounts and Records of the Trust a. The Agent shall examine and review the Trust's existing accounts, records, pertinent documents, and systems in order to determine or recommend how such accounts, records, documents, and systems shall be maintained. b. Upon receipt of necessary and appropriate information, instructions, accounts, records, and documents from the Trust, the Agent shall maintain and keep current and accurate the following books, accounts, records, journals, or other records of original entry, relating to the business of the Trust and each of the Rydex Funds and necessary or a p propriate for compliance with applicable regulations, including Rule 31a-1 and Rule 31a-2 of the 1940 Act, and as may be mutually agreed to between the Trust and the Agent: (1) Cash Receipts (2) Cash Disbursements (3) Dividend Record (4) Purchase and Sales of Portfolio Securities (5) Subscription and Redemption Journals (6) Security Ledger (7) Broker Ledger (8) General Ledger (9) Daily Expense Accruals (10) Daily Interest Accruals (11) S e curities and Monies borrowed or loaned and collateral therefor (12) Trial Balances c. Unless appropriate information necessary to perform the above functions is furnished to the Agent in a timely manner, the Agent shall incur no liability to the Trust or any other person. The Agent shall promptly notify the Trust in writing of any discrepancy, error or non-compliance in items (1) through (12) in Section 2(b), above, of which the Agent has knowledge. d. It shall be the responsibility of the Trust promptly to furnish the Agent with the declaration, record, and payment dates and amounts of any dividends or income and any other special actions taken concerning the portfolio securities of each of the Rydex Funds. e. The Agent shall maintain all accounts and records mentioned above as required by regulation and as agreed upon between the Trust and the Agent. 3. Accounting Entries and Confirmations 3 Upon receipt by the Agent of written or oral instructions from the Trust, the Agent shall make proper accounting entries in accordance with Generally Accepted Accounting Principles and regulations of the Commission. The Trust shall direct that each broker-dealer, or other person through whom a transaction has occurred, shall send a confirmation thereof to the Agent. The Agent shall verify this confirmation against the written or oral instructions when received from the Trust and forward the confirmation to the Trust's custodian (the "Custodian"). The Agent shall promptly notify the Trust of any discrepancy between the confirmation and the Trust's written instructions when received from the Trust but shall incur no responsibility or liability for such discrepancy. The Trust shall cause any necessary corrections to be made and shall advise the Agent and the Custodian accordingly. 4. Calculation of Net Asset Value a. The Agent shall calculate the Trust s net asset value for each of the Rydex Funds in accordance with the Trust's currently-effective prospectuses, once daily. b. The Agent shall prepare and maintain a daily evaluation of securities for which market quotations are available by the Agent's use of Bloomberg and ILX quotation s e r vices; all other securities shall be evaluated in accordance with the Trust's written instructions, and the Agent shall have no responsibility or liability for the accuracy of the information supplied by the Trust or provided in the written instructions. c. The Trust assumes all responsibility for computation o f "amortized cost," valuation of securities, and all valuations not ascertainable solely by mechanical procedures. 5. Statements From Custodian At the end of each month, the Agent shall obtain from the C u s t odian a monthly statement of cash and portfolio transactions, which shall be reconciled with the Agent's accounts and records maintained for the Trust. The Agent shall report any discrepancies to the Custodian, and shall report any unreconciled items to the Separate Account. 6. Daily and Periodic Reports The Agent shall supply daily and periodic reports to the Trust, as required by law or regulation, and as requested by the Trust and agreed upon by the Agent. 7. Reports and Confirmations to the Trust s Transfer Agent 4 a. The Trust shall report and confirm to the Trust s transfer agent the (the "Transfer Agent") purchases and redemptions for each of the Rydex Funds of which the Trust is aware. The Agent shall obtain from the Transfer Agent daily reports of Share purchases, redemptions, and total Shares outstanding for each of the Rydex Funds. b. The Agent shall reconcile outstanding Shares for each of the Rydex Funds with the Transfer Agent periodically and certify at least monthly to the Trust the reconciled Share balance outstanding for each of the Rydex Funds. 