As filed with the Securities and Exchange Commission on August 25, 2008
1933 Act No. 333-146680
1940 Act No. 811-22132
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 3
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 5
(Check appropriate box or boxes)
ABERDEEN FUNDS
(Exact Name of Registrant as Specified in Charter)
5 Tower Bridge
300 Barr Harbor Drive, Suite 300
West Conshohocken, PA19428
(Address of Principal Executive Offices) (Zip Code)
(610) 238-3600
(Registrant's Telephone Number, including Area Code)
Lucia Sitar, Esquire
c/o Aberdeen Asset Management Inc
1735 Market Street, 37th Floor
Philadelphia, PA19103
(Name and Address of Agent for Service of Process)
With Copies to:
Barbara A. Nugent, Esquire
Stradley Ronon Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA19103
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box):
____ immediately upon filing pursuant to paragraph (b) of Rule 485
____ on (date) pursuant to paragraph (b) 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
_X__ 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.
Aberdeen Core Plus Income Fund
Class A Shares
Class B Shares
Class C Shares
Class R Shares
Class S Shares
Institutional Service Class Shares
Institutional Class Shares
PROSPECTUS
[_______, 2008]
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved this Fund's shares or determined whether this
prospectus is complete or accurate. To state otherwise is a crime.
www.aberdeeninvestments.com
ABERDEEN CORE PLUS INCOME FUND
The Aberdeen Core Plus Income Fund is primarily intended to maximize total
return consistent with the preservation of capital and prudent investment
management by investing for both current income and capital appreciation.
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Class Ticker
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Class A XXXX
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Class B XXXX
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Class C XXXX
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Class R XXXX
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Class S XXXX
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Institutional Service Class XXXX
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Institutional Class XXXX
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TABLE OF CONTENTS
Section Aberdeen Funds
Section 1 Fund Summary & Performance Page [ ]
Aberdeen Core Plus Income Fund
Section 2 Fund Details
Additional Information about Investments,
Investment Techniques Page [ ]
and Risks
Section 3 Fund Management Page [ ]
Investment Adviser & Subadviser
Management Fees
Portfolio Management
Section 4 Historical Performance Data of the Adviser Page [ ]
Section 5 Investing with Aberdeen Funds Page [ ]
A Note About Share Classes
Choosing a Share Class
Reduction and Waiver of Class A Sales Charges
Waiver of Contingent Deferred Sales Charges -
Class A, Class B and Class C Shares
Sales Charges and Fees
Administrative Services Fees
Revenue Sharing
Contacting Aberdeen Funds
Buying Shares
Fund Transactions - Class A, Class B,
Class C and Class S Shares
Fair Value Pricing
In-Kind Purchases
Minimum Investments
Customer Identification Information
Accounts with Low Balances
Exchanging Shares
Automatic Withdrawal Program
Selling Shares
Excessive or Short-Term Trading
Restrictions on Transactions
Exchange and Redemption Fees
Section 6 Distribution and Taxes Page [ ]
Income and Capital Gains Distributions
Selling and Exchanging Shares
Other Tax Jurisdictions
Tax Status for Retirement Plans and Other
Tax-Deferred Accounts
Backup Withholding
Section 7 Financial Highlights Page [ ]
Introduction to the Aberdeen Core Plus Income Fund
This Prospectus provides information about the Aberdeen Core Plus Income Fund
(the "Core Plus Income Fund"), the shares of which are offered by Aberdeen Funds
(the "Trust"). The Core Plus Income Fund is primarily intended to maximize total
return consistent with the preservation of capital and prudent investment
management by investing for both current income and capital appreciation.
The following section summarizes key information about the Core Plus Income
Fund, including information regarding its investment objectives, principal
strategies, principal risks, performance and fees. As with any mutual fund,
there can be no guarantee that the Core Plus Income Fund will meet its
objectives or that the Fund's performance will be positive for any period of
time.
The Core Plus Income Fund's investment objective can be changed without
shareholder approval. Aberdeen Asset Management Inc. (the "Adviser") serves as
the Core Plus Income Fund's investment adviser.
A Note About Share Classes
The Core Plus Income Fund offers seven share classes - Class A, Class B, Class
C, Class R, Class S, Institutional Service Class and Institutional Class.
Section 1 Fund Summary & Performance
Objective
The Core Plus Income Fund seeks to maximize total return consistent with the
preservation of capital and prudent investment management by investing for both
current income and capital appreciation.
Principal Strategies
The Core Plus Income Fund seeks to achieve its objective by investing
primarily (generally, at least 80%) in a diversified portfolio of fixed income
securities and instruments, which include, but are not limited to the following:
- U.S. Government securities (including Treasury, agency and government
sponsored enterprises),
- foreign government and agency, supranational, quasi government
obligations,
- residential mortgage backed securities (MBS),
- commercial mortgage backed securities (CMBS),
- asset backed securities (ABS),
- municipal obligations,
- corporate obligations (including preferred stock, hybrid capital
securities, and convertible bonds),
- loan participations and assignments including revolving credit
facilities,
- inflation-indexed securities,
- non-dollar denominated securities,
- U.S. dollar denominated securities of foreign issuers,
- cash equivalents including commercial paper, repurchase agreements,
and other short term investments,
- private placements including securities issued under 144(a),
- structured securities,
- derivative instruments including futures, interest rate swaps, options
and credit derivatives,
- securtieies issued by government and non-government entities in
emerging market countries as determined by the Adviser, and
- Currency forward contracts.
Up to 25% of total assets may be invested in securities that are rated below
investment grade ("junk bonds"). Investment grade securities are those rated
Baa/BBB or higher by a nationally recognized statistical rating organization
("NRSRO") including Moody's Investor Services, Inc. ("Moody's"), Standard and
Poor's Rating Group ("Standard & Poor's"), or Fitch, Inc. ("Fitch"), or if
unrated, determined by the Adviser to be of comparable quality. The Fund may
invest in securities issued by sovereign and non-sovereign entities domiciled in
emerging market countries as determined by the Adviser.
Exposure to non-dollar denominated fixed income instruments is limited to 25% of
the market value of the Fund. Un-hedged exposure to foreign currencies generally
will not exceed 10% of the market value of the Fund. Currency forwards may be
used for hedging purposes, as well as for outright active currency positions.
Cross hedging is permitted. Furthermore, the net incremental aggregate sum of
the currency exposures for non-hedging purposes, irrespective of whether they
are long or short, cannot exceed 10% of the net assets of the Fund.
Derivative instruments tied to permissible fixed income instruments are
permitted for hedging and managing risk exposures. The Fund may use derivative
instruments as a substitute for purchasing or selling securities or for
non-hedging purposes to seek to enhance potential gains.
The Fund may also buy or sell securities on a forward commitment basis and lend
portfolio securities.
2
Principal Risks
The Core Plus Income Fund cannot guarantee that it will achieve its investment
objective.
As with any fund, the value of the Core Plus Income Fund's investments--and
therefore, the value of Fund shares--may fluctuate. These changes may occur
because of:
Interest Rate Risk. Interest rates have an effect on the value of the Fund's
fixed income investments because the value of those investments will vary as
interest rates fluctuate. Generally, fixed income securities will decrease in
value when interest rates rise and when interest rates decline, the value of
fixed income securities can be expected to rise. The longer the effective
maturity of the Fund's securities, the more sensitive the Fund will be to
interest rate changes. (As a general rule, a 1% rise in interest rates means a
1% fall in value for every year of duration.) As interest rates decline, the
issuers of securities held by the Fund may prepay principal earlier than
scheduled, forcing the Fund to reinvest in lower-yielding securities. Prepayment
may reduce the Fund's income. As interest rates increase, slower than expected
principal payments may extend the average life of fixed income securities. This
will have the effect of locking in a below-market interest rate, increasing the
Fund's duration and reducing the value of such a security. Because the Fund may
invest in mortgage-related securities, it is more vulnerable to both of these
risks.
Credit Risk. Credit risk refers to the likelihood that an issuer will default in
the payment of the principal or interest on an instrument and is broadly gauged
by the credit ratings of the securities in which the Fund invests. However,
ratings are only the opinions of rating agencies and are not guarantees of the
quality of the securities. In addition, the depth and liquidity of the market
for a fixed income security may affect its credit risk. Credit risk of a
security may change over its life and rated securities are often reviewed and
may be subject to down grade by a rating agency. A fund purchasing bonds faces
the risk that the creditworthiness of an issuer may decline, causing the value
of the bonds to decline. In addition, an issuer may not be able to make timely
payments on the interest and/or principal on the bonds it has issued. Because
the issuers of high-yield bonds or junk bonds (bonds rated below the fourth
highest category) may be in uncertain financial health, the prices of these
bonds may be more vulnerable to bad economic news or even the expectation of bad
news, than investment-grade bonds. In some cases, bonds, particularly high-yield
bonds, may decline in credit quality or go into default. Because the Fund may
invest in securities not paying current interest or in securities already in
default, these risks may be more pronounced. Fixed income securities are not
traded on exchanges. The over-the-counter market may be illiquid and there may
be times when no counterparty is willing to purchase or sell certain securities.
The nature of the market may make valuations difficult or unreliable.
Call and Redemption Risk. Some bonds allow the issuer to call a bond for
redemption (i.e., exercise its right to pay principal earlier than expected)
before it matures. If this happens, the Core Plus Income Fund may be unable to
recoup all of its initial investment and may be required to invest the proceeds
in securities with lower yields.
Market Risk. Deteriorating market conditions might cause a general weakness in
the market that reduces the prices of securities in that market. Developments in
a particular class of bonds or the stock market could also adversely affect the
Fund by reducing the relative attractiveness of bonds as an investment. Also, to
the extent that the Fund emphasizes bonds from any given industry, it could be
hurt if that industry does not do well.
Mortgage-Related Securities Risk. The Fund may invest in mortgage-related
securities. Rising interest rates may cause an issuer to exercise its right to
pay principal later than expected which tends to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates. As a result, in a period of rising interest rates, a fund that holds
mortgage-related securities may exhibit additional volatility. This is known as
extension risk. In addition, mortgage-related securities are subject to
prepayment risk. When interest rates decline, borrowers may pay off their
mortgages sooner than expected. This can reduce the returns of the Fund because
the Fund will have to reinvest that money at the lower prevailing interest
rates.
3
Foreign Investment Risk. Foreign investments involve certain special risks,
including:
o Political Risk. Some foreign governments have limited the outflow of
profits to investors abroad, imposed restrictions on the exchange or
export of foreign currency, extended diplomatic disputes to include
trade and financial relations, seized foreign investment and imposed
higher taxes.
o Soverign Risk. An issuer of non-U.S. Sovereign debt or the
governmental authorities that control the repayment of the debt may be
unable or unwilling to repay the principal or interest when due. The
Fund may have limited recourse to compel payment in the event of a
default.
o Information Risk. Companies based in foreign markets are usually not
subject to accounting, auditing and financial reporting standards and
practices as stringent as those in the U.S. Therefore, their financial
reports may present an incomplete, untimely or misleading picture of a
company, as compared to the financial reports required in the U.S.
o Liquidity Risk. Investments that trade less can be more difficult or
more costly to buy, or to sell, than more liquid or active
investments. This liquidity risk is a factor of the trading volume of
a particular investment, as well as the size and liquidity of the
entire local market. On the whole, foreign exchanges are smaller and
less liquid than U.S. exchanges. This can make buying and selling
certain investments more difficult and costly. Relatively small
transactions in some instances can have a disproportionately large
effect on the price and supply of securities. In certain situations,
it may become virtually impossible to sell an investment in an orderly
fashion at a price that approaches portfolio management's estimate of
its value. For the same reason, it may at times be difficult to value
the Fund's foreign investments.
o Regulatory Risk. There is generally less government regulation of
foreign markets, companies and securities dealers than in the U.S.
o Currency Risk. The Fund invests in securities denominated in foreign
currencies. Changes in exchange rates between foreign currencies and
the U.S. dollar may affect the U.S. dollar value of foreign securities
or the income or gain received on these securities.
o Limited Legal Recourse Risk. Legal remedies for investors may be more
limited than the legal remedies available in the U.S.
o Trading Practice Risk. Brokerage commissions and other fees are
generally higher for foreign investments than for U.S. investments.
The procedures and rules governing foreign transactions and custody
may also involve delays in payment, delivery or recovery of money or
investments.
o Taxes. Foreign withholding and certain other taxes may reduce the
amount of income available to distribute to shareholders of the Fund.
In addition, special U.S. tax considerations may apply to the Fund's
foreign investments.
Emerging Market Risk. All of the risks of investing in foreign securities are
increased in connection with investments in emerging markets securities. In
addition, profound social changes and business practices that depart from norms
in developed countries' economies have hindered the orderly growth of emerging
economies and their markets in the past and have caused instability. High levels
of debt tend to make emerging economies heavily reliant on foreign capital and
vulnerable to capital flight. Countries in emerging markets are also more likely
to experience high levels of inflation, deflation or currency devaluation, which
could also hurt their economies and securities markets. For these and other
reasons, investments in emerging markets are often considered speculative.
High Yield Securities and Bank Loan Risk. The Fund may invest or hold securities
rated lower than Baa by Moody's, BBB by Standard & Poor's, or the equivalent
rating of another NRSRO, which are considered below investment grade, or in
comparable unrated securities. The Fund may continue to hold previously
4
acquired securities that subsequently become rated below investment grade. Below
investment grade securities are commonly known as "high yield" or "junk bonds."
Securities which are in the lower-grade categories generally offer a higher
current yield than is offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, and greater liquidity concerns.
High yield securities and bank loans may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The prices of high yield securities and bank loans have in the
past been found to be less sensitive to interest-rate changes than higher-rated
investments, but more sensitive to adverse economic downturns or individual
corporate developments. A projection of an economic downturn or of a period of
rising interest rates, for example, could cause a decline in high yield security
or bank loan prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities or bank loans. If an issuer of high yield securities or bank
loans defaults, in addition to risking payment of all or a portion of interest
and principal, the Fund may incur additional expenses to seek recovery. In the
case of high yield securities structured as zero-coupon or pay-in-kind
securities, their market prices are affected to a greater extent by interest
rate changes, and therefore tend to be more volatile than securities which pay
interest periodically and in cash.
The markets for high yield securities and bank loans may be less liquid than the
markets for investment grade securities. To the extent that there is no
established retail market for high yield securities or bank loans in which the
Fund may invest, trading in such securities may be relatively inactive. Prices
of high yield securities and bank loans may decline rapidly if a significant
number of holders were to decide to sell their holdings in those securities.
Changes in expectations regarding an individual issuer of high yield securities
or bank loans generally could reduce market liquidity for such securities and
make their sale by the Fund more difficult.
Derivatives Risk. Risks associated with derivatives include the risk that the
derivative is not well correlated with the security, index or currency to which
it relates; the risk that derivatives may result in losses or missed
opportunities; the risk that the Fund will be unable to sell the derivative
because of an illiquid secondary market; the risk that a counterparty is
unwilling or unable to meet its obligation; and the risk that the derivative
transaction could expose the Fund to the effects of leverage, which could
increase the Fund's exposure to the market and magnify potential losses. There
is no guarantee that derivatives, to the extent employed, will have the intended
effect, and their use could cause lower returns or even losses to the Fund. The
use of derivatives by the Fund to hedge risk may reduce the opportunity for gain
by offsetting the positive effect of favorable price movements.
Pricing Risk. At times, market conditions may make it difficult to value some
investments, and the Fund may use certain valuation methodologies for some of
its investments, such as fair value pricing. Given the subjective nature of such
valuation methodologies, it is possible that the value determined for an
investment may be different than the value realized upon such investment's sale.
If the Fund has valued its securities too highly, you may pay too much for fund
shares when you buy into the Fund. If the Fund has underestimated the price of
its securities, you may not receive the full market value when you sell your
fund shares.
Securities Lending Risk. Any loss in the market price of securities loaned by
the Fund that occurs during the term of the loan would be borne by the Fund and
would adversely affect the Fund's performance. Also, there may be delays in
recovery of securities loaned or even a loss of rights in the collateral should
the borrower of the securities fail financially while the loan is outstanding.
However, loans will be made only to borrowers selected by the Fund's delegate
after a review of relevant facts and circumstances, including the
creditworthiness of the borrower.
Liquidity Risk. The risk that the Fund may invest to a greater degree in
instruments that trade in lower volumes and may make investments that may be
less liquid than other investments. Also the risk that the Fund may make
investments that may become less liquid in response to market developments or
adverse investor perceptions. When there is no willing buyer and investments
cannot be readily sold at the desired
5
time or price, the Fund may have to accept a lower price or may not be able to
sell the instrument at all. An inability to sell a portfolio position can
adversely affect the Fund's value or prevent the Fund from being able to take
advantage of other investment opportunities. To meet redemption requests, a Fund
may be forced to sell liquid securities at an unfavorable time and conditions.
To the extent that the Fund invests in non-investment grade fixed income
securities, and emerging country issuers it will be especially subject to the
risk that during certain periods, the liquidity of particular category, will
shrink or disappear suddenly and without warning as a result of adverse
economic, market or political events, or adverse investor perceptions, whether
or not accurate.
Non-Hedging Foreign Currency Trading Risk. The Fund's Adviser may purchase or
sell foreign currencies through the use of forward contracts based on the
Adviser's judgment regarding the direction of the market for a particular
foreign currency or currencies. In pursuing this strategy, the Adviser seeks to
profit from anticipated movements in currency rates by establishing "long"
and/or "short" positions in forward contracts on various foreign currencies.
Foreign exchange rates can be extremely volatile and a variance in the degree of
volatility of the market or in the direction of the market from the Adviser's
expectations may produce significant losses to the Fund.
Other factors that could affect performance include:
o portfolio management could be wrong in the analysis of industries,
companies, economic trends, the relative attractiveness of different
securities or other matters.
o at times, market conditions might make it hard to value some
investments or to get an attractive price for them.
If the value of the Core Plus Income Fund's investments goes down, you may lose
money.
For additional information regarding the above identified risks, see Section 2,
Fund Details: Additional Information about Investments, Investment Techniques
and Risks.
Performance
Performance information is not available because the Core Plus Income Fund is
new. However, the Adviser and its affiliates manage separate accounts and
commingled funds with substantially similar investment objectives and policies
as the Core Plus Income Fund. For more information about these similar accounts,
including performance information, see "Historical Performance Data of the
Adviser."
6
Fees and Expenses
This table describes the fees and expenses you may pay when buying and holding
shares of the Core Plus Income Fund, depending on the share class you select.