8. Review of Accounts and Records of the Trust The accounts and records of the Trust maintained by the Agent shall be the property of the Trust, and shall be made available to the Trust, within a reasonable period of time, upon demand. The Agent shall assist the Trust's independent auditors, and, upon approval of the Trust, or upon demand by any governmental or quasi-governmental entity, assist any such entity in any requested review of the Trust's accounts and records, but shall be reimbursed for all expenses and employee time invested in any such review outside of routine and normal periodic reviews. Upon receipt from the Trust of the necessary information, the Agent shall supply the necessary data for the Trust's completion of any necessary tax returns, questionnaires, periodic reports to shareholders, and such other reports and information requests as the Trust and the Agent shall agree upon from time to time. 9. Uniform Procedures The Agent and the Trust, from time to time, may adopt uniform or standard procedures, and the Agent may conclusively assume that any procedure approved by the Trust, or directed b y the Trust, does not conflict with or violate any requirements of the Trust's prospectuses, the Trust By-laws, or other governing documents of the Trust, or any rule or regulation of any regulatory body or governmental agency. The Trust shall be responsible to notify the Agent of any changes in the Trust s By-laws or in regulations or rules which might necessitate changes in the Agent's procedures. 10. Reliance The Agent may rely upon the advice of the Trust and upon statements of the Trust s accountants and other persons believed by the Agent in good faith to be expert in matters upon which such persons are consulted, and the Agent shall not be liable for any actions taken in good faith upon such statements. 5 11. Indemnification and Liability a. The Agent shall not be liable for any action taken in good faith reliance upon any authorized oral instructions, any written instructions, any certified copy of any resolution of the Trustees of the Trust, or any other document reasonably believed by the Agent to be genuine and to have been executed or signed by the proper person or persons. The Trust will send written instructions to confirm oral instructions, and the Agent will compare the written instructions against the oral instructions previously furnished. The Agent will inform the Trust promptly of any noted discrepancy. b. The Agent shall not be held to have notice of any change or lack of authority of any officer, employee, or agent of the Trust until receipt of written notification thereof by the Trust. c. The Trust shall indemnify the Agent and hold the Agent harmless from and against all actions, suits, and claims, whether groundless or otherwise, arising directly or i n d irectly out of or in connection with the Agent's performance under this Agreement and from and against any and a l l l osses, damages, costs, charges, attorneys' and a c c ountant's fees, payments, expenses, and liabilities incurred by the Agent in connection with any such action, suit, or claim unless caused by the Agent's breach of this Agreement, negligence, or willful misconduct. The Trust shall not be liable under this indemnification provision with respect to any claim made against the Agent unless the Agent shall have notified the Trust in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Agent (or after the Agent shall have received notice of such service on any designated agent), but failure to notify the Trust of any such claim shall not relieve the Trust from any liability which the Trust may have to the Agent against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Agent, the Trust shall be entitled to participate, at its own expense, in the defense of such action. The Trust also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Trust to such party of the Trust s election to assume the defense thereof, the Agent shall bear the fees and expenses of any additional counsel retained by the Agent, and the Agent will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. The Agent will promptly notify the Trust of the commencement of any litigation or proceedings 6 against the Agent in connection with the Shares or the operations of the Rydex Funds. d. The Agent shall indemnify the Trust and hold the Trust harmless from all actions, suits, damages, claims, d e m ands, losses, and liabilities (including reasonable attorneys' and accountants' fees and expenses) incurred or assessed against the Trust arising directly or indirectly from the Agent's negligence, wilful misconduct, or breach of this Agreement. The Agent shall not be liable under this indemnification provision with respect to any claim made against the Trust unless the Trust shall have notified the Agent in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Trust (or after the Trust shall have