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Class Class B Class C Class R Class S Institutional Institutional
A Shares Shares Shares Shares Service Class Class
Shares Shares Shares
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Shareholder fees (paid
directly from your
investment)(1)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Maximum Sales Charge 4.25%(2) None None None None None None
(Load) imposed upon
purchases (as a percentage
of offering price)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Maximum Deferred Sales None(3) 4.00%(4) 1.00%(5) None None None None
Charge (Load) (as a
percentage of offering or
sale price, whichever is
less)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Redemption/Exchange Fee 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
(as a percentage of amount
redeemed or exchanged)(6)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Annual Fund operating
expenses (expenses that
are deducted from fund
assets) (7)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Management Fees 0.33% 0.33% 0.33% 0.33% 0.33% 0.33% 0.33%
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Distribution and/or 0.25% 1.00% 1.00% 0.50% None None None
Service (12b-1) Fees
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Other Expenses(8)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Total annual fund
operating expenses
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Less: Amount of Fee
Limitations/Expense
Reimbursements(9)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
Net annual fund operating 0.85% 1.50% 1.50% 1.10% 0.50% 0.60% 0.50%
expenses(9)
---------------------------- ----------- ----------- ------------- --------- ---------- ---------------- ------------------
(Footnotes included after Example)
7
Example
This Example is intended to help you compare the cost of investing in the Core
Plus Income Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Core Plus Income Fund for the
time periods indicated and then sell all of your shares at the end of those
periods. It assumes a 5% return each year, no change in expenses and the expense
limitations for one year only (if applicable). Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
---------------------------------------------- ----------------- ---------------
Class A Shares*
---------------------------------------------- ----------------- ---------------
Class B Shares
---------------------------------------------- ----------------- ---------------
Class C Shares
---------------------------------------------- ----------------- ---------------
Class R Shares
---------------------------------------------- ----------------- ---------------
Class S Shares
---------------------------------------------- ----------------- ---------------
Institutional Class Shares
---------------------------------------------- ----------------- ---------------
Institutional Service Class Shares
---------------------------------------------- ----------------- ---------------
* Assumes a CDSC does not apply.
You would pay the following expenses on the same investment if you did not sell
your shares**:
1 Year 3 Years
--------------------------------- --------------- ----------------
Class B Shares
--------------------------------- --------------- ----------------
Class C Shares
** Expenses paid on the same investment in Class A (unless your shares are
subject to a CDSC applicable to purchases of $1,000,000 or more), Class R,
Institutional Service Class and Institutional Class shares do not change,
whether or not you sell your shares.
The Core Plus Income Fund does not apply sales charges on reinvested dividends
and other distributions. If these sales charges (loads) were included, your
costs would be higher.
--------------------------------------------------------------------------------
1 If you buy and sell shares through a broker or other financial
intermediary, the intermediary may charge a separate transaction fee.
2 The sales charge on purchases of Class A shares is reduced or eliminated
for purchases of $100,000 or more. For more information, see Section 5,
Investing with Aberdeen Funds: Choosing a Share Class--Reduction and Waiver
of Class A Sales Charges.
3 A contingent deferred sales charge (CDSC) of up to 0.75% will apply to
certain redemptions of Class A shares if purchased without sales charges
and for which a finders fee was paid. See Section 5, Investing with
Aberdeen Funds: Choosing a Share Class--Purchasing Class A Shares without a
Sales Charge.
8
4 A CDSC beginning at 4% and declining to 1% is charged if you sell Class B
shares within six years after purchase. Class B shares convert to Class A
shares after you have held them for seven years. See Section 5, Investing
with Aberdeen Funds: Choosing a Share Class--Class B Shares.
5 A CDSC of 1% is charged if you sell Class C shares within the first year
after purchase. For more information, see Section 5, Investing with
Aberdeen Funds: Choosing a Class Share - Class C Shares.
6 A redemption/exchange fee of 2% applies to shares redeemed or exchanged
within 15 calendar days after the date they were purchased. This fee is
intended to discourage frequent trading of Fund shares that can negatively
affect the Fund's performance. The fee does not apply to shares purchased
through reinvested dividends or capital gains or shares held in certain
omnibus accounts or retirement plans that cannot implement the fee.
7 The "Annual Fund Operating Expenses" are annualized expenses based on
anticipated fees and expenses payable by the Fund for the current fiscal
year.
8 "Other Expenses" include other ordinary operating expenses of the Fund
including administrative services fees which are permitted to be up to
0.25% with respect to Class A, Class R and Institutional Service Class
shares. The full 0.25% in administrative services fees is not reflected in
"Other Expenses" at this time because the Fund does not currently
anticipate selling its shares to intermediaries that charge the full amount
permitted during the current fiscal year. The amount currently reflected in
"Other Expenses" for administrative services fees is 0.10% for Class A
Shares, 0.10% for Class R Shares and 0.10% for Institutional Service Class
Shares. If the maximum amount of administrative services fees were charged,
the "Net annual fund operating expenses" would be higher.
9 The Trust and the Adviser have entered into a written contract limiting
operating expenses to 0.75% for Class A, 1.50% for Class B, 1.50% for Class
C, 1.00% for Class R, 0.50% for Class S, 0.50% for Institutional Service
Class, and 0.50% for Institutional Class at least through February 28,2009. This limit excludes certain Fund expenses, including any taxes,
interest, brokerage fees, short-sale dividend expenses, Acquired Fund Fees
and Expenses and administrative services fees. The Trust is authorized to
reimburse the Adviser for management fees previously limited and/or for
expenses previously paid by the Adviser, provided, however that any
reimbursements must be paid at a date not more than three years after the
fiscal year in which the Adviser limited the fees or reimbursed the
expenses and the reimbursements do not cause the Fund to exceed the expense
limitation in the agreement at the time the expenses are waived.
9
Section 2 Fund Details
Additional Information about Investments, Investment Techniques and Risks
U.S. Government Securities and U.S. Government Agency Securities - U.S.
government securities include Treasury bills, notes and bonds issued or
guaranteed by the U.S. government. Because these securities are backed by the
full faith and credit of the U.S. government, they present little credit risk.
However, the U.S. government does not guarantee the market value of its
securities, and interest rate changes, prepayment rates and other factors may
affect the value of U.S. government securities.
U.S. government agency securities may include obligations issued by:
o the Federal Housing Administration, the Farmers Home Administration
and the Government National Mortgage Association ("GNMA"), including
GNMA pass-through certificates;
o the Federal Home Loan Banks;
o the Federal National Mortgage Association ("FNMA");
o the Federal Home Loan Mortgage Corporation ("FHLMC"); and
o the Federal Farm Credit Banks.
Unlike U.S. government securities, U.S. government agency securities have
different levels of credit support from the government. GNMA pass-through
mortgage certificates are backed by the full faith and credit of the U.S.
government. While FNMA, FHLMC and the Federal Home Loan Banks are chartered by
Acts of Congress, their securities are backed only by the credit of the
respective instrumentality and are not issued or guaranteed by the U.S.
government. Although certain government agency securities are guaranteed, market
price and yield of the securities and net asset value and performance of the
Fund are not guaranteed.
Mortgage-Backed Securities - These fixed-income securities represent the right
to receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans. When interest rates fall, borrowers
may refinance or otherwise repay principal on their loans earlier than
scheduled. When this happens, certain types of mortgage-backed securities will
be paid off more quickly than originally anticipated and the Fund will have to
invest the proceeds in securities with lower yields. This risk is known as
"prepayment risk." When interest rates rise, certain types of mortgage-backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as "extension risk."
Because of prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other fixed-income securities.
Small movements in interest rates (both increases and decreases) may quickly and
significantly reduce the value of certain mortgage-backed securities.
The Fund generally will invest in fixed or floating rate mortgage-backed
securities which include, but are not limited to, U.S. Government agency
securities issued by GNMA, FHLMC or FNMA and non-agency issued securities. The
Fund may purchase securities on a when issued, to be announced, delayed
delivery, delayed settlement, or forward commitment basis. The Fund may also
utilize grantor trusts and senior classes of real estate investment conduits or
other legal structures, including collateralized mortgage obligations ("CMO's"),
as well as Interest Only ("IO") or Principal Only ("PO") instruments in
combination with each other or with MBS pass-throughs to synthetically create
pass-through equivalents. MBS pass-through roll proceeds may be re-invested in
short duration instruments with an effective duration of 1 year or less
including a short duration mutual fund or a pooled fund.
Asset-Backed Securities - Like traditional fixed-income securities, the value of
asset-backed securities typically increases when interest rates fall and
decreases when interest rates rise. Certain asset-backed securities may also be
subject to the risk of prepayment. In a period of declining interest rates,
borrowers may pay what they owe on the underlying assets more quickly than
anticipated. Prepayment reduces the yield to maturity and the average life of
the asset-backed securities. In addition, when the Fund reinvests the proceeds
of a prepayment, it may receive a lower interest rate. In a period of rising
interest rates, prepayments may occur at a slower rate than expected. As a
result, the average maturity of the Fund's
10
portfolio may increase. The value of longer term securities generally changes
more in response to changes in interest rates than shorter term securities.
Asset-backed securities present credit risks that are not presented by
mortgage-backed securities. This is because asset-backed securities generally do
not have the benefit of a security interest in collateral that is comparable to
mortgage assets. If the issuer of an asset-backed security defaults on its
payment obligations, there is the possibility that, in some cases, the Fund will
be unable to possess and sell the underlying collateral and that the Fund's
recoveries on repossessed collateral may not be available to support payments on
the securities. In the event of a default, the Fund may suffer a loss if it
cannot sell collateral quickly and receive the amount it is owed.
High-Yield Bonds, Bank Loans and Other Lower Rated Securities - Investment in
high-yield bonds, bank loans and other lower rated securities involves
substantial risk of loss. These securities are considered to be speculative with
respect to the issuer's ability to pay interest and principal when due and are
susceptible to default or decline in market value due to adverse economic and
business developments. The market values of high-yield securities and bank loans
tend to be very volatile, and these securities are less liquid than
investment-grade debt securities. Therefore, funds that invest in high-yield
bonds and bank loans are subject to the following risks:
o increased price sensitivity to changing interest rates and to adverse
economic and business developments;
o greater risk of loss due to default or declining credit quality;
o greater likelihood that adverse economic or company specific events
will make the issuer unable to make interest and/or principal payments
when due; and
o negative market sentiments toward high-yield securities may depress
their price and liquidity. If this occurs, it may become difficult to
price or dispose of a particular security held by the Fund.
Municipal Securities - The Fund may invest in securities and instruments issued
by state and local government issuers. Municipal Securities in which the Fund
may invest consist of bonds, notes, commercial paper and other instruments
(including participation interests in such securities) issued by or on behalf of
the states, territories and possessions of the United States (including the
District of Columbia) and their political subdivisions, agencies or
instrumentalities.
Municipal Securities include both "general" and "revenue" bonds and may be
issued to obtain funds for various purposes. General obligations are secured by
the issuer's pledge of its full faith, credit and taxing power. Revenue
obligations are payable only from the revenues derived from a particular
facility or class of facilities. Municipal Securities are often issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Municipal Securities
include private activity bonds, pre-refunded municipal securities and auction
rate securities.
Repurchase Agreements - When entering into a repurchase agreement, the Fund
essentially makes a short-term loan to a qualified bank or broker-dealer. The
Fund buys securities that the seller has agreed to buy back at a specified time
and at a set price that includes interest. There is a risk that the seller will
be unable to buy back the securities at the time required and the Fund could
experience delays in recovering amounts owed to it.
Derivatives - The Fund may invest in derivatives. A derivative is a contract
with its value based on the performance of an underlying financial asset, index
or other measure. For example, an option is a derivative because its value
changes in relation to the performance of an underlying stock. The value of an
option on a futures contract varies with the value of the underlying futures
contract, which in turn varies with the value of the underlying commodity or
security. Derivatives present the risk of disproportionately increased losses
and/or reduced opportunities for gains when the financial asset to which the
derivative is linked changes in unexpected ways. Some risks of investing in
derivatives include:
o the other party to the derivatives contract may fail to fulfill its
obligations;
o their use may reduce liquidity and make the Fund harder to value,
especially in declining markets;
o the Fund may suffer disproportionately heavy losses relative to the
amount invested; and
11
o changes in the value of derivatives may not match or fully offset
changes in the value of the hedged portfolio securities, thereby
failing to achieve the original purpose for using the derivatives.
Derivative instruments are permitted for hedging and managing risk exposures.
Permitted derivative instruments include, but are not limited to, fixed income
futures, swaps, currency forwards, and credit derivatives. Derivative
instruments may be used to adjust the interest rate, yield curve, currency,
volatility, credit or spread risk exposure of the Fund, or for other purposes
deemed necessary by the Adviser in good faith to advance the purposes of the
Fund. Credit derivatives may be used to adjust the Fund's exposure to a market
sector and/or to sell/buy protection on the credit risk of individual issuers or
a basket of individual issuers, although notional exposure to these instruments
will be limited to 15% of the net assets of the Fund. The Fund may use certain
derivative instruments as a substitute for purchasing or selling securities or
for non-hedging purposes to seek to enhance potential gains.
Zero Coupon Bonds - These securities pay no interest during the life of the
security and are issued by a wide variety of governmental issuers. They often
are sold at a deep discount. Zero coupon bonds may be subject to greater price
changes as a result of changing interest rates than bonds that make regular
interest payments; their value tends to grow more during periods of falling
interest rates and, conversely, tends to fall more during periods of rising
interest rates. Although not traded on a national securities exchange, zero
coupon bonds are widely traded by brokers and dealers, and are considered
liquid. Holders of zero coupon bonds are required by federal income tax laws to
pay taxes on the interest, even though such payments are not actually being
made. To avoid federal income tax liability, the Fund may have to make
distributions to shareholders and may have to sell some assets at inappropriate
times in order to generate cash for the distributions.
Floating- and Variable-Rate Securities - These securities do not have fixed
interest rates. Instead, the rates change over time. Floating-rate securities
have interest rates that vary with changes to a specific measure, such as the
Treasury bill rate. Variable-rate securities have interest rates that change at
preset times based on the specific measure. Some floating-and variable-rate
securities may be callable by the issuer, meaning that they can be paid off
before their maturity date and the proceeds may be required to be invested in
lower yielding securities that reduce the Fund's income.
Like other fixed-income securities, floating and variable rate securities are
subject to interest rate risk. The Fund will only purchase a floating- or
variable-rate security of the same quality as the debt securities it would
otherwise purchase.
Securities Lending - The Fund may lend securities, which involves the risk that
the borrower may fail to return the securities in a timely manner or at all.
Consequently, the Fund may lose money and there could be a delay in recovering
the loaned securities. The Fund could also lose money if it does not recover the
loaned securities and/or the value of the collateral falls, including the value
of investments made with cash collateral. Under certain circumstances, these
events could trigger adverse tax consequences to the Fund.
Temporary Investments - The Fund generally will be fully invested in accordance
with its objective and strategies. However, pending investment of cash balances,
or if the Fund's management believes that business, economic, political or
financial conditions warrant, the Fund may invest without limit in cash or money
market cash equivalents, including:
o U.S. or foreign government securities or securities of their agencies
or instrumentalities;
o certificates of deposit, bankers' acceptances and interest-bearing
savings deposits of commercial banks;
o prime quality commercial paper;
o bonds, denbentures, and short and intermediate term notes;
o repurchase agreements covering any of the securities in which the Fund
may invest directly; and
o shares of other investment companies that invest in securities in
which the Fund may invest, to the extent permitted by applicable law.
12
The use of temporary investments prevents the Fund from fully pursuing its
investment objective, and the Fund may miss potential market upswings.
The Statement of Additional Information ("SAI") contains more information on the
Fund's principal investments and strategies and can be requested using the
addresses and telephone numbers on the back of this prospectus.
Other Information
Commodity Pool Operator Exemption
The Fund is operated by a person that has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act ("CEA"), and, therefore, such person is not subject to registration or
regulation as a pool operator under the CEA.
Portfolio Holdings Disclosure
The Fund posts onto the Trust's internet site, www.aberdeeninvestments.com,
substantially all of its securities holdings as of the end of each month. Such
portfolio holdings are available no earlier than 15 calendar days after the end
of the previous month. A description of the Fund's policies and procedures
regarding the release of portfolio holdings information is available in the
Fund's SAI.
13
Section 3 Fund Management
Investment Adviser & Subadviser
Aberdeen Asset Management Inc. ("AAMI" or the "Adviser"), a Delaware corporation
formed in 1993, serves as the investment adviser to the Core Plus Income Fund.
The Adviser's principal place of business is located at 1735 Market Street, 37th
Floor, Philadelphia, Pennsylvania19103. As of June 30, 2008, the Adviser had
approximately $40.8 billion in assets under management. The Adviser manages and
supervises the investment of the Fund's assets on a discretionary basis.
Aberdeen Asset Management Investment Services Limited ("AAMISL"), a United
Kingdom corporation, serves as the Subadviser to the Core Plus Income Fund.
AAMISL's principal place of business is located at One Bow Churchyard, London,
England, EC4M9HH. As of June 30, 2008, AAMISL had approximately $2 billion in
assets under management. The Adviser and Subadviser are responsible for the
day-to-day management of the Fund's investments.
The Adviser and Subadviser are each wholly owned subsidiaries of Aberdeen Asset
Management PLC ("Aberdeen PLC"), which is the parent company of an asset
management group managing approximately $226.2 billion in assets as of June 30,2008 for a range of pension funds, financial institutions, investment trusts,
unit trusts, offshore funds, charities and private clients, in addition to U.S.
registered investment companies. Aberdeen PLC, its affiliates and subsidiaries
are referred to collectively herein as "Aberdeen." Aberdeen PLC was formed in
1983 and was first listed on the London Stock Exchange in 1991.
A discussion regarding the basis for the Board of Trustees' approval of the
investment advisory agreement for the Fund will be available in the Fund's first
annual or semi-annual report to shareholders.
Management Fees
The Core Plus Income Fund pays the Adviser a management fee based on the Fund's
average daily net assets. The Adviser pays the Subadviser from the management
fee it receives.
The total annual advisory fee that is paid to the Adviser (as a percentage of
average daily net assets) is as follows:
Management Fee
Fund Assets
-------------------------------------------- --------------------
On assets up to $500 0.325%
million
-------------------------------------------- --------------------
On assets of $500 million up to $1 0.305%
billion
-------------------------------------------- --------------------
On assets of $1 billion up to $5 0.285%
billion
-------------------------------------------- --------------------
On assets of $5 billion or 0.255%
more
Portfolio Management
The Fund is managed by a team of investment professionals. Portfolio decisions
are made jointly by the Head of U.S. Fixed Income Investment along with the
Senior Portfolio Managers. AAMI personnel handle day-to-day operations of the
U.S. fixed income portion of the Fund and AAMISL personnel are responsible for
day-to-day management of foreign securities, foreign currencies and related
investments. The SAI provides additional information about each portfolio
manager's compensation, other accounts managed by the portfolio manager, and the
portfolio manager's ownership of securities in the Fund, if any. The following
portfolio managers are jointly and primarily responsible for the day-to-day
management of the Fund:
14
Keith Bachman, Senior Portfolio Manager (AAMI)
Mr. Bachman is a senior portfolio manager for U.S. Fixed Income. Mr. Bachman
joined the Adviser in 2007 with 17 years of experience as director of credit
research at Stone Tower Capital, high yield analyst/portfolio manager at
Deutsche Asset Management, high yield analyst/director of distressed investments
at Oppenheimer Funds, high yield analyst at Merrill Lynch and bond analyst and
fund accountant at T. Rowe Price. He has a B.A. from the University of Maryland
Baltimore County and an M.B.A. from Columbia Business School.