received notice of such service on any designated agent), but failure to notify the Agent of any such claim shall not relieve the Agent from any liability which it may have to the Trust against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Trust, the Agent shall be entitled to participate, at its own expense, in the defense of such action. The Agent also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Agent to such party of the Agent's election to assume the defense thereof, the Trust shall bear the fees and expenses of any additional counsel retained by the Trust, and the Agent will not be liable to such party under this Agreement for any legal o r other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. The Trust will p r omptly notify the Agent of the commencement of any litigation or proceedings against the Trust in connection with the Shares or the operations of the Rydex Funds. e. The shareholders, Trustees, officers, employees, and agents of the Trust shall not be personally bound by or liable hereunder, nor shall resort be had to such person's private property for the satisfaction of any obligation or claim hereunder as provided for in the Trust s By-Laws. 12. Compensation The Trust agrees to pay the Agent compensation for its services and to reimburse the Agent for expenses, as set forth in Schedule A attached hereto, or as shall be set forth in amendments to such Schedule approved by the Trust and the Agent. 7 13. Days of Business Nothing contained in this Agreement is intended to or shall require the Agent, in any capacity hereunder, to perform any functions or duties on any holiday or other day of special observance on which the New York Stock Exchange is closed. Functions or duties normally scheduled to be performed on such days shall be performed on, and as of, the next business day on which the New York Stock Exchange is open for business. 14. Term of Agreement This Agreement is effective on the date hereof. This Agreement shall remain in full force and effect until September 25, 1997, unless terminated earlier in accordance with its terms, and thereafter from year to year; provided, that: (a) such continuance is approved by (i) either a vote of the majority of the Trustees or a vote of a "majority of the outstanding voting securities" (as defined at Section 2(a)(42) of the 1940 Act) of the Trust and (ii) a majority of the Trustees who are not "interested persons" (as defined at Section 2(a)(19) of the 1940 Act); and (b) the following findings are made by a majority of the Trustees who are not "interested persons" (as defined at Section 2(a)(19) of the 1940 Act): (i) that this Agreement is in the best interests of the Trust; (ii) that the services to be performed pursuant to this Agreement are services required for the operation of the Trust; (iii) that the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) that the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. 15. Termination This Agreement may be terminated, without the payment of any penalty, by either party hereto upon at least ninety (90) days' written notice to the other party. Any termination by the Trust will be pursuant to a vote of a majority of the Trustees. 8 16. Notices a. Communications to the Agent shall be addressed to: PADCO Service Company, Inc. 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President b. Communications to the Trust shall be addressed to: Rydex Series Trust 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Attention: President c. In the event of a change of address, communications will be addressed to such new address as designated in a written notice from the Trust or the Agent, as the case may be. All communications addressed in the above manner and by registered mail or delivered by hand will be sufficient under this Agreement. 17. Governing Law This Agreement is governed by the laws of the State of Maryland (without reference to such state's conflict of law rules). 18. Counterparts This Agreement may be executed in counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 9 19. Binding Effect and Assignment This Agreement shall be binding upon the parties hereto a n d their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the written consent of the Agent, or by the Agent without the written consent of the Trust, in each case authorized or approved by a resolution of the Trustees of the Trust. 