Warren Davis III, Senior Portfolio Manager (AAMI)
Mr. Davis is a senior portfolio manager for U.S. Fixed Income, specializing in
mortgage- and asset-backed fixed income investments for the Adviser since
December 2005. Prior to joining the Adviser, Mr. Davis served as a Managing
Director of Deutsche Asset Management, which he joined in 1995 after 9 years of
experience as a trader, analyst and developer of analytical and risk management
systems for Paine Webber and Merrill Lynch. Mr. Davis has a B.S. from
Pennsylvania State University and an M.B.A. from Drexel University.
Christopher Gagnier, Head of U.S. Fixed Income (AAMI)
Mr. Gagnier serves as Head of U.S. Fixed Income Investment and joined the
Adviser in 2005 when the Adviser acquired a portion of the fixed income business
of Deutsche Asset Management. He has oversight of the U.S. fixed income
investment team and process. Mr. Gagnier has headed the Core Plus Strategy since
1999 (as an employee at Deutsche Asset Management) and is senior portfolio
manager for corporate and high yield securities for the Adviser. Mr. Gagnier is
also primarily responsible for strategy allocations and portfolio management for
the Fund. Prior to joining the Adviser, Mr. Gagnier served as a Managing
Director of Deutsche Asset Management, which he joined in 1997 after 17 years of
experience in fixed income investments at Paine Webber and Continental Bank. Mr.
Gagnier has a B.S. from Wharton School of Business and an M.B.A. from University
of Chicago.
Neil Moriarty, Senior Portfolio Manager (AAMI)
Mr. Moriarty is a senior portfolio manager focusing on the mortgage and
government sectors for U.S. Fixed Income. Mr. Moriarty joined the Adviser in
December 2005 after 16 years of experience in fixed income trading and research
at several Wall Street firms including Deutsche Asset Management, PaineWebber
and Chase Securities. Mr. Moriarty also acted as a fixed income portfolio
manager at Swarthmore/Cypress Capital Management for two years. Mr. Moriarty has
a B.A. from the University of Massachusetts, Amherst.
Daniel Taylor, CFA, Senior Portfolio Manager (AAMI)
Mr. Taylor has served as a senior portfolio manager for U.S. Fixed Income,
specializing in asset-backed and commercial mortgage fixed income investments
for the Adviser since 2005. Prior to joining the Adviser, Mr. Taylor served as a
Managing Director of Deutsche Asset Management, which he joined in 1998 after 6
years of experience as a fixed income portfolio manager and senior credit
analyst for CoreStates Investment Advisors. Mr. Taylor has a B.S. from Villanova
University.
Timothy Vile, CFA, Senior Portfolio Manager (AAMI)
Mr. Vile has served as a senior portfolio manager for the Core Fixed Income and
Global Aggregate Fixed Income products for the Adviser since December 2005. Mr.
Vile was seconded to the London office from January 1999 to June 2002 to design
and develop the firm's European credit and global aggregate capabilities. Prior
to joining the Adviser, Mr. Vile served as a Managing Director of Deutsche
15
Asset Management, which he joined in 1991 as a member of the firm's core fixed
income team. Prior to Deutsche Asset Management, Mr. Vile had 6 years of
experience that included serving as a portfolio manager for fixed income
portfolios at Equitable Capital Management. Mr. Vile has a B.S. from Susquehanna
University.
Brett Diment, Head of Emerging Market Debt (AAMISL)
Brett Diment is the head of emerging markets on the fixed income team. Mr.
Diment joined AAMISL via the acquisition of Deutsche Asset Management's London
and Philadelphia fixed income businesses in 2005. Mr. Diment held the same role
at Deutsche Asset Management since 1999. Mr. Diment joined Deutsche Asset
Management in 1991 as a graduate and started researching emerging markets in
1995. Mr. Diment graduated with a B.Sc. from the London School of Economics.
16
Section 4 Historical Performance Data of the Adviser
The following table gives the historical performance of actual, fee-paying
separate accounts, and commingled funds referred to as a "Composite," managed by
the Adviser or its affiliates that have investment objectives, policies,
strategies and risks substantially similar to those of the Core Plus Income
Fund. The Composite does not reflect all of the firm's assets under management.
A complete list and description of the firm's composites are available upon
request. The data illustrates the past performance of the Adviser in managing
substantially similar accounts. The data does not represent the performance of
the Core Plus Income Fund. Performance is historical and does not represent the
future performance of the Core Plus Income Fund or of the Adviser.
The manner in which the performance was calculated for the Composite differs
from that of registered mutual funds such as the Core Plus Income Fund. This
composite performance data was calculated in accordance with the standards of
the Chartered Financial Analyst Institute (CFAI(R)).(1) All returns presented
were calculated on a total return basis and include all dividends and interest,
accrued income, and realized and unrealized gains and losses. Except as
otherwise noted, all returns reflect the payment of investment management fees,
brokerage commissions, and execution costs paid by the accounts included in the
composite, without taking into account federal or state income taxes. Custodial
fees, if any, were not included in the calculations. Securities are valued as of
trade-date. Accounts in the Composite were under management for the entire
reporting period. There is no minimum asset size below which portfolios were
excluded from the Composite. The currency used to express performance in the
Composite is U.S. dollars. Performance results are presented both net of
investment management fees and gross of investment management fees. Because of
variation in fee levels, the "net of fees" Composite returns may not be
reflective of performance in any one particular account. Therefore, the
performance information shown below is not necessarily representative of the
performance information that typically would be shown for a registered mutual
fund.
The accounts that are included in the Composite are not subject to the same type
of expenses to which the Core Plus Income Fund is subject and are not subject to
the diversification requirements, specific tax restrictions, and investment
limitations imposed by the federal securities and tax laws. Consequently, the
performance results for the Composite could have been adversely affected if the
accounts in the Composite were subject to the same federal securities and tax
laws as the Core Plus Income Fund.
The investment results for the Composite presented below are not intended to
predict or suggest the future returns of the Core Plus Income Fund. The Core
Plus Income Fund has no performance record, and the performance data shown below
should not be considered a substitute for the Core Plus Income Fund's own
performance information. Total return performance of the Core Plus Income Fund
will be calculated in accordance with the regulations of the Securities and
Exchange Commission ("SEC"). The SEC standardized average annual total return is
neither time weighted or asset weighted and is determined for specified periods
by computing the annualized percentage change in the value of an initial amount
that is invested in a share class of the Core Plus Income Fund at the maximum
public offering price. Investors should be aware that the differences in the
methodology between the CFAI and the SEC could result in different performance
data for identical time periods.
----------------
(1) CFAI is an international, nonprofit organization of more than 50,000
investment practitioners and educators in over 100 countries. CFAI offers
services in three broad categories: Education through seminars and
publications; Professional Conduct and Ethics; and Standards of Practice
and Advocacy. These CFAI performance presentation standards are intended to
(i) promote full and fair presentations by investment advisers of their
performance results and (ii) ensure uniformity in reporting so that
performance results of the investment advisers are directly comparable. The
Adviser has prepared and presented this report in compliance with the
Global Investment Performance Standards (GIPS(R)). CFAI has not been
involved in the preparation or review of this report.
17
The Core Plus Income Composite Characteristics*
(1/1/96 through 6/30/08)
----------- ----------------------------------------
Rate of Return %
----------- ------------- -------------- ----------------------------- ------------ ------------ --------- -----------
Year Benchmark
Composite Composite (Lehman No. of Accounts
(Net of (Gross of Brothers at end of period
Investment Investment U.S. (accounts Total Firm % of
Management Management Aggregate) throughout Composite Assets Firm Dispersion
Fees) Fees) (1) entire period) Assets ($M) ($M)(2) Assets (3)
----------- ------------- -------------- ----------- ----------------- ------------ ------------ --------- -----------
6 months
ended June30, 2008 (1.23) (1.15) 1.13 21 (20) $5,072 $161,071 3.15% 0.07%
2007 5.06 5.25 6.97 21 (17) 5,181 169,247 3.06 0.20
2006 5.22 5.44 4.33 19 (18) 4,715 134,345 3.51 0.08
2005 3.00 3.22 2.43 16 (16) 4,138 110,422 3.75 0.13
2004 5.37 5.60 4.34 19 (14) 4,092 29,961 13.66 0.16
2003 6.38 6.60 4.10 17 (17) 3,212 27,568 11.65 0.50
2002 9.68 10.07 10.25 20 (14) 3,934 27,240 14.44 0.39
2001 8.59 9.13 8.44 17 (13) 4,161 26,347 15.79 0.35
2000 11.12 11.67 11.63 13 (6) 2,859 23,087 12.38 0.80
1999 0.62 1.13 (0.82) 7 (3) 702 19,951 3.52 n/a
1998 6.99 7.53 8.69 5 (3) 1,599 14,541 11 n/a
1997 9.51 10.05 9.65 <5 201 10,213 1.97 n/a
1996 5.74 6.27 3.63 <5 149 8,749 1.7 n/a
----------- ------------- -------------- ----------- ----------------- ------------ ------------ --------- -----------
1) The Lehman Brothers U.S. Aggregate Index covers the U.S.
dollar-denominated, investment-grade, fixed-rate, taxable bond market of
SEC-registered securities. The index includes bonds from the U.S. Treasury,
U.S. Government-Related, Corporate, mortgage backed securities (agency
fixed-rate and hybrid adjustable rate mortgage pass-throughs), asset backed
securities, and commercial mortgage backed securities sectors. U.S. Agency
Hybrid Adjustable Rate Mortgage (ARM) securities are scheduled to be added
to the U.S. Aggregate Index on April 1, 2007, but are not eligible for the
Global Aggregate Index. The U.S. Aggregate Index is a component of the U.S.
Universal Index in its entirety. The index was created in 1986, with index
history backfilled to January 1, 1976.
2) Aberdeen PLC (the "Firm") is defined as all portfolios managed globally by
subsidiaries of Aberdeen PLC, excluding Property, Private Equity, Private
Client and Lloyds Syndicate portfolios. The Firm is comprised of three
divisions that either were or were part of legacy firms (Aberdeen Asset
Management Inc. and the Fixed Income products of Deutsche Asset Management
UK and Deutsche Asset Management Americas) plus the Aberdeen non-U.S. asset
management divisions. The inception date of the Firm is December 1, 2005.
Composite returns, start date and composite and firm assets reported prior
to December 1, 2005 represent those of the legacy firm which managed the
product at the time. A complete list of the Firm's composites is available
upon request.
3) The dispersion of annual returns is measured by the standard deviation
among asset-weighted portfolio returns represented within the composite for
the full year. Dispersion is not calculated for composites with less than
five accounts for the whole period.
* This composite includes all fee-paying portfolios equal to or over U.S. $10
million, managed on a discretionary basis according to the composite
strategy, which seeks to out perform the Lehman Brothers U.S. Aggregate
Bond Index. Returns include the reinvestment of all income. Returns are
time-weighted total rates of return including cash and cash equivalents,
income and realized and unrealized gains and losses. Returns are shown net
of non-recoverable tax, while recoverable tax is included on a cash basis.
Gross returns are presented before management and custodial fees, but after
all trading expenses. Net returns are calculated after the deduction of a
representative management fee.
18
Section 5 Investing with Aberdeen Funds
A Note About Share Classes
The Core Plus Income Fund offers seven share classes - Class A, Class B, Class
C, Class R, Class S, Institutional Service Class and Institutional Class.
An investment in any share class of the Fund represents an investment in the
same assets of the Fund. However, the fees, sales charges and expenses for each
share class are different. The different share classes simply let you choose the
cost structure that is right for you. The fees and expenses for the Fund are set
forth in the Fund Summary.
Choosing a Share Class
When selecting a share class, you should consider the following:
o which share classes are available to you;
o how long you expect to own your shares;
o how much you intend to invest;
o total costs and expenses associated with a particular share class; and
o whether you qualify for any reduction or waiver of sales charges.
Your financial adviser can help you to decide which share class is best suited
to your needs.
The Aberdeen Funds offer several different share classes each with different
price and cost features. The table below compares Class A, Class B and Class C
shares, which are available to all investors.
Class R, Class S, Institutional Service Class and Institutional Class shares are
available only to certain investors. For eligible investors, Class R, Class S,
Institutional Service Class and Institutional Class shares may be more suitable
than Class A, Class B or Class C shares.
Before you invest, compare the features of each share class, so that you can
choose the class that is right for you. We describe each share class in detail
on the following pages. Your financial adviser can help you with this decision.
When you buy shares, be sure to specify the class of shares. If you do not
choose a share class, your investment will be made in Class A shares. If you are
not eligible for the class you have selected, your investment may be refused.
However, we recommend that you discuss your investment with a financial adviser
before you make a purchase to be sure that the Fund and the share class are
appropriate for you. In addition, consider the Fund's investment objectives,
principal investment strategies and principal risks to determine which fund and
share class is most appropriate for your situation.
19
Comparing Class A, Class B and Class C Shares
Classes and Charges Points to Consider
------------------------------------------------------- ---------------------------------------------------------
Class A Shares
Front-end sales charge up to 4.25% for Class A shares A front-end sales charge means that a portion of your
initial investment goes toward the sales charge and is
not invested.
Contingent deferred sales charge (CDSC)(1) Reduction and waivers of sales charges may be available.
Total annual operating expenses are lower than Class B
Annual service and/or 12b-1 fee of 0.25% and Class C expenses which means higher dividends
and/or NAV per share.
Administrative services fee of up to 0.25%
No conversion feature.
No maximum investment amount.
------------------------------------------------------- ---------------------------------------------------------
Class B Shares
CDSC up to 4.00% No front-end sales charge means your full investment
immediately goes toward buying shares.
No reduction of CDSC, but waivers may be available.
The CDSC declines to 1% in most years to zero after six
years.
Total annual operating expenses are higher than Class A
Annual service and/or 12b-1 fee of 1.00% expenses which means lower dividends and/or NAV per
share.
No administrative services fee
Automatic conversion to Class A shares after seven
years, which means lower annual expenses in the future.
Maximum investment amount of $100,000. Larger
investments may be rejected.
------------------------------------------------------- ---------------------------------------------------------
Class C Shares
CDSC of 1.00% No front-end sales charge means your full investment
immediately goes toward buying shares.
No reduction of CDSC, but waivers may be available.
The CDSC declines to zero after one year.
Annual service and/or 12b-1 fee of 1.00%
No administrative services fee Total annual operating expenses are higher than Class A
expenses which means lower dividends and/or NAV per
share.
20
No conversion feature.
Maximum investment amount of $1,000,000(2). Larger
investments may be rejected.
(1) Unless you are otherwise eligible to purchase Class A shares without a
sales charge, a CDSC of up to 0.75% will be charged on Class A shares
redeemed within 18 months of purchase if you paid no sales charge on the
original purchase and a finders fee was paid.
(2) This limit was calculated based on a one-year holding period.
Class A Shares
Class A shares may be most appropriate for investors who want lower fund
expenses or those who qualify for reduced front-end sales charges or a waiver of
sales charges.
Front-End Sales Charges for Class A Shares
----------------------------- ---------------------------------------------------------------
Sales Charge as a Percentage of
----------------------------- ---------------------------------------------------------------
Offering Price* Dealer Commission as
Net Amount Invested a Percentage of
Amount of Purchase (Approximately) Offering Price
----------------------------- ----------------- ---------------------- ----------------------
Less than $100,000 4.25% 4.44% 3.75%
----------------------------- ----------------- ---------------------- ----------------------
$100,000 up to $250,000 3.50% 3.63% 3.00%
----------------------------- ----------------- ---------------------- ----------------------
$250,000 up to $500,000 2.50% 2.56% 2.00%
----------------------------- ----------------- ---------------------- ----------------------
$500,000 up to $1 million 2.00% 2.04% 1.75%
----------------------------- ----------------- ---------------------- ----------------------
$1 million or more None None None**
----------------------------- ----------------- ---------------------- ----------------------
* The offering price of Class A Shares of the Fund is the next determined NAV
per share plus the initial sales charge listed in the table above which is
paid to the Fund's distributor at the time of purchase of shares.
** Dealer may be eligible for a finders fee as described in "Purchasing ClassA Shares without a Sales Charge" below.
Reduction and Waiver of Class A Sales Charges
If you qualify for a reduction or waiver of Class A sales charges, you must
notify Customer Service, your financial adviser or other intermediary at the
time of purchase and must also provide any required evidence showing that you
qualify. The value of cumulative quantity discount eligible shares equals the
cost or current value of those shares, whichever is higher. The current value of
shares is determined by multiplying the number of shares by their current NAV.
In order to obtain a sales charge reduction, you may need to provide your
financial intermediary or the Fund's transfer agent, at the time of purchase,
with information regarding shares of the Fund held in other accounts which may
be eligible for aggregation. Such information may include account statements or
other records regarding shares of the Fund held in (i) all accounts (e.g.,
retirement accounts) with the Fund and your financial intermediary; (ii)
accounts with other financial intermediaries; and (iii) accounts in the name of
immediate family household members (spouse and children under 21). You should
retain any records necessary to substantiate historical costs because the Fund,
its transfer agent, and financial intermediaries may not maintain this
information. Otherwise, you may not receive the reduction or waiver. See
"Reduction of Class A Sales Charges" and "Waiver of Class A Sales Charges" below
and "Reduction of Class A Sales Charges" in the SAI for more information. This
information regarding breakpoints is available free of charge at
www.aberdeeninvestments.com.
21
Reduction of Class A Sales Charges
Investors may be able to reduce or eliminate front-end sales charges on Class A
shares through one or more of these methods:
o A Larger Investment. The sales charge decreases as the amount of your
investment increases.
o Rights of Accumulation. To qualify for the reduced Class A sales
charge that would apply to a larger purchase than you are currently
making (as shown in the table above), you and other family members
living at the same address can add the value of any Class A, Class B,
Class C or Class D shares (not all Aberdeen Funds offer Class B or
Class D shares) in all Aberdeen Funds that you currently own or are
currently purchasing to the value of your Class A purchase.
o Share Repurchase Privilege. If you redeem Fund shares from your
account, you qualify for a one-time reinvestment privilege. You may
reinvest some or all of the proceeds in shares of the same class
without paying an additional sales charge within 30 days of redeeming
shares on which you previously paid a sales charge. (Reinvestment does
not affect the amount of any capital gains tax due. However, if you
realize a loss on your redemption and then reinvest all or some of the
proceeds, all or a portion of that loss may not be tax deductible.)
o Letter of Intent Discount. If you declare in writing that you or a
group of family members living at the same address intend to purchase
at least $50,000 in Class A shares during a 13-month period, your
sales charge is based on the total amount you intend to invest. You
are permitted to backdate the letter in order to include purchases
made during the previous 90 days. You can also combine your purchase
of Class A, Class B and Class C shares with your purchases of Class D
shares to fulfill your Letter of Intent. You are not legally required
to complete the purchases indicated in your Letter of Intent. However,
if you do not fulfill your Letter of Intent, additional sales charges
may be due and shares in your account would be liquidated to cover
those sales charges.
Waiver of Class A Sales Charges
Front-end sales charges on Class A shares are waived for the following
purchasers:
o investors purchasing shares through an unaffiliated brokerage firm
that has an agreement with the Fund or the Fund's distributor to waive
sales charges;
o directors, officers, full-time employees, sales representatives and
their employees and investment advisory clients of a broker-dealer
that has a dealer/selling agreement with the Fund's distributor;
o any investor who pays for shares with proceeds from sales of Class D
shares of an Aberdeen Fund (Class D shares are offered by other
Aberdeen Funds, but not this Fund) and Class A Shares are purchased
instead;
o retirement plans;
o investment advisory clients of the Adviser's affiliates; and
o directors, officers, full-time employees (and their spouses, children
or immediate relatives) of companies that may be affiliated with the
Adviser from time to time.
The SAI lists other investors eligible for sales charge waivers.
Purchasing Class A Shares Without a Sales Charge
Purchases of $1 million or more of Class A shares have no front-end sales
charge. You can purchase $1 million or more in Class A shares in one or more of
the funds offered by the Trust (including the Fund in this prospectus) at one
time. Or, you can utilize the Rights of Accumulation Discount and Letter of
Intent Discount as described above. However, a contingent deferred sales charge
(CDSC) may apply when you redeem your shares in certain circumstances (see
Contingent Deferred Sales Charges on Certain Redemptions of Class A Shares).
A CDSC of up to 0.75% applies to purchases of $1 million or more of Class A
Shares if a "finders fee" is paid by the Fund's distributor or Adviser to your
financial adviser or intermediary and you redeem your shares within 18 months of
purchase. The CDSC covers the finders fee paid to the selling dealer.
22
The CDSC does not apply:
o if you are eligible to purchase Class A shares without a sales charge
for another reason; or
o no finders fee was paid; or
o to shares acquired through reinvestment of dividends or capital gains
distributions.
Contingent Deferred Sales Charge on Certain Redemptions of Class A Shares
24
Amount of Purchase Amount of CDSC
$1 Million up to $4 Million 0.75%
$4 Million up to $25 Million 0.50%
$25 Million or More 0.25%
A shareholder may be subject to a CDSC if he or she redeems Class A shares
within 18 months of the date of purchase. Any CDSC is based on the original
purchase price or the current market value of the shares being redeemed,
whichever is less. If you redeem a portion of your shares, shares that are not
subject to a CDSC are redeemed first, followed by shares that you have owned the
longest. This minimizes the CDSC you pay. Please see "Waiver of ContingentDeferred Sales Charges-Class A, Class B and Class C Shares" for a list of
situations where a CDSC is not charged.
The CDSC for Class A shares of the Fund is described above; however, the CDSC
for Class A shares of other Aberdeen Funds may be different and are described in
their respective prospectuses. If you purchase more than one Aberdeen Fund and
subsequently redeem those shares, the amount of the CDSC is based on the
specific combination of Aberdeen Funds purchased and is proportional to the
amount you redeem from each Aberdeen Fund.
Waiver of Contingent Deferred Sales Charges - Class A, Class B and Class CShares
The CDSC is waived on:
o the redemption of Class A, Class B or Class C shares purchased through
reinvested dividends or distributions;
o Class B shares which are qualifying redemptions of Class B shares
under the Automatic Withdrawal Program;
o Class A, Class B or Class C shares sold following the death or
disability of a shareholder, provided the redemption occurs within one
year of the shareholder's death or disability;
o mandatory withdrawals of Class A, Class B or Class C shares from
traditional IRA accounts after age 70 1/2and for other required
distributions from retirement accounts; and
o redemptions of Class C shares from retirement plans offered by
retirement plan administrators that maintain an agreement with the
Fund, the Fund's Adviser or the Fund's distributor.
If a CDSC is charged when you redeem your Class B or Class C shares, and you
then reinvest the proceeds in Class B or Class C shares within 30 days, shares
equal to the amount of the CDSC are re-deposited into your new account.
If you qualify for a waiver of a CDSC, you must notify Customer Service, your
financial adviser or intermediary at the time of purchase and must also provide
any required evidence showing that you qualify. For more complete information,
see the SAI.
Class B Shares
Class B shares may be appropriate if you do not want to pay a front-end sales
charge, are investing less than $100,000 and anticipate holding your shares for
longer than six years.
If you redeem Class B shares within six years of purchase you must pay a CDSC
(if you are not entitled to a waiver). The amount of the CDSC decreases as shown
in the following table:
Sale Within Sales Charge
------------------------- ----------------
23
1 Year 4%
2 Years 3%
3 Years 3%
4 Years 2%
5 Years 2%
6 Years 1%
7 Years or More 0%
For Class B shares, the CDSC is based on the original purchase price or the
current market value of the shares being redeemed, whichever is less. If you
redeem a portion of your shares, shares that are not subject to a CDSC are
redeemed first, followed by shares that you have owned the longest. This
minimizes the CDSC that you pay. See "Waiver of Contingent Deferred SalesCharges-Class A, Class B and Class C Shares" for a list of situations where a
CDSC is not charged.
The Fund's distributor or Adviser may compensate broker-dealers and financial
intermediaries for sales of Class B shares from its own resources at the rate of
4.00% of such sales.
Conversion of Class B Shares
After you hold your Class B shares for seven years, they automatically convert
at no charge into Class A shares, which have lower Fund expenses. Shares
purchased through the reinvestment of dividends and other distributions are also
converted. Because the share price of Class A shares is usually higher than that
of Class B shares, you may receive fewer Class A shares than the number of Class
B shares converted; however, the total dollar value will be the same.
Class C Shares
Class C shares may be appropriate if you are uncertain how long you will hold
your shares. If you redeem your Class C shares within the first year after you
purchase them you must pay a CDSC of 1%.
For Class C shares, the CDSC is based on the original purchase price or the
current market value of the shares being redeemed, whichever is less. If you
redeem a portion of your shares, shares that are not subject to a CDSC are
redeemed first, followed by shares that you have owned the longest. This
minimizes the CDSC that you pay. See "Waiver of Contingent Deferred SalesCharges-Class A, Class B and Class C Shares" for a list of situations where a
CDSC is not charged.
The Fund's distributor or Adviser may compensate broker-dealers and financial
intermediaries for sales of Class C shares from its own resources at the rate of
1.00% of sales of Class C shares.
Class S Shares
Class S shares are only available to investors who received the Class S shares
in connection with a reorganization from a previous fund.
Share Classes Available Only to Institutional Accounts
The Core Plus Income Fund offers Institutional Service Class, Institutional
Class and Class R shares. Only certain types of entities and selected
individuals are eligible to purchase shares of these classes.
If an institution or retirement plan has hired an intermediary and is eligible
to invest in more than one class of shares, the intermediary can help determine
which share class is appropriate for that retirement plan or other institutional
account. Plan fiduciaries should consider their obligations under ERISA when
determining which class is appropriate for the retirement plan.
24
Other fiduciaries should also consider their obligations in determining the
appropriate share class for a customer including:
o the level of distribution and administrative services the plan
requires;
o the total expenses of the share class; and
o the appropriate level and type of fee to compensate the intermediary.
An intermediary may receive different compensation depending on which
class is chosen.
Class R Shares
Class R shares are available to retirement plans including:
o 401(k) plans;
o 457 plans;
o 403(b) plans;
o profit sharing and money purchase pension plans;
o defined benefit plans;
o non-qualified deferred compensation plans; and
o other retirement accounts in which the retirement plan or the
retirement plan's financial services firm has an agreement with the
Fund, the Fund's Adviser or the Fund's distributor to use Class R
shares.
The above-referenced plans are generally small and mid-sized retirement plans
that have at least $1 million in assets and shares held through omnibus accounts
that are represented by an intermediary such as a broker, third-party
administrator, registered investment adviser or other plan service provider.
Class R shares are not available to:
o institutional non-retirement accounts;
o traditional and Roth IRAs;
o Coverdell Education Savings Accounts;
o SEPs and SAR-SEPs;
o SIMPLE IRAs;
o one-person Keogh plans;
o individual 403(b) plans; or
o 529 Plan accounts.
Institutional Service Class Shares
Institutional Service Class shares are available for purchase only by the
following:
o retirement plans advised by financial professionals who are not
associated with brokers or dealers primarily engaged in the retail
securities business and rollover individual retirement accounts from
such plans;
o retirement plans for which third-party administrators provide
recordkeeping services and are compensated by the Fund for these
services;
o a bank, trust company or similar financial institution investing for
its own account or for trust accounts for which it has authority to
make investment decisions as long as the accounts are part of a
program that collects an administrative services fee;
o registered investment advisers investing on behalf of institutions and
high net-worth individuals where the adviser is compensated by the
Fund for providing services; or
o life insurance separate accounts using the investment to fund benefits
for variable annuity contracts issued to governmental entities as an
investment option for 457 or 401(k) plans.
Institutional Class Shares
Institutional Class shares are available for purchase only by the following:
o funds of funds offered by affiliates of the Fund;
25
o retirement plans for which no third-party administrator receives
compensation from the Fund;
o institutional advisory accounts of the Adviser's affiliates, those
accounts which have client relationships with an affiliate of the
Adviser, its affiliates and their corporate sponsors, subsidiaries;
and related retirement plans;
o rollover individual retirement accounts from such institutional
advisory accounts;
o a bank, trust company or similar financial institution investing for
its own account or for trust accounts for which it has authority to
make investment decisions as long as the accounts are not part of a
program that requires payment of Rule 12b-1 or administrative service
fees to the financial institution;
o registered investment advisers investing on behalf of institutions and
high net-worth individuals where the advisers derive compensation for
advisory services exclusively from clients; or
o high net-worth individuals who invest directly without using the
services of a broker, investment adviser or other financial
intermediary.
Sales Charges and Fees
Sales Charges
Sales charges, if any, are paid to the Fund's distributor. These fees are either
kept or paid to your financial adviser or other intermediary.
Distribution and Service Fees
The Fund has adopted a Distribution Plan under Rule 12b-1 of the Investment
Company Act of 1940, which permits the Class A, Class B, Class C and Class R
shares of the Fund to compensate the Fund's distributor or any other entity
approved by the Board of the Trust (collectively, "payees") for expenses
associated with distribution-related and/or shareholder services provided by
such entities. These fees are paid to the Fund's distributor and are either kept
or paid to your financial adviser or other intermediary for distribution and
shareholder services. Class S, Institutional Class and Institutional Service
Class shares pay no 12b-1 fee.
These 12b-1 fees are in addition to applicable sales charges and are paid from
the Fund's assets on an ongoing basis. (The fees are accrued daily and paid
monthly.) As a result, 12b-1 fees increase the cost of your investment and over
time may cost more than other types of sales charges. Under the Distribution
Plan, Class A, Class B, Class C and Class R shares pay the Fund's distributor
annual amounts not exceeding the following:
Class As a % of Daily Net Assets
------------------- -------------------------------------------------
Class A shares 0.25% (distribution or service fee)
Class B shares 1.00% (0.25% service fee)
Class C shares 1.00% (0.25% service fee)
Class R shares 0.50% (0.25% of which may be either a
distribution or service fee)
Administrative Services Fees
Class A, Class R and Institutional Service Class shares of the Fund are subject
to fees pursuant to an Administrative Services Plan adopted by the Board of
Trustees of the Trust. (These fees are in addition to Rule 12b-1 fees for Class
A and Class R shares as described above.) These fees are paid by the Fund to
broker-dealers or other financial intermediaries who provide administrative
support services to beneficial shareholders on behalf of the Fund. Under the
Administrative Services Plan, the Fund may pay a broker-dealer or other
intermediary a maximum annual fee of 0.25% for Class A, Class R and
Institutional Service
26
Class shares; however, many intermediaries do not charge the maximum permitted
fee or even a portion thereof.
Because these fees are paid out of the Fund's Class A, Class R and Institutional
Service Class assets on an ongoing basis, these fees will increase the cost of
your investment in such share class over time and may cost you more than paying
other types of fees.
Revenue Sharing
The Adviser and/or its affiliates (collectively, "Aberdeen") may make payments
for marketing, promotional or related services provided by broker-dealers and
other financial intermediaries that sell shares of the Trust or which include
them as investment options for their respective customers.
These payments are often referred to as "revenue sharing payments." The
existence or level of such payments may be based on factors that include,
without limitation, differing levels or types of services provided by the
broker-dealer or other financial intermediary, the expected level of assets or
sales of shares, the placing of some or all of the Fund on a recommended or
preferred list and/or access to an intermediary's personnel and other factors.
Revenue sharing payments are paid from Aberdeen's own legitimate profits and
other of its own resources (not from the Fund) and may be in addition to any
Rule 12b-1 payments that are paid to broker-dealers and other financial
intermediaries. The Trust's Board of Trustees will monitor these revenue sharing
arrangements as well as the payment of advisory fees paid by the Fund to its
respective advisers to ensure that the levels of such advisory fees do not
involve the indirect use of the Fund's assets to pay for marketing, promotional
or related services. Because revenue sharing payments are paid by Aberdeen and
not from the Fund's assets, the amount of any revenue sharing payments is
determined by Aberdeen.
In addition to the revenue sharing payments described above, Aberdeen may offer
other incentives to sell shares of the Fund in the form of sponsorship of
educational or other client seminars relating to current products and issues,
assistance in training or educating an intermediary's personnel and/or
entertainment or meals. These payments may also include, at the direction of a
retirement plan's named fiduciary, amounts to a retirement plan intermediary to
offset certain plan expenses or otherwise for the benefit of plan participants
and beneficiaries.
The recipients of such payments may include:
o the Fund's distributor and other affiliates of the Adviser;
o broker-dealers;
o financial institutions; and
o other financial intermediaries through which investors may purchase
shares of the Fund.
Payments may be based on current or past sales, current or historical assets or
a flat fee for specific services provided. In some circumstances, such payments
may create an incentive for an intermediary or its employees or associated
persons to sell shares of the Fund to you instead of shares of funds offered by
competing fund families.
Contact your financial intermediary for details about revenue sharing payments
it may receive.
Notwithstanding the revenue sharing payments described above, all investment
advisers and subadvisers to the Trust are prohibited from considering a
broker-dealer's sale of any of the Trust's shares in selecting such
broker-dealer for the execution of Fund portfolio transactions, except as may be
specifically permitted by law.
Fund portfolio transactions nevertheless may be effected with broker-dealers who
coincidentally may have assisted customers in the purchase of Fund shares,
although neither such assistance nor the volume of
27
shares sold of the Trust or any affiliated investment company is a qualifying or
disqualifying factor in the investment adviser's selection of such broker-dealer
for portfolio transaction execution.
Contacting Aberdeen Funds
Customer Service Representatives are available 8 a.m. to 9 p.m. Eastern Time,
Monday through Friday at 866-667-9231.
Automated Voice Response Call 866-667-9231, 24 hours a day, seven days a week,
for easy access to mutual fund information. Choose from a menu of options to:
o make transactions;
o hear fund price information; and
o obtain mailing and wiring instructions.
Internet Go to www.aberdeeninvestments.com 24 hours a day, seven days a week,
for easy access to your mutual fund accounts. The website provides instructions
on how to select a password and perform transactions. On the website, you can:
o download Fund prospectuses;
o obtain information on the Aberdeen Funds;
o access your account information; and
o request transactions, including purchases, redemptions and exchanges.
By Regular Mail Aberdeen Funds, P.O. Box 183148, Columbus, Ohio43218-3148.
By Overnight Mail Aberdeen Funds, 3435 Stelzer Road, Columbus, Ohio43219.
By Fax 866-923-4269.
28
Share Price
The net asset value or "NAV" is the value of a single share. A separate NAV is
calculated for each share class of the Fund. The NAV is:
o calculated at the close of regular trading (usually 4 p.m. Eastern
Time) each day the New York Stock Exchange is open.
o generally determined by dividing the total net market value of the
securities and other assets owned by the Fund allocated to a
particular class, less the liabilities allocated to that class, by the
total number of outstanding shares of that class.
The purchase or "offering" price for Fund shares is the NAV (for a particular
class) next determined after the order is received by the Fund's transfer agent
or an authorized intermediary, plus any applicable sales charge.
The Fund does not calculate NAV on days when the New York Stock Exchange is
closed.
o New Year's Day
o Martin Luther King, Jr. Day
o Presidents' Day
o Good Friday
o Memorial Day
o Independence Day
o Labor Day
o Thanksgiving Day
o Christmas Day
o Other days when the New York Stock Exchange is closed.
Foreign securities may trade in their local markets on days the Fund is closed.
As a result, if the Fund holds foreign securities, its NAV may be impacted on
days when investors may not be able to purchase or redeem shares.
Buying Shares
Fund Transactions - Class A, Class B, Class C and Class S Shares
All transaction orders must be received by the Fund's agent in Columbus, Ohio or
an authorized intermediary prior to the calculation of the Fund's NAV to receive
that day's NAV.
How to Buy Shares How to Exchange* or Sell** Shares
-------------------------------------------------------------------------------------------------------------------
* Exchange privileges may be amended or discontinued
Be sure to specify the class of shares you wish to upon 60 days written notice to shareholders.
purchase. The Fund may reject any order to buy shares and ** A medallion signature guarantee may be required.
may suspend the offering of shares at any time. See "Medallion Signature Guarantee" below.
Through an authorized intermediary. The Fund or the Through an authorized intermediary. The Fund or the
Fund's distributor has relationships with certain brokers Fund's distributor has relationships with certain
and other financial intermediaries who are authorized to brokers and other financial intermediaries who are
accept purchase, exchange and redemption orders for the authorized to accept purchase, exchange and redemption
Fund. Your transaction is processed at the NAV next orders for the Fund. Your transaction is processed at
calculated after the Fund's transfer agent or an the NAV next calculated after the Fund's transfer agent
authorized intermediary receives your order in proper form. or an authorized intermediary receives your order in
proper form.
------------------------------------------------------------ ------------------------------------------------------
29
By mail. Complete an application and send with a check By mail or fax. You may request an exchange or
made payable to: Aberdeen Funds. Payment must be made in redemption by mailing or faxing a letter to Aberdeen
U.S. dollars and drawn on a U.S. bank. The Fund does not Funds. The letter must include your account number(s)
accept cash, starter checks, third-party checks, and the name(s) of the Fund(s) you wish to exchange
travelers' checks, credit card checks or money orders. from and to. The letter must be signed by all account
owners. We reserve the right to request original
documents for any faxed requests.