20. Amendment, Modification, and Waiver No term or provision of this Agreement may be amended, modified, or waived without the affirmative vote or action by written consent of the Agent and the Trust effected in accordance with the provisions of the 1940 Act, and the rules thereunder, and Section 14 of this Agreement. IN WITNESS WHEREOF, the Agent and the Trust have executed this Agreement as of the date first written above. RYDEX SERIES TRUST By: /s/ Albert P. Viragh Jr. Albert P. Viragh, Jr. President PADCO SERVICE COMPANY, INC. By: /s/ Albert P. Viragh, Jr. Albert P. Viragh, Jr. President 10 SCHEDULE A PADCO SERVICE COMPANY, INC. FEE SCHEDULE FOR ACCOUNTING SERVICES RYDEX SERIES TRUST - Each Separate Rydex Fund A. MINIMUM ANNUAL FEE - (Based upon average net assets - payable monthly) shall be the greater of: First Year - $7,500 Second Year - $15,000 Third and Subsequent Years - $20,000 or Basis Point Fee 10 Basis Points on first $30 million of assets 5 Basis Points on next $20 million of assets 3 Basis Points on next $50 million of assets 2 Basis Points on assets over $100 million B. I n addition, all out-of-pocket expenses shall be separately charged, shall include but not be limited to: printed forms, postage, overnight mail and telephone expense. C. PADCO Service Company, Inc. warrants that the above rates of compensation are guaranteed for a two-year period. At that time, the Trust acknowledges that the Agent has the right to revise the Agent's compensation schedule. 12 EX-99.9AEFIDBDAGR 11 Exhibit (9)(e) Fidelity Bond Allocation Agreement Among Rydex Series Trust, PADCO Advisors, Inc., The Rydex Advisor Variable Annuity Account, PADCO Advisors II, Inc., and PADCO Service Company, Inc. PAGE Amendment to FIDELITY BOND ALLOCATION AGREEMENT among RYDEX SERIES TRUST, PADCO ADVISORS, INC., RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT, PADCO ADVISORS II, INC., and PADCO SERVICE COMPANY, INC. The following Amendment is made to the first paragraph of the Preamble to the Fidelity Bond Allocation Agreement, dated June 26, 1996, among Rydex Series Trust, PADCO Advisors, Inc., Rydex Advisor Variable Annuity Account, PADCO Advisors II, Inc., and PADCO Service Company, Inc. (the "Allocation Agreement"), and is hereby incorporated into and made a part of the Allocation Agreement: The first two paragraphs to the Preamble to the Allocation Agreement are amended, effective September 26, 1996, to read as follows: ALLOCATION AGREEMENT (the "Agreement"), is made as of this 26th day of June, 1996, by and among: R Y DEX SERIES TRUST (the "Trust"), a registered investment company organized as a Delaware business trust on March 9, 1993, with its principal place of business at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, on behalf of the Trust and the Trust's series of THE NOVA FUND, THE URSA FUND, THE RYDEX OTC FUND, THE RYDEX PRECIOUS METALS FUND, THE RYDEX U.S. GOVERNMENT BOND FUND, THE JUNO FUND, THE RYDEX U.S. GOVERNMENT MONEY MARKET FUND, THE RYDEX INSTITUTIONAL MONEY MARKET FUND, and THE RYDEX HIGH YIELD FUND, and all future registered investment companies which are named insureds under a joint fidelity bond as described below and for which PADCO Advisors, Inc. acts as PAGE investment adviser and for which PADCO Service Company, Inc. acts as transfer agent and shareholder servicing agent (the above-referenced entities hereinafter are collectively referred to as the "Rydex Funds"); In witness whereof, the parties hereto have caused these Amendments to be executed in their names and on their behalf and through their duly-authorized officers as of the 26th day of September, 1996. ATTEST: RYDEX SERIES TRUST By:/s/ Robert M. Steele By: /s/ Albert P. Viragh, Jr. Name: Robert M. Steele Albert P. Viragh, Jr. Title: Vice President President ATTEST: RYDEX SERIES TRUST on behalf of the RYDEX FUNDS of RYDEX SERIES TRUST By:/s/ Robert M. Steele By: /s/ Albert P. Viragh, Jr. Name: Robert M. Steele Albert P.Viragh, Jr. Title: Vice President President 2 ATTEST: PADCO ADVISORS, INC. By:/s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr. Name: Amanda C. Viragh Albert P.Viragh, Jr. Title: Secretary President ATTEST: RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT By:/s/ Robert M. Steele By: / s / L. Gregory Gloeckner. Name: Robert M. Steele L. Gregory Gloeckner Title: Vice President Vice President ATTEST: RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT on behalf of the SUBACCOUNTS of RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT By:/s/ Robert M. Steele By: /s/ L. Gregory Gloeckner Name: Robert M. Steele L. Gregory Gloeckner Title: Vice President Vice President ATTEST: PADCO ADVISORS II, INC. By:/s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr. Name: Amanda C. Viragh Albert P.Viragh, Jr. Title: Secretary President ATTEST: PADCO SERVICE COMPANY, INC. By:/s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr. Name: Amanda C. Viragh Albert P.Viragh, Jr. Title: Secretary President 3 Fidelity Bond Allocation Agreement Among Rydex Series Trust, PADCO Advisors, Inc., The Rydex Advisor Variable Annuity Account, PADCO Advisors II, Inc., and PADCO Service Company, Inc. Dated June 26, 1996 THIS ALLOCATION AGREEMENT (the "Agreement"), is made as of this 26th day of June, 1996, by and among: R Y D E X SERIES TRUST (the "Trust"), a