------------------------------------------------------------ ------------------------------------------------------
By telephone. You will have automatic telephone By telephone. You will have automatic telephone
privileges unless you decline this option on your privileges unless you decline this option on your
application. The Fund follows procedures to confirm that application. The Fund follows procedures to confirm
telephone instructions are genuine and will not be liable that telephone instructions are genuine and will not
for any loss, injury, damage or expense that results from be liable for any loss, injury, damage or expense that
executing such instructions. The Fund may revoke results from executing such instructions. The Fund may
telephone privileges at any time, without notice to revoke telephone privileges at any time, without
shareholders. notice to shareholders. For redemptions, shareholders
who own shares in an IRA account should call
866-667-9231.
Additional information for selling shares. A check
made payable to the shareholder(s) of record will be
mailed to the address of record. The Fund may record
telephone instructions to redeem shares, and may
request redemption instructions in writing, signed by
all shareholders on the account.
------------------------------------------------------------ ------------------------------------------------------
On-line. Transactions may be made through the Aberdeen On-line. Transactions may be made through the Aberdeen
Funds' website at www.aberdeeninvestments.com. However, Funds' website at www.aberdeeninvestments.com.
the Fund may discontinue on-line transactions of Fund However, the Fund may discontinue on-line transactions
shares at any time. of Fund shares at any time.
------------------------------------------------------------ ------------------------------------------------------
By bank wire. You may have your bank transmit funds by By bank wire. The Fund can wire the proceeds of your
federal funds wire to the Fund's custodian bank. (The redemption directly to your account at a commercial
authorization will be in effect unless you give the Fund bank. A voided check must be attached to your
written notice of its termination.) application. (The authorization will be in effect
unless you give the Fund written notice of its
o if you choose this method to open a new account, termination.)
you must call our toll-free number before you wire
your investment and arrange to fax your completed o your proceeds typically will be wired to your
application. bank on the next business day after your order has
been processed.
o your bank may charge a fee to wire funds.
o Aberdeen Funds deducts a $20 service fee from
o the wire must be received by 4:00 p.m. in order the redemption proceeds for this service.
to receive the current day's NAV.
o your financial institution may also charge a
fee for receiving the wire.
o funds sent outside the U.S. may be subject to
higher fees.
Bank wire is not an option for exchanges.
------------------------------------------------------------ ------------------------------------------------------
30
By Automated Clearing House (ACH). Your redemption
By Automated Clearing House (ACH). You can fund your proceeds can be sent to your bank via ACH on the
Aberdeen Funds' account with proceeds from your bank via second business day after your order has been
ACH on the second business day after your purchase order processed. A voided check must be attached to your
has been processed. A voided check must be attached to application. Money sent through ACH should reach your
your application. Money sent through ACH typically bank in two business days. There is no fee for this
reaches Aberdeen Funds from your bank in two business service. (The authorization will be in effect unless
days. There is no fee for this service. (The you give the Fund written notice of its termination.)
authorization will be in effect unless you give the Fund
written notice of its termination.) ACH is not an option for exchanges.
------------------------------------------------------------ ------------------------------------------------------
Retirement plan participants should contact their Retirement plan participants should contact their
retirement plan administrator regarding transactions. retirement plan administrator regarding transactions.
Retirement plans or their administrators wishing to Retirement plans or their administrators wishing to
conduct transactions should call our toll-free number conduct transactions should call our toll-free number
866-667-9231. Eligible entities or individuals wishing to 866-667-9231. Eligible entities or individuals wishing
conduct transactions in Institutional Service Class or to conduct transactions in Institutional Service Class
Institutional Class shares should call our toll-free or Institutional Class shares should call our toll-
number 866-667-9231. free number 866-667-9231.
31
Fair Value Pricing
The Trust's Board of Trustees has adopted Valuation Procedures governing the
method by which individual portfolio securities held by the Fund are valued in
order to determine the Fund's NAV. The Valuation Procedures provide that the
Fund's assets are valued primarily on the basis of market quotations. Where such
market quotations are either unavailable or are deemed by the Adviser to be
unreliable, a Pricing Committee, consisting of officers of the Trust and
employees of the Adviser, meets to determine a manual "fair valuation" in
accordance with the Valuation Procedures. In addition, the Pricing Committee
will "fair value" securities whose value is affected by a "significant event."
Pursuant to the Valuation Procedures, any "fair valuation" decisions are subject
to the review of the Valuation Committee of the Board of Trustees.
A "significant event" is an event that materially affects the value of a
domestic or foreign security that occurs after the close of the principal market
on which such security trades but before the calculation of the Fund's NAV.
Significant events that could affect individual portfolio securities may include
corporate actions such as reorganizations, mergers and buy-outs, corporate
announcements on earnings, significant litigation, regulatory news such as
government approvals and news relating to natural disasters affecting the
issuer's operations. Significant events that could affect a large number of
securities in a particular market may include significant market fluctuations,
market disruptions or market closings, governmental actions or other
developments, or natural disasters or armed conflicts that affect a country or
region.
Due to the time differences between the closings of the relevant foreign
securities exchanges and the time that the Fund's NAV is calculated, the Fund
may fair value its foreign investments more frequently than it does other
securities. When fair value prices are utilized, these prices will attempt to
reflect the impact of the financial markets' perceptions and trading activities
on the Fund's foreign investments since the last closing prices of the foreign
investments were calculated on their primary foreign securities markets or
exchanges. Fair value pricing of foreign securities may occur on a daily basis,
for instance, using data furnished by an independent pricing service that draws
upon, among other information, the market values of foreign investments.
Therefore, the fair values assigned to the Fund's foreign investments may not be
the quoted or published prices of the investments on their primary markets or
exchanges.
By fair valuing a security whose price may have been affected by significant
events or by news after the last market pricing of the security, the Fund
attempts to establish a price that it might reasonably expect to receive upon
the current sale of that security. These procedures are intended to help ensure
that the prices at which the Fund's shares are purchased and redeemed are fair,
and do not result in dilution of shareholder interests or other harm to
shareholders.
In-Kind Purchases
The Fund may accept payment for shares in the form of securities that are
permissible investments for the Fund.
Minimum Investments
Class A, Class B and Class C Shares
To open an account $2,000 (per Fund)
To open an IRA account $1000 (per Fund)
Additional investments $100 (per Fund)
To start an Automatic Asset Accumulation $1,000
Plan $50
Additional Investments
(Automatic Asset Accumulation Plan)
Class R Shares
To open an account No Minimum
Additional Investments No Minimum
32
Class S Shares
To open an account $2,500
To open an IRA account (including UTMAs and UGMAs) $1,000
Additional investments $50
To start an Automatic Asset Accumulation Plan $1,000
Additional Investments (Automatic Asset $50
Accumulation Plan)
Institutional Service Class
Shares $50,000 (per Fund)
To open an account No Minimum
Additional Investments
Institutional Class Shares
To open an account $1,000,0000 (per Fund)
Additional Investments No Minimum
Minimum investment requirements do not apply to purchases by employees of the
Adviser or its affiliates (or their spouses, children or immediate relatives),
or to certain retirement plans, fee-based programs or omnibus accounts. If you
purchase shares through an intermediary, different minimum account requirements
may apply. The Trust reserves the right to waive the investment minimums under
certain circumstances.
Customer Identification Information
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify
and record information that identifies each person that opens a new account and
to determine whether such person's name appears on government lists of known or
suspected terrorists and terrorist organizations.
As a result, unless such information is collected by the broker-dealer or other
financial intermediary pursuant to an agreement, the Fund must obtain the
following information for each person that opens a new account:
o name;
o date of birth (for individuals);
o residential or business street address (although post office boxes are
still permitted for mailing); and
o Social Security number, taxpayer identification number or other
identifying number.
You may also be asked for a copy of your driver's license, passport or other
identifying document in order to verify your identity. In addition, it may be
necessary to verify your identity by cross-referencing your identification
information with a consumer report or other electronic database. Additional
information may be required to open accounts for corporations and other
entities. Federal law prohibits the Fund and other financial institutions from
opening a new account unless they receive the minimum identifying information
listed above. After an account is opened, the Fund may restrict your ability to
purchase additional shares until your identity is verified. The Fund may close
your account or take other appropriate action if they are unable to verify your
identity within a reasonable time. If your account is closed for this reason,
your shares will be redeemed at the NAV next calculated after the account is
closed.
Accounts with Low Balances
Maintaining small accounts is costly for the Fund and may have a negative effect
on performance. Shareholders are encouraged to keep their accounts above the
Fund's minimum.
o If the value of your account falls below $2,000 ($1,000 for IRA
accounts), you are generally subject to a $5 quarterly fee. Shares
from your account are redeemed each quarter to cover the fee, which is
returned to the Fund to offset small account expenses. Under some
circumstances, the Fund may waive the quarterly fee.
33
o The Fund reserves the right to redeem your remaining shares and close
your account if a redemption of shares brings the value of your
account below $2,000 ($1,000 for IRA Accounts). In such cases, you
will be notified and given 60 days to purchase additional shares
before the account is closed.
Exchanging Shares
You may exchange your Fund shares for shares of any Aberdeen Fund that is
currently accepting new investments as long as:
o both accounts have the same registration;
o your first purchase in the new fund meets its minimum investment
requirement; and
o you purchase the same class of shares. For example, you may exchange
between Class A shares of any Aberdeen Fund, but may not exchange
between Class A shares, Class B shares and Class C shares (except
Class S shares of the Fund may be exchanged for Institutional Class
shares of another Aberdeen Fund).
The exchange privileges may be amended or discontinued upon 60 days' written
notice to shareholders.
Generally, there are no sales charges for exchanges of Class B, Class C, Class
R, Class S, Institutional Class or Institutional Service Class shares. However,
o if you exchange from Class A shares of the Fund with a lower sales
charge to a fund with a higher sales charge, you may have to pay the
difference in the two sales charges.
o if you exchange Class A shares that are subject to a CDSC, and then
redeem those shares within 18 months of the original purchase, the
CDSC applicable to the original purchase is charged.
For purposes of calculating a CDSC, the length of ownership is measured from the
date of original purchase and is not affected by any permitted exchange
Automatic Withdrawal Program
You may elect to automatically redeem Class A, Class B, Class C and Class S
shares in a minimum amount of $50. Complete the appropriate section of the
Mutual Fund Application for New Accounts or contact your financial intermediary
or the Fund's transfer agent. Your account value must meet the minimum initial
investment amount at the time the program is established. This program may
reduce, and eventually deplete, your account. Generally, it is not advisable to
continue to purchase Class A or Class C shares subject to a sales charge while
redeeming shares using this program. An automatic withdrawal plan for Class C
shares will be subject to any applicable CDSC. If you own Class B shares, you
will not be charged a CDSC on redemptions if you redeem 12% or less of your
account value in a single year. More information about the waiver of the CDSC
for Class B shares is located in the SAI.
Selling Shares
You can sell, or in other words redeem, your Fund shares at any time, subject to
the restrictions described below. The price you receive when you redeem your
shares is the NAV (minus any applicable sales charges or redemption fee) next
determined after the Fund's authorized intermediary or an agent of the Fund
receives your properly completed redemption request. The value of the shares you
redeem may be worth more or less than their original purchase price depending on
the market value of the Fund's investments at the time of the redemption.
You may not be able to redeem your Fund shares or the Fund may delay paying your
redemption proceeds if:
o the New York Stock Exchange is closed (other than customary weekend
and holiday closings);
o trading is restricted; or
o an emergency exists (as determined by the Securities and Exchange
Commission).
34
Generally, the Fund will pay you for the shares that you redeem within three
days after your redemption request is received. Payment for shares that you
recently purchased may be delayed up to 10 business days from the purchase date
to allow time for your payment to clear. The Fund may delay forwarding
redemption proceeds for up to seven days if the account holder:
o is engaged in excessive trading or
o if the amount of the redemption request would disrupt efficient
portfolio management or adversely affect the Fund.
If you choose to have your redemption proceeds mailed to you and the redemption
check is returned as undeliverable or is not presented for payment within six
months, the Fund reserves the right to reinvest the check proceeds and future
distributions in the shares of the particular Fund at the Fund's then-current
NAV until you give the Fund different instructions.
Under extraordinary circumstances, the Fund, in its sole discretion, may elect
to honor redemption requests by transferring some of the securities held by the
Fund directly to an account holder as a redemption in-kind. For more about
Aberdeen Funds' ability to make a redemption-in-kind, see the SAI.
The Board of Trustees of the Trust has adopted procedures for redemptions
in-kind by shareholders including affiliated persons of the Fund. Affiliated
persons of the Fund include shareholders who are affiliates of the Adviser and
shareholders of the Fund owning 5% or more of the outstanding shares of the
Fund. These procedures provide that a redemption in-kind shall be effected at
approximately the affiliated shareholder's proportionate share of the Fund's
current net assets, and are designed so that such redemptions will not favor the
affiliated shareholder to the detriment of any other shareholder.
Medallion Signature Guarantee
A medallion signature guarantee is required for redemptions of shares of the
Fund in any of the following instances:
o your account address has changed within the last 15 calendar days;
o the redemption check is made payable to anyone other than the
registered shareholder;
o the proceeds are mailed to any address other than the address of
record; or
o the redemption proceeds are being wired to a bank for which
instructions are currently not on your account.
A medallion signature guarantee is a certification by a bank, brokerage firm or
other financial institution that a customer's signature is valid. Medallion
signature guarantees can be provided by members of the STAMP program. We reserve
the right to require a medallion signature guarantee in other circumstances,
without notice.
Excessive or Short-Term Trading
The Aberdeen Funds seek to discourage excessive or short-term trading (often
described as "market timing"). Excessive trading (either frequent exchanges
between Aberdeen Funds or sales and repurchases of Aberdeen Funds within a short
time period) may:
o disrupt portfolio management strategies;
o increase brokerage and other transaction costs; and
o negatively affect fund performance.
A fund may be more or less affected by short-term trading in fund shares,
depending on various factors such as the size of the fund, the amount of assets
the fund typically maintains in cash or cash equivalents, the dollar amount,
number and frequency of trades in fund shares and other factors. A fund that
invests in foreign securities may be at greater risk for excessive trading.
Investors may attempt to take advantage of anticipated price movements in
securities held by a fund based on events occurring after the close of a foreign
market that may not be reflected in the fund's NAV (referred to as "arbitrage
market timing"). Arbitrage market timing may also be attempted in funds that
hold significant investments in small-cap
35
securities, high-yield bonds and other types of investments that may not be
frequently traded. There is the possibility that arbitrage market timing, under
certain circumstances, may dilute the value of a fund's shares if redeeming
shareholders receive proceeds (and buying shareholders receive shares) based on
NAVs that do not reflect appropriate fair value prices.
The Board of Trustees of the Trust has adopted and implemented the following
policies and procedures to detect, discourage and prevent excessive or
short-term trading in the Fund:
Monitoring of Trading Activity
The Fund, through the Adviser, its subadviser and its agents, monitors selected
trades and flows of money in and out of the Fund in an effort to detect
excessive short-term trading activities. If a shareholder is found to have
engaged in excessive short-term trading, the Fund may, in its discretion, ask
the shareholder to stop such activities or refuse to process purchases or
exchanges in the shareholder's account.
Restrictions on Transactions
Whenever the Fund is able to identify short-term trades or traders, the Fund has
broad authority to take discretionary action against market timers and against
particular trades and uniformly will apply the short-term trading restrictions
to all such trades that the Fund identifies. The Fund also has sole discretion
to:
o restrict purchases or exchanges that the Fund or its agents believe
constitute excessive trading and
o reject transactions that violate the Fund's excessive trading policies
or its exchange limits.
The Fund also has implemented redemption and exchange fees to certain accounts
to discourage excessive trading and to help offset the expense of such trading.
In general:
o an exchange equaling 1% or more of the Fund's NAV may be rejected and
o redemption and exchange fees are imposed on certain Aberdeen Funds.
These Aberdeen Funds may assess either a redemption fee if you redeem
your Fund shares or an exchange fee if you exchange your Fund shares
into another Aberdeen Fund. The short-term trading fees are deducted
from the proceeds of the redemption of the affected Fund shares.
Fair Valuation
The Fund has fair value pricing procedures in place as described above in
Section 5, Investing with Aberdeen Funds: Buying Shares--Share Price. Despite
its best efforts, Aberdeen Funds may be unable to identify or deter excessive
trades conducted through certain intermediaries or omnibus accounts that
transmit aggregate purchase, exchange and redemption orders on behalf of their
customers. In short, the Fund may not be able to prevent all market timing and
its potential negative impact.
Exchange and Redemption Fees
In order to discourage excessive trading, the Aberdeen Funds impose exchange and
redemption fees on shares held in certain types of accounts. If you redeem or
exchange your shares in such account within a designated holding period, the
redemption fee is paid directly to the fund from which the shares are being
redeemed and is designed to offset brokerage commissions, market impact and
other costs associated with short-term trading of fund shares. For purposes of
determining whether a redemption fee applies to an affected account, shares that
were held the longest are redeemed first. If you exchange assets into a fund
with a redemption/exchange fee, a new period begins at the time of the exchange.
Redemption and exchange fees do not apply to:
o shares redeemed or exchanged under regularly scheduled withdrawal
plans;
o shares purchased through reinvested dividends or capital gains;
o shares redeemed following the death or disability of a shareholder.
The disability, determination of disability and subsequent redemption
must have occurred during the period the fee applied;
36
o shares redeemed in connection with mandatory withdrawals from
traditional IRAs after age 70 1/2and other required distributions from
retirement accounts;
o shares redeemed or exchanged from retirement accounts within 30 days
of an automatic payroll deduction; or
o shares redeemed or exchanged by any "fund of funds" that is affiliated
with the Fund.
With respect to shares redeemed or exchanged following the death or disability
of a shareholder, mandatory retirement plan distributions or sale within 30
calendar days of an automatic payroll deduction, you must inform Customer
Service or your intermediary that the fee does not apply. You may be required to
show evidence that you qualify for the exception. Redemption and exchange fees
will be assessed unless or until the Fund is notified that an account is exempt.
Only certain intermediaries have agreed to collect the exchange and redemption
fees from their customer accounts. In addition, the fees do not apply to certain
types of accounts held through intermediaries, including certain:
o broker wrap fee and other fee-based programs;
o qualified retirement plan accounts
o omnibus accounts where there is no capability to impose a redemption
fee on underlying customers' accounts; and
o intermediaries that do not or cannot report sufficient information to
impose an exchange fee on their customer accounts.
To the extent that exchange and redemption fees cannot be collected on
particular transactions and excessive trading occurs, the remaining Fund
shareholders bear the expense of such frequent trading.
37
The following Aberdeen Funds may assess the fee listed below on the total value
of shares that are redeemed or exchanged out of one of these funds into another
Aberdeen Fund if you have held the shares of the fund for less than the minimum
holding period listed below:
Minimum Holding
Exchange/ Period (Calendar
Fund Redemption Fee Days)
Aberdeen China Opportunities Fund 2.00% 90
Aberdeen Developing Markets Fund 2.00% 90
Aberdeen Global Financial Services Fund 2.00% 90
Aberdeen Health Sciences Fund 2.00% 90
Aberdeen Natural Resources Fund 2.00% 90
Aberdeen Technology and Communications Fund 2.00% 90
Aberdeen Global Utilities Fund 2.00% 90
Aberdeen Hedged Core Equity Fund 2.00% 90
Aberdeen International Equity Fund 2.00% 90
Aberdeen Market Neutral Fund 2.00% 90
Aberdeen Select Mid Cap Growth Fund 2.00% 90
Aberdeen Small Cap Fund 2.00% 90
Aberdeen Small Cap Opportunities Fund 2.00% 90
Aberdeen Small Cap Growth Fund 2.00% 90
Aberdeen Select Small Cap Fund 2.00% 90
Aberdeen Small Cap Value Fund 2.00% 90
Aberdeen Equity Long-Short Fund 2.00% 90
Aberdeen Select Worldwide Fund 2.00% 90
Aberdeen Select Equity Fund 2.00% 30
Aberdeen Select Growth Fund 2.00% 30
Aberdeen Core Plus Income Fund 2.00% 15
Aberdeen Tax-Free Income Fund 2.00% 7
38
Section 6 Distributions and Taxes
The following information is provided to help you understand the income and
capital gains you may earn while you own Fund shares, as well as certain federal
income tax consequences of owning Fund shares. The Fund intends to qualify each
year as a regulated investment company under the Internal Revenue Code. As a
regulated investment company, the Fund generally pays no federal income tax on
the income and gains it distributes to you. The amount of any distribution will
vary, and there is no guarantee the Fund will pay either an income dividend or a
capital gains distribution. For tax advice about your personal tax situation,
please speak with your tax adviser.
Income and Capital Gains Distributions
The Fund expects to declare and distribute its net investment income, if any, to
shareholders as dividends quarterly. Capital gains, if any, may be distributed
at least annually. The Fund may distribute income dividends and capital gains
more frequently, if necessary, in order to reduce or eliminate federal excise or
income taxes on the Fund. All income and capital gains distributions are
automatically reinvested in shares of the Fund. You may request a payment in
cash in writing if the distribution is in excess of $5.
If you choose to have dividends or capital gains distributions, or both, mailed
to you and the distribution check is returned as undeliverable or is not
presented for payment within six months, the Trust reserves the right to
reinvest the check proceeds and future distributions in the shares of the Fund
at the Fund's then-current NAV until you give the Trust different instructions.
If you are a taxable investor, dividends and capital gains distributions you
receive from the Fund, whether you reinvest your distributions in additional
Fund shares or receive them in cash, are subject to federal income tax, state
taxes or local taxes:
o distributions are taxable to you at either ordinary income or capital
gains tax rates;
o distributions of short-term capital gains are federally taxable at
applicable ordinary income tax rates;
o distributions of long-term capital gains are taxable to you as
long-term capital gains no matter how long you have owned your Fund
shares;
o for individuals, a portion of the income dividends paid may be
qualified dividend income eligible for long-term capital gains tax
rates, provided that certain holding period requirements are met;
o for corporate shareholders, a portion of income dividends paid may be
eligible for the corporate dividend-received deduction, subject to
certain limitations; and
o distributions declared in December to shareholders of record in such
month, but paid in January, are taxable as if they were paid in
December.
The amount and type of income dividends and the tax status of any capital gains
distributed to you are reported on Form 1099-DIV, which we send to you annually
during tax season (unless you hold your shares in a qualified tax-deferred plan
or account or are otherwise not subject to federal income tax). Mutual funds may
reclassify income after your tax reporting statement is mailed to you. This can
result from the rules in the Internal Revenue Code that effectively prevent
mutual funds, such as the Fund, from ascertaining with certainty, until after
the calendar year end, and in some cases the Fund's fiscal year end, the final
amount and character of distributions the Fund has received on its investments
during the prior calendar year. Prior to issuing your statement, the Fund makes
every effort to search for reclassified income to reduce the number of corrected
forms mailed to shareholders. However, when necessary, the Fund will send you a
corrected Form 1099 to reflect reclassified information.
Distributions from the Fund (both taxable dividends and capital gains) are
normally taxable to you when made, regardless of whether you reinvest these
distributions or receive them in cash (unless you hold your shares in a
qualified tax-deferred plan or account or are otherwise not subject to federal
income tax).
If you are a taxable investor and invest in the Fund shortly before it makes a
capital gains distribution, some of your investment may be returned to you in
the form of a taxable distribution. This is commonly known as "buying adividend."
39
Selling and Exchanging Shares
Selling your shares may result in a realized capital gain or loss, which is
subject to federal income tax. For tax purposes, an exchange from one Aberdeen
Fund to another is the same as a sale. For individuals, any long-term capital
gains you realize from selling Fund shares are taxed at a maximum rate of 15%
(or 0% for individuals in the 10% and 15% federal income tax rate brackets).
Short-term capital gains are taxed at ordinary income tax rates. You or your tax
adviser should track your purchases, tax basis, sales and any resulting gain or
loss. If you redeem Fund shares for a loss, you may be able to use this capital
loss to offset any other capital gains you have.
Other Tax Jurisdictions
Distributions may be subject to state and local taxes, even if not subject to
federal income taxes. State and local tax laws vary; please consult your tax
adviser. Non-U.S. investors may be subject to U.S. withholding at a 30% or lower
treaty tax rate and estate tax, and are subject to special U.S. tax
certification requirements to avoid backup withholding and claim any treaty
benefits.
Tax Status for Retirement Plans and Other Tax-Deferred Accounts
When you invest in the Fund through a qualified employee benefit plan,
retirement plan or some other tax-deferred account, income dividends and capital
gains distributions generally are not subject to current federal income taxes.
In general, these plans or accounts are governed by complex tax rules. You
should ask your tax adviser or plan administrator for more information about
your tax situation, including possible state or local taxes.
Backup Withholding
By law, you may be subject to backup withholding on a portion of your taxable
distributions and redemption proceeds unless you provide your correct Social
Security or taxpayer identification number and certify that (1) this number is
correct, (2) you are not subject to backup withholding, and (3) you are a U.S.
person (including a U.S. resident alien). You may also be subject to withholding
if the Internal Revenue Service instructs us to withhold a portion of your
distributions and proceeds. When withholding is required, the amount is 28% of
any distributions or proceeds paid.
This discussion of "Distributions and Taxes" is not intended or written to be
used as tax advice. Because everyone's tax situation is unique, you should
consult your tax professional about Federal, state, local or foreign tax
consequences before making an investment in the Fund.
Section 7 Financial Highlights
Because the Fund is new, it has no financial history.
40
Information from Aberdeen Funds
Please read this Prospectus before you invest, and keep it with your records.
The following documents - which may be obtained free of charge - contain
additional information about the Fund:
o Statement of Additional Information (incorporated by reference into
this Prospectus)
o Annual Reports (which contain discussions of the market conditions and
investment strategies that significantly affected the Fund's
performance)
o Semiannual Reports
The above documents are available free of charge at the Aberdeen Funds website
at www.aberdeeninvestments.com. To obtain any of the above documents free of
charge, to request other information about the Fund, or to make other
shareholder inquiries, you may also contact us at the address or toll free
number listed below.
To reduce the volume of mail you receive, only one copy of financial reports,
prospectuses, other regulatory materials and other communications will be mailed
to your household (if you share the same last name and address). You can call us
at 866-667-9231, or write to us at the address listed below, to request (1)
additional copies free of charge, or (2) that we discontinue our practice of
mailing regulatory materials together.
If you wish to receive regulatory materials and/or account statements
electronically, you can sign-up for our free e-delivery service. Please visit
the Fund's website at www.aberdeeninvestments.com or call 866-667-9231 for
information.
For Additional Information Contact:
By Regular Mail:
Aberdeen Funds
P.O. Box 183148
Columbus, Ohio43218-3148
By Overnight Mail:
Aberdeen Funds
3435 Stelzer Road
Columbus, Ohio43219
For 24-Hour Access:
866-667-9231 (toll free) Customer Service Representatives are available 8 a.m. -
9 p.m. Eastern Time, Monday through Friday. Call after 7 p.m. Eastern Time for
closing share prices.
Also visit the Aberdeen Funds' website at www.aberdeeninvestments.com.
Information From the Securities and Exchange Commission (SEC)
You can obtain information about the Fund, including the SAI from the SEC
o on the SEC's EDGAR database via the Internet at www.sec.gov;
o by electronic request to publicinfo@sec.gov;
o in person at the SEC's Public Reference Room in Washington, D.C. (For
their hours of operation, call 202-551-8090); or
o by mail by sending your request to Securities and Exchange Commission
Public Reference Section, Washington, D.C. 20549-0102 (The SEC charges
a fee to copy any documents).
THE TRUST'S INVESTMENT COMPANY ACT FILE NO.: 811-22132
Statement of Additional Information
_______________, 2008
ABERDEEN FUNDS
Aberdeen Core Plus Income Fund
Aberdeen Funds (the "Trust") is a registered open-end investment company
consisting of 27 series as of the date hereof. This Statement of Additional
Information ("SAI") relates to the Aberdeen Core Plus Income Fund (the "Fund").
This SAI is not a prospectus but is incorporated by reference into the
Prospectus for the Aberdeen Core Plus Income Fund. It contains information in
addition to and more detailed than that set forth in the Prospectus and should
be read in conjunction with the Aberdeen Core Plus Income Fund Prospectus.
Terms not defined in this SAI have the meanings assigned to them in the
Prospectus. You can order copies of the Prospectus without charge by writing to
Citi Fund Services Ohio, Inc. ("Citi") at 3435 Stelzer Road, Columbus, Ohio43219-3035 or calling (toll-free) 866-667-9231.
TABLE OF CONTENTS
PAGE
GENERAL INFORMATION AND HISTORY...............................................1
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTSAND INVESTMENT POLICIES.......................................................1
DESCRIPTION OF PORTFOLIO INSTRUMENTS ANDINVESTMENT POLICIES...........................................................4
INVESTMENT RESTRICTIONS......................................................59
DISCLOSURE OF PORTFOLIO HOLDINGS.............................................61
BOARD OF TRUSTEES COMMITTEES.................................................70
INVESTMENT ADVISORY AND OTHER SERVICES.......................................73
BROKERAGE ALLOCATION.........................................................80
ADDITIONAL INFORMATION ON PURCHASES AND SALES................................82
VALUATION OF SHARES..........................................................90
SYSTEMATIC INVESTMENT STRATEGIES.............................................92
INVESTOR PRIVILEGES..........................................................93
INVESTOR SERVICES............................................................95
ADDITIONAL INFORMATION.......................................................96
ADDITIONAL GENERAL TAX INFORMATION FOR THE FUND..............................99
MAJOR SHAREHOLDERS..........................................................109
FINANCIAL STATEMENTS........................................................109
APPENDIX A - DEBT RATINGS...................................................A-1
APPENDIX B - PROXY VOTING GUIDELINES SUMMARIES..............................B-1
APPENDIX C - PORTFOLIO MANAGERS.............................................C-1
GENERAL INFORMATION
The Trust is an open-end management investment company formed as a statutory
trust under the laws of the state of Delaware by a Certificate of Trust filed on
September 27, 2007. The Trust currently consists of 27 separate series, each
with its own investment objective. The Fund is a diversified, open-end
management investment company as defined in the Investment Company Act of 1940,
as amended (the "1940 Act").
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Aberdeen Core Plus Income Fund
The Fund invests in a variety of securities and employs a number of
investment techniques that involve certain risks. The Prospectus for the Fund
highlights the principal investment strategies, investment techniques and risks.
This SAI contains additional information regarding both the principal and
non-principal investment strategies of the Fund. The following table sets forth
additional information concerning permissible investments and techniques for the
Fund. A "Y" in the table indicates that the Fund may invest in or follow the
corresponding instrument or technique. An empty box indicates that the Fund does
not intend to invest in or follow the corresponding instrument or technique.
----------------------------------------------------------- ------------------
Types of Investment or Technique Aberdeen Core Plus
Income
----------------------------------------------------------- ------------------
Adjustable rate securities Y
----------------------------------------------------------- ------------------
Asset-backed securities Y
----------------------------------------------------------- ------------------
Certificates of Deposits and Bankers' Acceptances Y
----------------------------------------------------------- ------------------
Mortgage-backed and mortgage pass-through securities Y
----------------------------------------------------------- ------------------
Stripped mortgage securities Y
----------------------------------------------------------- ------------------
Collateralized mortgage obligations Y
----------------------------------------------------------- ------------------
Common stocks Y
----------------------------------------------------------- ------------------
Convertible securities Y
----------------------------------------------------------- ------------------
Corporate Obligations Y
----------------------------------------------------------- ------------------
Direct Debt Instruments Y
----------------------------------------------------------- ------------------
Advance Refunded Bonds Y
----------------------------------------------------------- ------------------
1
Dollar roll transactions Y
----------------------------------------------------------- ------------------
Eurodollar Instruments Y
----------------------------------------------------------- ------------------
Eurobonds Y
----------------------------------------------------------- ------------------
Foreign currencies Y
----------------------------------------------------------- ------------------
Foreign fixed income securities including Sovereign Debt Y
and Privatized Enterprises
----------------------------------------------------------- ------------------
Brady Bonds Y
----------------------------------------------------------- ------------------
Foreign commercial paper Y
----------------------------------------------------------- ------------------
Non-investment grade debt (High Yield/High Risk Bonds) Y
----------------------------------------------------------- ------------------
Illiquid and Restricted securities Y
----------------------------------------------------------- ------------------
Private Placement Commercial Paper Y
----------------------------------------------------------- ------------------
Borrowing Y
----------------------------------------------------------- ------------------
Indexed securities Y
----------------------------------------------------------- ------------------
Lending portfolio securities Y
----------------------------------------------------------- ------------------
Investment of securities lending collateral Y
----------------------------------------------------------- ------------------
Participation Interests Y
----------------------------------------------------------- ------------------
Real estate investment trust (REITs) Y
----------------------------------------------------------- ------------------
Repurchase agreements Y
----------------------------------------------------------- ------------------
Reverse repurchase agreements Y
----------------------------------------------------------- ------------------
Securities backed by guarantees Y
----------------------------------------------------------- ------------------
Strategic Transactions and Derivatives Y
----------------------------------------------------------- ------------------
Futures Y
----------------------------------------------------------- ------------------
Options Y
----------------------------------------------------------- ------------------
2
Swap, Caps, Floors and Collars Y
----------------------------------------------------------- ------------------
Credit Default Swaps Y
----------------------------------------------------------- ------------------
Synthetic Investments Y
----------------------------------------------------------- ------------------
Currency Transactions Y
----------------------------------------------------------- ------------------
Stripped zero coupon securities/Custodial Receipts Y
----------------------------------------------------------- ------------------
Supranational Entities Y
----------------------------------------------------------- ------------------
Trust Preferred Securities Y
----------------------------------------------------------- ------------------
U.S. government securities Y
----------------------------------------------------------- ------------------
Warrants Y
----------------------------------------------------------- ------------------
When-issued/delayed-delivery securities Y
----------------------------------------------------------- ------------------
Standby Commitment Agreements Y
----------------------------------------------------------- ------------------
Temporary Investments Y
----------------------------------------------------------- ------------------
Money market instruments Y
----------------------------------------------------------- ------------------
Securities of Investment companies Y
----------------------------------------------------------- ------------------
Preferred stocks Y
----------------------------------------------------------- ------------------
Pay-in-kind bonds and Deferred payments securities Y
----------------------------------------------------------- ------------------
Loan Participations and Assignments Y
----------------------------------------------------------- ------------------
Forward currency contracts Y
----------------------------------------------------------- ------------------
Put Bonds Y
----------------------------------------------------------- ------------------
Municipal Securities Y
----------------------------------------------------------- ------------------
Loans Y
----------------------------------------------------------- ------------------
Structured Securities Y
----------------------------------------------------------- ------------------
Inverse Floating Rate Instruments Y
----------------------------------------------------------- ------------------
Please review the discussions in the Prospectus for further information
regarding the investment objectives and policies of the Fund.
3
DESCRIPTION OF PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
General Investment Objective and Policies
The Fund seeks to maximize total return consistent with preservation of
capital and prudent investment management, by investing for both current income
and capital appreciation. The Fund primarily invests in US dollar-denominated
investment grade fixed income securities, including corporate bonds, US
government and agency bonds and mortgage- and asset-backed securities. A
significant portion of the Fund's assets may also be allocated among foreign
investment grade fixed income securities, high yield bonds of US and foreign
issuers (including high yield bonds of issuers in countries with new or emerging
securities markets), or, to maintain liquidity, in cash or money market
instruments. The Fund normally invests at least 65% of total assets in high
grade US bonds (those considered to be in the top three grades of credit
quality, i.e., grade A or higher). The Fund may invest up to 25% of its total
assets in foreign investment grade bonds (those considered to be in the top four
grades of credit quality, i.e., grade Baa or BBB or higher). In addition, the
Fund may also invest up to 20% of total assets in securities of US and foreign
issuers that are below investment grade (rated as low as the sixth credit grade,
i.e., grade B, otherwise known as junk bonds), including investment in US dollar
or foreign currency denominated bonds of issuers located in countries with new
or emerging securities markets. The Fund may have an exposure of up to 10% of
total assets in foreign currencies. Currency forward contracts are permitted for
both non-hedging and hedging purposes.
Information Concerning Duration
Duration is a measure of the average life of a fixed-income security that
was developed as a more precise alternative to the concepts of "term to
maturity" or "average dollar weighted maturity" as measures of "volatility" or
"risk" associated with changes in interest rates. Duration incorporates a
security's yield, coupon interest payments, final maturity and call features
into one measure.
Most debt obligations provide interest ("coupon") payments in addition to
final ("par") payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments and the nature of the call
provisions, the market values of debt obligations may respond differently to
changes in interest rates.
Traditionally, a debt security's "term-to-maturity" has been used as a
measure of the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term-to-maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Average dollar weighted maturity is calculated by averaging the
terms of maturity of each debt security held with each maturity "weighted"
according to the percentage of assets that it represents. Duration is a measure
of the expected life of a debt security on a present value basis and reflects
both principal and interest payments. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable security, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any debt security with
4
interest payments occurring prior to the payment of principal, duration is
ordinarily less than maturity. In general, all other factors being the same, the
lower the stated or coupon rate of interest of a debt security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a debt security, the shorter the duration of the security.