registered investment company organized as a Delaware business trust on March 9, 1993, with its principal place of b u siness at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852, on behalf of the Trust and the Trust's series of THE NOVA FUND, THE URSA FUND, THE RYDEX OTC FUND, THE RYDEX PRECIOUS METALS FUND, THE RYDEX U.S. GOVERNMENT BOND FUND, THE JUNO FUND, THE RYDEX U.S. GOVERNMENT MONEY MARKET FUND, and THE RYDEX I N S TITUTIONAL MONEY MARKET FUND, and all future registered investment companies which are named insureds under a joint fidelity bond as described below and for which PADCO Advisors, Inc. acts as investment adviser and for which PADCO Service Company, Inc. acts as transfer agent and shareholder servicing agent (the above-referenced entities hereinafter are collectively referred to as the "Rydex Funds"); P A D C O ADVISORS, INC. ("PADCO I"), a registered investment adviser incorporated under the laws of the State of Maryland on February 5, 1993, with its principal place of business at 6116 Executive Boulevard, Suite 400, Rockville, Maryland 20852; RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT (the "Separate Account"), a registered investment company established as a managed separate account of Great American Reserve Insurance Company ("Great American Reserve") under the laws of the State of Texas on April 15, 1996, with its principal place of business at 11815 North Pennsylvania Street, Carmel, Indiana 46032, and with offices at 6116 Executive Boulevard, Rockville, Maryland 20852, on b e half of the Separate Account and the Separate Account's subaccounts of THE NOVA SUBACCOUNT, THE URSA SUBACCOUNT, THE OTC SUBACCOUNT, THE PRECIOUS METALS SUBACCOUNT, THE U.S. GOVERNMENT BOND SUBACCOUNT, THE JUNO SUBACCOUNT, THE MONEY MARKET I SUBACCOUNT, and THE MONEY MARKET II SUBACCOUNT, and all future registered investment companies which are named insureds under a joint fidelity bond as described below and for which PADCO Advisors II, Inc. acts as investment adviser and for which PADCO Service Company, Inc. acts as Subaccount asset allocation administration servicer (the above- referenced subaccounts of the Separate Account h e r einafter are collectively referred to as the "Subaccounts"); PADCO ADVISORS II, INC. ("PADCO II"), a registered investment adviser incorporated under the laws of the State of Maryland on July 5, 1994, with its principal p l a c e of business at 6116 Executive Boulevard, Rockville, Maryland 20852; and P A D CO SERVICE COMPANY, INC. (the "Servicer"), a registered transfer agent incorporated under the laws of the State of Maryland on October 6, 1993, with its principal place of business at 6116 Executive Boulevard, Rockville, Maryland 20852. This Agreement is entered into by the aforementioned parties (collectively, the "Joint Insureds") under the following circumstances: W I T N E S S E T H WHEREAS, Section 17(g), "Transactions of Certain Affiliated Persons and Underwriters," of the Investment Company Act of 1 9 40, as amended (the "1940 Act"), provides that the Securities and Exchange Commission (the "Commission") is a u t horized to require that officers and employees of registered investment companies be bonded against larceny and embezzlement, and the Commission, under Rule 17g-1, "Bonding of Officers and Employees of Registered Management Investment Companies," under the 1940 Act, has promulgated rules and regulations dealing with this subject; WHEREAS, the Trust, the Rydex Funds, PADCO I, the Separate Account, the Subaccounts, PADCO II, and the Servicer, are named or will be named as joint insureds under the terms of a certain bond or policy of insurance which insures against larceny and embezzlement of officers and employees (the "Fidelity Bond"), a copy of which Fidelity Bond is attached hereto as Exhibit A; WHEREAS, the trustees of the Trust (the "Trustees"), including a majority of the Trustees who are not "interested persons" of the Trust, as that term is defined in Section 2(a)(19) of the 1940 Act, and the managers of the Separate Account (the "Managers"), including a majority of the Managers who are not "interested persons" of the Separate Account, as that term is defined in Section 2(a)(19) of the 1940 Act, and have considered all relevant factors, including, but not limited to, the number of the parties named as "joint insureds" under the joint Fidelity Bond, the nature of the business activities of such Joint Insureds, the amount of the joint insured bond, the amount of the premium for such bond, and the ratable allocation of the premium among all parties named as insureds under the joint Fidelity Bond, and have determined that the share of the premium allocated to each of the Rydex Funds and to each of the New Subaccounts is less than the premium each such Rydex Fund and each such New Subaccount, respectively, would have had to pay if each such - 2 - Rydex Fund and each such New Subaccount had provided and maintained a single insured bond, as required pursuant to paragraph (e) of Rule 17g-1, and also have determined that it would be in the best interests of (1) the Trust and the Rydex Funds and (2) the Separate Account and the Subaccounts for (1) the Trust and the Rydex Funds and (2) the Separate Account and the Subaccounts, respectively, to be included as covered joint insureds under the joint insured Fidelity Bond, pursuant to the requirements of Rule 17g-1 under the 1940 Act; WHEREAS, a majority of the Trustees of the Trust who are not "interested persons," as that term is defined in Section 2(a)(19) of the 1940 Act, and a majority of the Managers of the Separate Account who are not "interested persons," as that term is defined in Section 2(a)(19) of the 1940 Act, each has given due consideration to all factors relevant to the form, amount, and apportionment of premiums and recoveries on such joint insured Fidelity Bond and such Managers have approved the term and amount of the Fidelity Bond, the portions of the premium payable by each of the Rydex Funds, the Subaccounts, PADCO I, PADCO II, and the Servicer, and the manner in which recovery of said Fidelity Bond, if any, shall be shared by and among the parties hereto as set forth; and WHEREAS, the Trust, the Rydex Funds, PADCO I, the Separate Account, the Subaccounts, PADCO II, and the Servicer now desire to enter into the agreement required by Rule 17g-l(f) under the 1940 Act to establish the manner in which recovery on said Fidelity Bond, if any, shall be shared. NOW, THEREFORE, IT IS HEREBY AGREED by and among the parties as follows: 1. Payment of Premiums PADCO I shall pay eight percent (8%), PADCO II shall pay eight percent (8%), the Servicer shall pay four percent (4%), and the Rydex Funds and the Subaccounts shall pay eighty percent (80%) of the premium payable under the Fidelity Bond. Each of the Rydex Funds and the Subaccounts shall pay that percentage of said amount of the premium due under the Fidelity Bond which is derived by a fraction, (i) the denominator of which is the total net assets of all the Rydex Funds and Subaccounts combined, and (ii) the numerator of which is the total net assets of each such Rydex Fund or each such Subaccount individually. Each of the Rydex Funds, PADCO I, each of the Subaccounts, PADCO II, and the Servicer agree that the appropriateness of the allocation of said premium will be determined jointly by PADCO I and PADCO II (collectively, the "Advisors") on a monthly basis, subject to approval by both the Trustees and - 3 - the Managers of both the Fidelity Bond and this Allocation Agreement no less often than annually. 2. Allocation of Recoveries (a) If more than one of the parties hereto is damaged in a single loss for which recovery is received under the Fidelity Bond, each such party shall receive that portion of the recovery which represents the loss sustained by that party, unless the recovery is inadequate to indemnify fully such party sustaining a loss. (b) If the recovery is inadequate to indemnify fully each such party sustaining a loss, then the recovery shall be allocated among such parties as follows: (i) Each such party sustaining a loss shall be allocated an amount equal to the lesser of that party's actual loss or the minimum amount of bond which would be required to be m a intained by such party under a single insured bond (determined as of the time of the loss) in accordance with the provisions of Rule 17g-l(d)(1) under the 1940 Act. (ii) The remaining portion of the proceeds shall be allocated to each such party sustaining a loss not fully covered by the allocation under subparagraph 2(b)(i), above, in the proportion that each such party's last payment of premium bears to the sum of the last such premium payments of all such parties. If such allocation would result in any party which had sustained a loss receiving a portion of the recovery in excess of the loss actually sustained, such excess portion shall be allocated among the other parties whose losses would not be fully indemnified. The allocation shall bear the same proportion as each such party's last payment of premium bears to the sum of the last premium payments of all parties entitled to receive a share of the excess. Any allocation in excess of a loss actually sustained by any such party shall be reallocated in the same manner. 