There are some situations where the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example, floating
and variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Fund's investment adviser or subadviser
will use more sophisticated analytical techniques to project the economic life
of a security and estimate its interest rate exposure. Since the computation of
duration is based on predictions of future events rather than known factors,
there can be no assurance that the Fund will at all times achieve its targeted
portfolio duration.
The change in market value of U.S. government fixed-income securities is
largely a function of changes in the prevailing level of interest rates. When
interest rates are falling, a portfolio with a shorter duration generally will
not generate as high a level of total return as a portfolio with a longer
duration. When interest rates are stable, shorter duration portfolios generally
will not generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates, which
is commonly the case.) When interest rates are rising, a portfolio with a
shorter duration will generally outperform longer duration portfolios. With
respect to the composition of a fixed-income portfolio, the longer the duration
of the portfolio, generally, the greater the anticipated potential for total
return, with, however, greater attendant interest rate risk and price volatility
than for a portfolio with a shorter duration.
Debt Obligations
Debt Securities Generally. The Fund may invest in debt securities,
including bonds of private issuers. Portfolio debt investments will be selected
on the basis of, among other things, credit quality, and the fundamental
outlooks for currency, economic and interest rate trends, taking into account
the ability to hedge a degree of currency or local bond price risk.
The principal risks involved with investments in bonds include interest
rate risk, credit risk and pre-payment risk. Interest rate risk refers to the
likely decline in the value of bonds as interest rates rise. Generally,
longer-term securities are more susceptible to changes in value as a result of
interest-rate changes than are shorter-term securities. Credit risk refers to
the risk that an issuer of a bond may default with respect to the payment of
principal and interest. The lower a bond is rated, the more it is considered to
be a speculative or risky investment. Pre-payment risk is commonly associated
with pooled debt securities, such as mortgage-backed securities and asset backed
securities, but may affect other debt securities as well. When the underlying
debt obligations are prepaid ahead of schedule, the return on the security will
be lower than expected. Pre-payment rates usually increase when interest rates
are falling.
5
Lower-rated securities are more likely to react to developments affecting
these risks than are more highly rated securities, which react primarily to
movements in the general level of interest rates. Although the fluctuation in
the price of debt securities is normally less than that of common stocks, in the
past there have been extended periods of cyclical increases in interest rates
that have caused significant declines in the price of debt securities in general
and have caused the effective maturity of securities with prepayment features to
be extended, thus effectively converting short or intermediate term securities
(which tend to be less volatile in price) into long term securities (which tend
to be more volatile in price).
Ratings as Investment Criteria. High-quality, medium-quality and
non-investment grade debt obligations are characterized as such based on their
ratings by nationally recognized statistical rating organizations ("NRSROs"),
such as Standard & Poor's Rating Group ("Standard & Poor's") or Moody's
Investor Services ("Moody's"). In general, the ratings of NRSROs represent the
opinions of these agencies as to the quality of securities that they rate. Such
ratings, however, are relative and subjective, and are not absolute standards of
quality and do not evaluate the market value risk of the securities. These
ratings are used by the Fund as initial criteria for the selection of portfolio
securities, but the Fund also relies upon the independent advice of the Fund's
adviser or subadviser(s) to evaluate potential investments. This is particularly
important for lower-quality securities. Among the factors that will be
considered is the long-term ability of the issuer to pay principal and interest
and general economic trends, as well as an issuer's capital structure, existing
debt and earnings history. The Appendix to this SAI contains further information
about the rating categories of NRSROs and their significance.
Subsequent to its purchase by the Fund, an issuer of securities may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. In addition, it is possible that an NRSRO might not change its
rating of a particular issuer to reflect subsequent events. None of these events
generally will require sale of such securities, but the Fund's adviser or
subadviser will consider such events in its determination of whether the Fund
should continue to hold the securities. In addition, to the extent that the
ratings change as a result of changes in an NRSRO or its rating systems, or due
to a corporate reorganization, the Fund will attempt to use comparable ratings
as standards for its investments in accordance with its investment objective and
policies.
Investment-Grade Securities. The Fund may purchase "investment-grade"
bonds, which are those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A or BBB
by Standard & Poor's or Fitch, Inc. ("Fitch") or a comparable rating by
another NRSRO; or, if unrated, judged to be of equivalent quality as determined
by the Advisor. Moody's considers bonds it rates Baa to have speculative
elements as well as investment-grade characteristics. To the extent that the
Fund invests in higher-grade securities, the Fund will not be able to avail
itself of opportunities for higher income which may be available at lower
grades.
Medium-Quality Securities. The Fund anticipates investing in medium-quality
obligations, which are obligations rated in the fourth highest rating category
by any NRSRO (e.g., rated Baa by Moody's or BBB by Standard & Poor's or
Fitch). Medium-quality securities, although considered investment-grade, may
have some speculative characteristics and may be subject to greater fluctuations
in value than higher-rated securities. In addition, the issuers of
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medium-quality securities may be more vulnerable to adverse economic conditions
or changing circumstances than issuers of higher-rated securities.
Lower Quality (High-Risk) Securities. Non-investment grade debt or lower
quality/rated securities, commonly known as junk bonds (hereinafter referred to
as "lower-quality securities") include (i) bonds rated as low as C by Moody's,
Standard & Poor's, or Fitch, (ii) commercial paper rated as low as C by
Standard & Poor's, Not Prime by Moody's or Fitch 4 by Fitch; and (iii)
unrated debt securities of comparable quality. Lower-quality securities, while
generally offering higher yields than investment grade securities with similar
maturities, involve greater risks, including the possibility of default or
bankruptcy. There is more risk associated with these investments because of
reduced creditworthiness and increased risk of default. Under NRSRO guidelines,
lower-quality securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Lower-quality
securities are considered to have extremely poor prospects of ever attaining any
real investment standing, to have a current identifiable vulnerability to
default or to be in default, to be unlikely to have the capacity to make
required interest payments and repay principal when due in the event of adverse
business, financial or economic conditions, or to be in default or not current
in the payment of interest or principal. They are regarded as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. The special risk considerations in connection with investments in
these securities are discussed in "High Yield/High Risk Bonds" below.
Adjustable Rate Securities. The interest rates paid on the adjustable rate
securities in which the fund invests generally are readjusted at intervals of
one year or less to an increment over some predetermined interest rate index.
There are three main categories of indices: those based on US Treasury
securities, those derived from a calculated measure such as a cost of funds
index and those based on a moving average of mortgage rates. Commonly used
indices include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day Treasury bill
rate, rates on longer-term Treasury securities, the 11th District Federal Home
Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month,
three-month, six-month or one-year London Interbank Offered Rate ("LIBOR"), the
prime rate of a specific bank or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds index, tend to lag behind changes in market rate levels and tend to be
somewhat less volatile.
Asset-Backed Securities. Asset backed securities may include pools of
loans, receivables or other assets. Payment of principal and interest may be
largely dependent upon the cash flows generated by the assets backing the
securities. Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failures by obligors on
7
underlying assets to make payments, the securities may contain elements of
credit support which fall into two categories: (i) liquidity protection, and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses results from payment of the insurance obligations on
at least a portion of the assets in the pool. This protection may be provided
through guarantees, policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security. The
availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments may require the
Fund to dispose of any then existing holdings of such securities.
Other Asset-Backed Securities. The securitization techniques used to
develop mortgage-backed securities are now being applied to a broad range of
assets. Through the use of trusts and special purpose corporations, various
types of assets, including automobile loans, computer leases and credit card
receivables, are being securitized in pass-through structures similar to
mortgage pass-through structures or in a structure similar to the collateralized
mortgage obligation structure. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM
represent undivided fractional interests in a trust whose assets consist of a
pool of motor vehicle retail installment sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARSSM are passed through monthly to certificate holders, and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
trust. An investor's return on CARSSM may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
The Fund may also invest in residual interests in asset-backed securities.
In the case of asset-backed securities issued in a pass-through structure, the
cash flow generated by the underlying assets is applied to make required
payments on the securities and to pay related administrative expenses. The
residual in an asset-backed security pass-through structure represents the
interest in any excess cash flow remaining after making the foregoing payments.
The amount of residual cash flow resulting from a particular issue of
asset-backed securities will
8
depend on, among other things, the characteristics of the underlying assets, the
coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying
assets. Asset-backed security residuals not registered under the Securities Act
of 1933, as amended (the "Securities Act") may be subject to certain
restrictions on transferability. In addition, there may be no liquid market for
such securities.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments may require
the Fund to dispose of any then-existing holdings of such securities.
Participations and assignments involve credit risk, interest rate risk,
liquidity risk, and the risk of being a lender. If the Fund purchases a
participation, it may only be able to enforce its rights through the lender, and
may assume the credit risk of both the lender and the borrower.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks. For example, if a
loan is foreclosed, the purchaser could become part owner of any collateral, and
would bear the costs and liabilities associated with owning and disposing of the
collateral. In addition, it is at least conceivable that under emerging legal
theories of lender liability, a purchaser could be held liable as a co-lender.
In the case of loans administered by a bank or other financial institution
that acts as agent for all holders, if assets held by the agent for the benefit
of a purchaser are determined to be subject to the claims of the agent's general
creditors, the purchaser might incur certain costs and delays in realizing
payment on the loan or loan participation and could suffer a loss of principal
or interest.
In the case of loan participations where a bank or other lending
institution serves as financial intermediary between the Fund and the borrower,
if the participation does not shift to the Fund the direct debtor-creditor
relationship with the borrower, SEC interpretations require the Fund, in some
circumstances, to treat both the lending bank or other lending institution and
the borrower as issuers for purposes of the Fund's investment policies. Treating
a financial intermediary as an issuer of indebtedness may restrict the Fund's
ability to invest in indebtedness related to a single financial intermediary, or
a group of intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
Certificates of Deposit and Bankers' Acceptances. Certificates of deposit
are receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
9
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
The Fund may also invest in certificates of deposit issued by banks and
savings and loan institutions which had, at the time of their most recent annual
financial statements, total assets of less than $1 billion, provided that (i)
the principal amounts of such certificates of deposit are insured by an agency
of the US Government, (ii) at no time will the Fund hold more than $100,000
principal amount of certificates of deposit of any one such bank, and (iii) at
the time of acquisition, no more than 10% of the Fund's assets (taken at current
value) are invested in certificates of deposit of such banks having total assets
not in excess of $1 billion.
Banker's acceptances are credit instruments evidencing the obligations of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time 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. Fixed time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties that
vary with market conditions and the remaining maturity of the obligation. Fixed
time deposits subject to withdrawal penalties maturing in more than seven
calendar days are subject to the Fund's limitation on investments in illiquid
securities.
Mortgage-Backed Securities and Mortgage Pass-Through Securities. The Fund
may invest in mortgage-backed securities which are interests in pools of
mortgage loans, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
pools underlying mortgage pass-through securities consist of mortgage loans
secured by mortgages or deeds of trust creating a first lien on commercial,
residential, residential multi-family and mixed residential/commercial
properties. Underlying mortgages may be of a variety of types, including
adjustable rate, conventional 30-year, graduated payment and 15-year.
Unlike fixed rate mortgage-backed securities, adjustable rate
mortgage-backed securities are collateralized by or represent interest in
mortgage loans with variable rates of interest. These variable rates of interest
reset periodically to align themselves with market rates. The Fund will not
benefit from increases in interest rates to the extent that interest rates rise
to the point where they cause the current coupon of the underlying adjustable
rate mortgages to exceed any maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. In this event, the value of the
adjustable rate mortgage-backed securities in the Fund would likely decrease.
Also, the Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage-backed securities are different than market yields
during interim periods between coupon reset dates or if the timing of changes to
the index upon which the rate for the underlying mortgage is based lags behind
changes in market rates. During periods of declining interest rates, income to
the Fund derived from adjustable rate mortgage-backed securities which remain in
a mortgage pool will decrease in contrast to the income on
10
fixed rate mortgage-backed securities, which will remain constant. Adjustable
rate mortgages also have less potential for appreciation in value as interest
rates decline than do fixed rate investments.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association ("GNMA")) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, at the scheduled payment dates regardless of whether or not the
mortgagor actually makes the payment.
One difference between adjustable rate mortgages and fixed rate mortgages
is that for certain types of adjustable rate mortgage securities, the rate of
amortization of principal, as well as interest payments, can and does change in
accordance with movements in a specified, published interest rate index. The
amount of interest due to an adjustable rate mortgage security holder is
calculated by adding a specified additional amount, the "margin," to the index,
subject to limitations or "caps" on the maximum and minimum interest that is
charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period.
The Mortgage-Backed Securities either issued or guaranteed by GNMA, the
Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA" or "Fannie Mae") ("Certificates") are called pass-through
Certificates because a pro rata share of both regular interest and principal
payments (less GNMA's, FHLMC's or FNMA's fees and any applicable loan servicing
fees), as well as unscheduled early prepayments on the underlying mortgage pool,
are passed through monthly to the holder of the Certificate (i.e., the fund).
The yields provided by these Mortgage-Backed Securities have historically
exceeded the yields on other types of US Government Securities with comparable
maturities in large measure due to the prepayment risk discussed below.
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly-owned US Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the US Government, the timely payment of principal and
interest on securities issued by institutions approved by GNMA (such as savings
and loan institutions, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages. These guarantees, however, do
not apply to the market value or yield of mortgage-backed securities or to the
value of fund shares. Also, GNMA securities often are purchased at a premium
over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.
11
Government-related guarantors (i.e., not backed by the full faith and
credit of the US Government) include Fannie Mae and the FHLMC. Fannie Mae is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
Fannie Mae purchases conventional (i.e., not insured or guaranteed by any
government agency) mortgages from a list of approved seller/servicers which
include state and federally-chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by Fannie Mae are guaranteed as to timely payment
of principal and interest by Fannie Mae but are not backed by the full faith and
credit of the US Government.
FHLMC is a corporate instrumentality of the US Government and was created
by Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the US Government.
Recent turmoil in the mortgage-backed securities markets has raised
questions about the ability of FNMA and FHLMC to raise additional capital as a
result of losses they have sustained. Recently enacted legislation has granted
FNMA and FHLMC a larger temporary credit line from the U.S. Treasury and has
granted the Department of the Treasury authority to temporarily purchase equity
shares of FNMA and FHLMC. In addition, the Board of Governors of the Federal
Reserve has granted the Federal Reserve Bank of New York the authority to lend
to FNMA and FHLMC. There is no assurance that these measures will avert the
insolvency of FNMA and FHLMC. In the event FNMA or FHLMC continue to have
difficulty raising additional capital or become insolvent, or the credit granted
to it are insufficient to cover FNMA's or FHLMC's payment obligations, the Fund
could sustain losses on its holdings of mortgage-backed securities.
To the extent that such mortgage-backed securities are held by the Fund,
the prepayment right will tend to limit to some degree the increase in net asset
value of the Fund because the value of the mortgage-backed securities held by
the Fund may not appreciate as rapidly as the price of non-callable debt
securities. Mortgage-backed securities are subject to the risk of prepayment and
the risk that the underlying loans will not be repaid. Because principal may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional debt securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and may expose the Fund to a lower rate of return upon
reinvestment because the proceeds from such prepayments may be reinvested at
lower prevailing interest rates. Further, because of this feature, the value of
adjustable rate mortgages is unlikely to rise during periods of declining
interest rates to the same extent as fixed-rate instruments. When interest rates
rise, mortgage prepayment rates tend to decline, thus lengthening the life of a
mortgage-related security and increasing the price volatility of that security,
affecting the price volatility of the Fund's shares.
12
If prepayments of principal are made on the underlying mortgages during
periods of rising interest rates, the fund generally will be able to reinvest
such amounts in securities with a higher current rate of return. However, the
fund will not benefit from increases in interest rates to the extent that
interest rates rise to the point where they cause the current coupon of
adjustable rate mortgages held as investments by the fund to exceed the maximum
allowable annual or lifetime reset limits (or "cap rates") for a particular
mortgage. Also, the Fund's net asset value could vary to the extent that current
yields on Mortgage-Backed Securities are different than market yields during
interim periods between coupon reset dates.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Advisor determines that the
securities meet the Fund's quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Private lenders or government-related entities may also create mortgage
loan pools offering pass-through investments where the mortgages underlying
these securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may be shorter than was previously customary. As new types of
mortgage-related securities are developed and offered to investors, the Fund,
consistent with its investment objective and policies, may consider making
investments in such new types of securities.
Impact of Sub-Prime Mortgage Market. The Fund may invest in
mortgage-backed, asset-backed and other fixed-income securities whose value and
liquidity may be adversely affected by the critical downturn in the sub-prime
mortgage lending market in the U.S. Sub-prime loans, which, have higher interest
rates, are made to borrowers with low credit ratings or other factors that
increase the risk of default. Concerns about widespread defaults on sub-prime
loans have also created heightened volatility and turmoil in the general credit
markets. As a result, the Fund's investments in certain fixed-income securities
may decline in value, their market value may be more difficult to determine, and
the Fund may have more difficulty disposing of them.
13
Stripped Mortgage Securities. Stripped mortgage securities are derivative
multiclass mortgage securities. Stripped mortgage securities may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive the entire principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a NRSRO.
In addition to the stripped mortgage securities described above, the Fund
may invest in similar securities such as Super POs and Levered IOs which are
more volatile than POs, IOs and IOettes. Risks associated with instruments such
as Super POs are similar in nature to those risks related to investments in POs.
IOettes represent the right to receive interest payments on an underlying pool
of mortgages with similar risks as those associated with IOs. Unlike IOs, the
owner also has the right to receive a very small portion of the principal. Risks
connected with Levered IOs and IOettes are similar in nature to those associated
with IOs. The Fund may also invest in other similar instruments developed in the
future that are deemed consistent with its investment objective, policies and
restrictions. See "Additional General Tax Information For The Fund" in this SAI.
The Fund may also purchase stripped mortgage-backed securities for hedging
purposes to protect the Fund against interest rate fluctuations. For example,
since an IO will tend to increase in value as interest rates rise, it may be
utilized to hedge against a decrease in value of other fixed-income securities
in a rising interest rate environment.
With respect to IOs, if the underlying mortgage securities experience
greater than anticipated prepayments of principal, the Fund may fail to recoup
fully its initial investment in these securities even if the securities are
rated in the highest rating category by a NRSRO. Stripped mortgage-backed
securities may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors. The market value of the class consisting entirely of principal
payments can be extremely volatile
14
in response to changes in interest rates. The yields on stripped mortgage-backed
securities that receive all or most of the interest are generally higher than
prevailing market yields on other mortgage-backed obligations because their cash
flow patterns are also volatile and there is a greater risk that the initial
investment will not be fully recouped. The market for collateralized mortgage
obligations and other stripped mortgage-backed securities may be less liquid if
these securities lose their value as a result of changes in interest rates; in
that case, the Fund may have difficulty in selling such securities.