3. Obligation to Maintain Minimum Coverage (a) Each of the Rydex Funds and each of the Subaccounts represents and warrants to each of the other parties hereto that the minimum amount of coverage required of each such Rydex Fund and each such Subaccount, respectively, shall be determined as of the date hereof pursuant to the schedule set forth in paragraph (d)(1) of Rule 17g-1 under the 1940 Act. The parties hereto agree that the Advisors will determine jointly, no less than at the end of each calendar quarter, the minimum amount of coverage which would be required of each of the Rydex Funds and each of the Subaccounts by Rule 17g- - 4 - 1(d)(1) if a determination with respect to the adequacy of the coverage were currently being made. (b) In the event that the total amount of the minimum coverages thus determined exceeds the amount of coverage of the then-effective Fidelity Bond, the Trustees and the Managers will be notified and will determine whether it is necessary or appropriate to increase the total amount of coverage of the Fidelity Bond to an amount not less than the total amount of such minimums, or to secure such excess coverage for one or more of the parties hereto, which, when added to the total coverage of the Fidelity Bond, will equal an amount of such minimums. (c) Unless either or both the Trust and the Separate Account elects to terminate this Agreement (pursuant to Paragraph 4, below) and the Trust's and the Separate Account's respective participation in a joint-insured bond, each Rydex Fund and each Subaccount agrees to pay the Rydex Fund's and the Subaccount's respective fair portion of the new or additional premium (taking into account all of the then- existing circumstances). 4. Prior Agreements; Termination T h is Agreement shall supersede all prior agreements relating to an allocation of premium on any joint insured bond and shall apply to the present Fidelity Bond coverage and any renewal or replacement thereof. This Agreement shall continue until terminated by any party hereto upon the giving of not less than sixty (60) days notice to the other parties hereto in writing. 5. Law Governing This Agreement is governed by the laws of the State of Maryland (without reference to such state's conflict of law rules). 6. Counterparts This Agreement may be executed in counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 7. Amendment, Modification, and Waiver No term or provision of this Agreement may be amended, modified, or waived without the affirmative vote or action by written consent of each of the parties hereto. - 5 - IN WITNESS WHEREOF, the parties hereto have caused these presents to be duly executed by their duly-authorized officers as of the date first above written. ATTEST: RYDEX SERIES TRUST By: /s/ Timothy P. Hagan By: /s/ Albert P. Viragh, Jr. Name: Timothy P. Hagan Albert P. Viragh, Jr. Title: Vice President President ATTEST: RYDEX SERIES TRUST on behalf of the RYDEX FUNDS of RYDEX SERIES TRUST By: /s/ Timothy P. Hagan By: /s/ Albert P. Viragh, Jr.Name: Timothy P. Hagan Albert P. Viragh, Jr. Title: Vice President President ATTEST: PADCO ADVISORS, INC. By: /s/ Timothy P. Hagan By: /s/ Albert P. Viragh, Jr. Name: Timothy P. Hagan Albert P. Viragh, Jr. Title: Vice President President ATTEST: RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT By: /s/ Timothy P. Hagan By: /s/ L. Gregory Gloeckner Name: Timothy P. Hagan L. Gregory Gloeckner Title: Vice President Vice President - 6 - ATTEST: RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT on behalf of the SUBACCOUNTS of RYDEX ADVISOR VARIABLE ANNUITY ACCOUNT By: /s/ Timothy P. Hagan By: /s/ L. Gregory Gloeckner Name: Timothy P. Hagan L. Gregory Gloeckner Title: Vice President Vice President ATTEST: PADCO ADVISORS II, INC. By: /s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr. Name: Amanda C. Viragh Albert P. Viragh, Jr. Title: Secretary President ATTEST: PADCO SERVICE COMPANY, INC. By: /s/ Amanda C. Viragh By: /s/ Albert P. Viragh, Jr. Name: Amanda C. Viragh Albert P. Viragh, Jr. Title: Secretary President - 7 - EX-99.10OPINCOUNS. 12 Exhibit (10) Opinion and Consent of Jorden Burt Berenson Klingensmith & Suarez, counsel to Rydex Series Trust PAGE JORDEN BURT BERENSON & JOHNSON LLP Suite 400 East 1025 Thomas Jefferson Street, N.W. Washington, D. C. 20007-0805 (202) 965-8100 Telecopier (202) 965-8104 October 28, 1996 Rydex Series Trust 6116 Executive Boulevard Suite 400 Rockville, Maryland 20852 Ladies and Gentlemen: T h is opinion is furnished in connection with the registration under the Securities Act of 1933, as amended, of shares ("Shares") of the following separate series of Rydex Series Trust (the Trust ) that will be offered and sold by the Trust: The Nova Fund, The Ursa Fund, The Rydex OTC Fund, The Rydex Precious Metals Fund, The Rydex U.S. Government Bond Fund, The Juno Fund, The Rydex High Yield Fund, The Rydex U.S. Government Money Market Fund, and The Rydex Institutional Money Market Fund. I n rendering our opinion, we have examined such documents, records, and matters of law as we deemed necessary for purposes of this opinion. We have assumed the genuineness of all signatures of all parties, the authenticity of all documents submitted as originals, the correctness of all copies, and the correctness of all facts set forth in the certificates delivered to us and the correctness of all written or oral statements made to us. Based upon and subject to the foregoing, it is our opinion that the Shares that will be issued by the Trust when sold will be legally issued, fully paid, and nonassessable. Our opinion is rendered solely in connection with the Registration Statement on Form N-1A under which the Shares will be registered and may not be relied upon for any other purposes without our written consent. We hereby consent to the use of this opinion as an exhibit to such Registration Statement. PAGE Sincerely, /S/ JORDEN BURT BERENSON & JOHNSON LLP JORDEN BURT BERENSON & JOHNSON LLP PAGE EX-99.11OTHCONSNT 13 Exhibit (11) Consent of Deloitte & Touche LLP, independent auditors for Rydex Series Trust PAGE EXHIBIT 11 INDEPENDENT AUDITORS CONSENT Rydex Series Trust We consent to the incorporation by reference in this Post- Effective Amendment to the Trust s Registration Statement of our report dated August 20, 1996 appearing in the Annual Report - June 30, 1996 and to the reference to us under the caption Financial Highlights appearing in the Prospectus, which also is a part of such Registration Statement. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Princeton, New Jersey October 25, 1996 PAGE EX-27.FDSNOVAFUND 14
6 0000899148 RYDEX SERIES TRUST 1 NOVA FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 194072313 195429089 37499192 1606409 0 234534690 4028551 0 5965023 9993574 0 221230953 14321854 5326106 0 0 358049 0 2952114 224541116 0 5854668 0 (1675503) 4179165 22094745 2685556 28959466 0 0 0 0 188794994 (179799246) 0 132666112 211019 5944622 0 0 1022794 0 1747874 133266709 11.81 .56 3.31 0 0 0 15.68 1.31 0 0
EX-27.FDSURSAFUND 15
6 0000899148 RYDEX SERIES TRUST 5 URSA FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 394422034 405078199 5271488 1580514 0 411930201 963305 0 218413628 219376933 0 267465208 25507832 14522559 736280 0 (76639912) 0 991692 192553268 0 8410112 0 (2398342) 6011770 (36517831) 3161168 (27344893) 0 0 0 0 276476043 (265490770) 0 64924573 852643 (39188713) 0 0 1607706 0 2469816 178050323 8.79 .30 (1.54) 0 0 0 7.55 1.39 0 0
EX-27.FDSOTCFUND 16
6 0000899148 RYDEX SERIES TRUST 6 OVER-THE-COUNTER FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 50359366 57928177 14949705 602182 0 73480064 16424003 0 8340147 24764150 0 49698232 3213376 5071294 976052 0 (9541295) 0 7582925 48715914 148945 1048165 0 (892594) 304516 7408632 (894564) 6818584 0 0 (1826446) 0 168346003 (170312258) 108337 (13231674) 142169 4393443 0 0 541443 0 916004 68763150 12.22 .06 3.24 0 (.36) 0 15.16 1.33 0 0
EX-27.FDSMETALSFUN 17
6 0000899148 RYDEX SERIES TRUST 3 PRECIOUS METALS FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 40954821 38542470 2921199 113110 0 41576779 1306676 0 3696533 5003209 0 48087669 4039466 4682918 0 (1091) (9095596) 0 (2417412) 36573570 376675 303537 0 (683646) (3434) 2288270 (6585369) (4300533) 0 0 0 0 87901045 (88544497) 0 (4287511) 34289 (11383866) 0 0 406902 0 704167 53024533 8.73 0 .32 0 0 0 9.05 1.33 0 0
EX-27.FDSBONDFUND 18
6 0000899148 RYDEX SERIES TRUST 4 US GOVERNMENT BOND FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 17646441 17843329 4674507 30402 0 22548238 2490360 0 1726733 4217093 0 18713170 2043061 271480 16759 0 (351994) (243678) 196888 18331145 0 1111295 0 (228383) 882912 (103013) 188414 968313 0 (885787) (243678) 0 19714470 (18040885) 97996 15739636 15988 (248981) 15988 0 97820 0 236172 18676074 9.55 .46 (.45) (.46) (.13) 0 8.97 1.26 0 0
EX-27.FDSJUNOFUND 19
6 0000899148 RYDEX SERIES TRUST 7 JUNO FUND 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 18841622 18834812 442665 99851 0 19377328 260825 0 256890 517715 0 22677052 1991493 473611 61802 0 (3491638) 0 (387603) 18859613 0 1014806 0 (304210) 710596 (1855288) (397053) (1541745) 0 0 0 0 25594613 (24076731) 0 14558302 135504 (1636350) 0 0 174866 0 320232 19549520 9.08 .34 .05 0 0 0 9.47 1.64 0 0
EX-27.FDSMMFUND 20
6 0000899148 RYDEX SERIES TRUST 2 US GOVERMENT MONEY MARKET 1 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 169891981 169891981 11976285 41411 0 181909677 0 0 27985130 27985130 0 153931181 153983648 284198395 0 (6634) 0 0 0 153924547 0 9185697 0 (1725865) 7459832 467 0 7460299 0 (7466933) (467) 0 4139232212 (4276965783) 7466821 (130273848) 0 0 0 0 891864 0 1758657 178271053 1 .04 0 (.04) 0 0 1 .99 0 0
EX-27.FDSINS.FUND 21
6 0000899148 RYDEX SERIES TRUST 8 INSTITUTIONAL MONEY MARKET FUND 1 3-MOS JUN-30-1997 JUL-11-1996 SEP-30-1996 30928326 30928326 2087354 55953 0 33071633 0 0 2290749 2290749 0 30780884 30780884 0 0 0 0 0 0 30780884 0 453849 0 (98553) 355296 0 0 355296 0 (355296) 0 0 267794601 (237210377) 196660 30780884 0 0 0 0 47002 0 98553 35366152 1.00 .01 0 (.01) 0 0 1.00 1.24 0 0
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