Collateralized Mortgage Obligations ("CMOs"). CMOs are hybrids between
mortgage-backed bonds and mortgage pass-through securities. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
Fannie Mae, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
The principal risk of CMOs results from the rate of prepayments on
underlying mortgages serving as collateral and from the structure of the deal.
An increase or decrease in prepayment rates will affect the yield, average life
and price of CMOs.
The Fund may also invest in, among others, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among
15
other things, the actual prepayment experience on the underlying mortgage loans
falls within a predefined range. If the actual prepayment experience on the
underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another; a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-backed securities.
Common Stock. The Fund may invest in common stock, but currently does not
intend to invest in this type of security to any significant extent. The Fund
may receive common stock as proceeds from a defaulted debt security held by the
Fund or from a convertible bond converting to common stock. In such situations,
the Fund will hold the common stock at the Adviser's discretion. Common stock is
issued by companies to raise cash for business purposes and represents a
proportionate interest in the issuing companies. Therefore, the Fund
participates in the success or failure of any company in which it holds stock.
The market value of common stock can fluctuate significantly, reflecting the
business performance of the issuing company, investor perception and general
economic or financial market movements. Smaller companies are especially
sensitive to these factors and may even become valueless. Despite the risk of
price volatility, however, common stocks also offer a greater potential for gain
on investment, compared to other classes of financial assets such as bonds or
cash equivalents.
Convertible Securities. The Fund may invest in convertible securities, that
is, bonds, notes, debentures, preferred stocks and other securities which are
convertible into common stock. Investments in convertible securities can provide
an opportunity for capital appreciation and/or income through interest and
dividend payments by virtue of their conversion or exchange features.
The convertible securities in which the Fund may invest are either fixed
income or zero coupon debt securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted from
time to time due to stock splits, dividends, spin-offs, other corporate
distributions or scheduled changes in the exchange ratio. Convertible debt
securities and convertible preferred stocks, until converted, have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion or
exchange feature, the market value of convertible securities typically changes
as the market value of the underlying common stocks changes, and, therefore,
also tends to follow movements in the general market for equity securities. A
unique feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common stock, although
typically not as much as the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
16
As debt securities, convertible securities are investments which provide
for a stream of income (or in the case of zero coupon securities, accretion of
income) with generally higher yields than common stocks. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.
Of course, like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar
non-convertible securities. Convertible securities may be issued as fixed income
obligations that pay current income or as zero coupon notes and bonds, including
Liquid Yield Option Notes ("LYONs"(TM)).
Zero coupon convertible securities are debt securities which are issued at
a discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to sell the securities back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations then conventional
convertible securities.
Corporate Obligations. Investment in corporate debt obligations involves
credit and interest rate risk. The value of fixed-income investments will
fluctuate with changes in interest rates and bond market conditions, tending to
rise as interest rates decline and to decline as interest rates rise. Corporate
debt obligations generally offer less current yield than securities of lower
quality, but lower-quality securities generally have less liquidity, greater
credit and market risk, and as a result, more price volatility. Longer term
bonds are, however, generally more volatile than bonds with shorter maturities.
Direct Debt Instruments. Direct debt instruments are interests in amounts
owed by a corporate, governmental or other borrower to lenders (direct loans),
to suppliers of goods or services (trade claims or other receivables) or to
other parties. The Fund may invest in all types of direct debt investments, but
among these investments the Fund currently intends to invest primarily in direct
loans and trade claims.
When the fund participates in a direct loan it will be lending money
directly to an issuer. Direct loans generally do not have an underwriter or
agent bank, but instead, are negotiated between a company's management team and
a lender or group of lenders. Direct loans typically offer better security and
structural terms than other types of high yield securities.
17
Direct debt obligations are often the most senior-obligations in an issuer's
capital structure or are well-collateralized so that overall risk is lessened.
Trade claims are unsecured rights of payment arising from obligations other
than borrowed funds. Trade claims include vendor claims and other receivables
that are adequately documented and available for purchase from high yield
broker-dealers. Trade claims typically may sell at a discount. In addition to
the risks otherwise associated with low-quality obligations, trade claims have
other risks, including the possibility that the amount of the claim may be
disputed by the obligor. Trade claims normally would be considered illiquid and
pricing can be volatile.
Direct debt instruments involve a risk of loss in case of default or
insolvency of the borrower. The Fund will rely primarily upon the
creditworthiness of the borrower and/or the collateral for payment of interest
and repayment of principal. The value of the fund's investments may be adversely
affected if scheduled interest or principal payments are not made. Because most
direct loans will be secured, there will be a smaller risk of loss with direct
loans than with an investment in unsecured high yield bonds or trade claims.
Indebtedness of borrowers whose creditworthiness is poor involves substantially
greater risks and may be highly speculative. Borrowers that are in bankruptcy or
restructuring may never pay off their indebtedness or may pay only a small
fraction of the amount owed. Investments in direct debt instruments also involve
interest rate risk and liquidity risk. However, interest rate risk is lessened
by the generally short-term nature of direct debt instruments and their interest
rate structure, which typically floats. To the extent the direct debt
instruments in which the fund invests are considered illiquid, the lack of a
liquid secondary market (1) will have an adverse impact on the value of such
instruments, (2) will have an adverse impact on the fund's ability to dispose of
them when necessary to meet the fund's liquidity needs or in response to a
specific economic event, such as a decline in creditworthiness of the issuer,
and (3) may make it more difficult for the fund to assign a value of these
instruments for purposes of valuing the fund's portfolio and calculating its net
asset value. In order to lessen liquidity risk, the fund anticipates investing
primarily in direct debt instruments that are quoted and traded in the high
yield market and will not invest in these instruments if it would cause more
than 15% of the fund's net assets to be illiquid. Trade claims may also present
a tax risk to the fund.
The Fund will not invest in trade claims if it effects the fund's
qualification as a regulated investment company under Subchapter M of the
Internal Revenue Code.
Advance Refunded Bonds. The Fund may purchase municipal securities that are
subsequently refunded by the issuance and delivery of a new issue of bonds prior
to the date on which the outstanding issue of bonds can be redeemed or paid. The
proceeds from the new issue of bonds are typically placed in an escrow fund
consisting of US Government obligations that are used to pay the interest,
principal and call premium on the issue being refunded. The Fund may also
purchase Municipal Securities that have been refunded prior to purchase by the
Fund.
Dollar Roll Transactions. Dollar roll transactions consist of the sale by
the Fund to a bank or broker/dealer (the "counterparty") of GNMA certificates or
other mortgage-backed securities together with a commitment to purchase from the
counterparty similar, but not identical, securities at a future date, at the
same price. The counterparty receives all principal
18
and interest payments, including prepayments, made on the security while it is
the holder. The Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a different purchase and repurchase price fixed
and a cash settlement made at each renewal without physical delivery of
securities. Moreover, the transaction may be preceded by a firm commitment
agreement pursuant to which the Fund agrees to buy a security on a future date.
The Fund will segregate cash, US Government securities or other liquid
assets in an amount sufficient to meet their purchase obligations under the
transactions.
Dollar rolls may be treated for purposes of the 1940 Act as borrowings of
the Fund because they involve the sale of a security coupled with an agreement
to repurchase. Like all borrowings, a dollar roll involves costs to the Fund.
For example, while the Fund receives a fee as consideration for agreeing to
repurchase the security, the Fund forgoes the right to receive all principal and
interest payments while the counterparty holds the security. These payments to
the counterparty may exceed the fee received by the Fund, thereby effectively
charging the Fund interest on its borrowing. Further, although the Fund can
estimate the amount of expected principal prepayment over the term of the dollar
roll, a variation in the actual amount of prepayment could increase or decrease
the cost of the Fund's borrowing.
The entry into dollar rolls involves potential risks of loss that are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security that the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments for hedging purposes or to enhance potential gain. Eurodollar
instruments are US dollar-denominated futures contracts or options thereon which
are linked to LIBOR, although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate
for borrowings. The Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked. Additionally, Eurodollar instruments are
subject to certain sovereign risks and other risks associated with foreign
investments. One such risk is the possibility that a sovereign country might
prevent capital, in the form of dollars, from flowing across their borders.
Other risks include: adverse political and economic developments; the extent and
quality of government regulation of financial markets and institutions; the
imposition of foreign withholding taxes, and the expropriation or
nationalization of foreign issues.
Eurobond Obligations. The Fund may invest in Eurobond obligations, which
are fixed income securities. The Eurobonds that the Fund will purchase may
include bonds issued
19
and denominated in euros. Eurobonds may be issued by government and corporate
issuers in Europe. Eurobond obligations are subject to the same risks that
pertain to domestic issuers, notably credit risk, market risk and liquidity
risk. However, Eurobond obligations are also subject to certain sovereign risks.
One such risk is the possibility that a sovereign country might prevent capital
from flowing across its boarders. Other risks include adverse political and
economic developments; the extent and quality of government regulation of
financial markets and institutions the imposition of foreign withholding taxes;
and the expropriation or nationalization of foreign issuers.
Foreign Currencies. Because investments in foreign securities usually will
involve currencies of foreign countries, and because the Fund may hold foreign
currencies and forward contracts, futures contracts and options on foreign
currencies and foreign currency futures contracts, the value of the assets of
the Fund as measured in US dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
the Fund may incur costs and experience conversion difficulties and
uncertainties in connection with conversions between various currencies.
Fluctuations in exchange rates may also affect the earning power and asset value
of the foreign entity issuing the security.
The strength or weakness of the US dollar against these currencies is
responsible for part of the Fund's investment performance. If the dollar falls
in value relative to the Japanese yen, for example, the dollar value of a
Japanese stock held in the portfolio will rise even though the price of the
stock remains unchanged. Conversely, if the dollar rises in value relative to
the yen, the dollar value of the Japanese stock will fall. Many foreign
currencies have experienced significant devaluation relative to the dollar.
Although the Fund values its assets daily in terms of US dollars, it does
not intend to convert its holdings of foreign currencies into US dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers typically do
not charge a fee for conversion, they do realize a profit based on the
difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into options or forward or futures contracts to purchase or sell
foreign currencies.
Foreign Fixed Income Securities. Since most foreign fixed income securities
are not rated, the Fund will invest in foreign fixed income securities based on
the Advisor's analysis without relying on published ratings. Since such
investments will be based upon the Advisor's analysis rather than upon published
ratings, achievement of the Fund's goals may depend more upon the abilities of
the Advisor than would otherwise be the case.
The value of the foreign fixed income securities held by the Fund, and thus
the net asset value of the Fund's shares, generally will fluctuate with (a)
changes in the perceived creditworthiness of the issuers of those securities,
(b) movements in interest rates, and (c) changes in the relative values of the
currencies in which the Fund's investments in fixed income
20
securities are denominated with respect to the US Dollar. The extent of the
fluctuation will depend on various factors, such as the average maturity of the
Fund's investments in foreign fixed income securities, and the extent to which
the Fund hedges its interest rate, credit and currency exchange rate risks. A
longer average maturity generally is associated with a higher level of
volatility in the market value of such securities in response to changes in
market conditions.
Investments in sovereign debt, including Brady Bonds (Brady Bonds are debt
securities issued under a plan implemented to allow debtor nations to
restructure their outstanding commercial bank indebtedness), involve special
risks. Foreign governmental issuers of debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or pay interest when due. In the event of default, there may be limited or no
legal recourse in that, generally, remedies for defaults must be pursued in the
courts of the defaulting party. Political conditions, especially a sovereign
entity's willingness to meet the terms of its fixed income securities, are of
considerable significance. Also, there can be no assurance that the holders of
commercial bank loans to the same sovereign entity may not contest payments to
the holders of sovereign debt in the event of default under commercial bank loan
agreements. In addition, there is no bankruptcy proceeding with respect to
sovereign debt on which a sovereign has defaulted, and the Fund may be unable to
collect all or any part of its investment in a particular issue. Foreign
investment in certain sovereign debt is restricted or controlled to varying
degrees, including requiring governmental approval for the repatriation of
income, capital or proceeds of sales by foreign investors. These restrictions or
controls may at times limit or preclude foreign investment in certain sovereign
debt or increase the costs and expenses of the Fund. Sovereign debt may be
issued as part of debt restructuring and such debt is to be considered
speculative. There is a history of defaults with respect to commercial bank
loans by public and private entities issuing Brady Bonds. All or a portion of
the interest payments and/or principal repayment with respect to Brady Bonds may
be uncollateralized.
Privatized Enterprises. Investments in foreign securities may include
securities issued by enterprises that have undergone or are currently undergoing
privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or
part of their interests in state enterprises. The Fund's investments in the
securities of privatized enterprises may include privately negotiated
investments in a government or state-owned or controlled company or enterprise
that has not yet conducted an initial equity offering, investments in the
initial offering of equity securities of a state enterprise or former state
enterprise and investments in the securities of a state enterprise following its
initial equity offering.
In certain jurisdictions, the ability of foreign entities, such as the
Fund, to participate in privatizations may be limited by local law, or the price
or terms on which the Fund may be able to participate may be less advantageous
than for local investors. Moreover, there can be no assurance that governments
that have embarked on privatization programs will continue to divest their
ownership of state enterprises, that proposed privatizations will be successful
or that governments will not re-nationalize enterprises that have been
privatized.
In the case of the enterprises in which the Fund may invest, large blocks
of the stock of those enterprises may be held by a small group of stockholders,
even after the initial
21
equity offerings by those enterprises. The sale of some portion or all of those
blocks could have an adverse effect on the price of the stock of any such
enterprise.
Prior to making an initial equity offering, most state enterprises or
former state enterprises go through an internal reorganization or management.
Such reorganizations are made in an attempt to better enable these enterprises
to compete in the private sector. However, certain reorganizations could result
in a management team that does not function as well as an enterprise's prior
management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of
years, with the government continuing to hold a controlling position in the
enterprise even after the initial equity offering for the enterprise.
Prior to privatization, most of the state enterprises in which the Fund may
invest enjoy the protection of and receive preferential treatment from the
respective sovereigns that own or control them. After making an initial equity
offering, these enterprises may no longer have such protection or receive such
preferential treatment and may become subject to market competition from which
they were previously protected. Some of these enterprises may not be able to
operate effectively in a competitive market and may suffer losses or experience
bankruptcy due to such competition.
Brady Bonds. Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan. The Brady Plan is an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989
as a mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the International Bank for
Reconstruction and Development (the "World Bank") and the International Monetary
Fund (the "IMF"). The Brady Plan framework, as it has developed, contemplates
the exchange of external commercial bank debt for newly issued bonds known as
"Brady Bonds." Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and/or the IMF support the restructuring by providing funds pursuant
to loan agreements or other arrangements that enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements with the World Bank and/or the IMF, debtor
nations have been required to agree to the implementation of certain domestic
monetary and fiscal reforms. Such reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs seek to promote the debtor country's economic growth and development.
Investors should also recognize that the Brady Plan only sets forth general
guiding principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor nations and
their creditors. The Fund's Adviser may believe that economic reforms undertaken
by countries in connection with the issuance of Brady Bonds may make the debt of
countries which have issued or have announced plans to issue Brady Bonds an
attractive opportunity for investment. However, there can be no assurance that
the Adviser's expectations with respect to Brady Bonds will be realized.
22
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the Fund will purchase Brady Bonds in secondary markets,
as described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due date at maturity
(typically 30 years from the date of issuance) by U.S. Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds. The U.S.
Treasury bonds purchased as collateral for such Brady Bonds are financed by the
IMF, the World Bank and the debtor nations' reserves. In addition, interest
payments on certain types of Brady Bonds may be collateralized by cash or
high-grade securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of the
interest accruals being uncollateralized. In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. However, in light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are considered
speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and, for payment of interest and (except in the case of
principal collateralized Brady Bonds) principal, will be relying primarily on
the willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds.
Foreign Commercial Paper. The Fund may invest in commercial paper which is
indexed to certain specific foreign currency exchange rates. The terms of such
commercial paper provide that its principal amount is adjusted upwards or
downwards (but not below zero) at maturity to reflect changes in the exchange
rate between two currencies while the obligation is outstanding. The Fund will
purchase such commercial paper with the currency in which it is denominated and,
at maturity, will receive interest and principal payments thereon in that
currency, but the amount or principal payable by the issuer at maturity will
change in proportion to the change (if any) in the exchange rate between two
specified currencies between the date the instrument is issued and the date the
instrument matures. While such commercial paper entails the risk of loss of
principal, the potential for realizing gains as a result of changes in foreign
currency exchange rate enables the Fund to hedge or cross-hedge against a
decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. The Fund
will purchase such commercial paper for hedging
23
purposes only, not for speculation. The Fund believes that such investments do
not involve the creation of a senior security, but nevertheless will establish a
segregated account with respect to its investments in this type of commercial
paper and maintain in such account cash not available for investment or other
liquid assets having a value equal to the aggregate principal amount of
outstanding commercial paper of this type.
Foreign and Emerging Markets Investment Risk- Foreign securities are normally
denominated and traded in foreign currencies. As a result, the value of the
fund's foreign investments and the value of its shares may be affected favorably
or unfavorably by changes in currency exchange rates relative to the US dollar.
There may be less information publicly available about a foreign issuer than
about a US issuer, and foreign issuers may not be subject to accounting,
auditing and financial reporting standards and practices comparable to those in
the US. The securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable US issuers. Foreign brokerage commissions
and other fees are also generally higher than in the US. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of the Fund's assets held
abroad) and expenses not present in the settlement of investments in US markets.
Payment for securities without delivery may be required in certain foreign
markets.
In addition, foreign securities may be subject to the risk of
nationalization or expropriation of assets, imposition of currency exchange
controls or restrictions on the repatriation of foreign currency, confiscatory
taxation, political or financial instability and diplomatic developments which
could affect the value of the Fund's investments in certain foreign countries.
Governments of many countries have exercised and continue to exercise
substantial influence over many aspects of the private sector through the
ownership or control of many companies, including some of the largest in these
countries. As a result, government actions in the future could have a
significant effect on economic conditions which may adversely affect prices of
certain portfolio securities. There is also generally less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the US. Dividends or interest on, or proceeds from the sale of, foreign
securities may be subject to foreign withholding taxes, and special US tax
considerations may apply. Moreover, foreign economies may differ favorably or
unfavorably from the US economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Legal remedies available to investors in certain foreign countries may be
more limited than those available with respect to investments in the US or in
other foreign countries. The laws of some foreign countries may limit the Fund's
ability to invest in securities of certain issuers organized under the laws of
those foreign countries.
Of particular importance, many foreign countries are heavily dependent upon
exports, particularly to developed countries, and, accordingly, have been and
may continue to be adversely affected by trade barriers, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the US and other countries with which they trade. These economies also have
been and may continue to be negatively impacted by economic conditions in the US
and other trading partners, which can lower the demand for goods produced in
those countries.
24
The risks described above, including the risks of nationalization or
expropriation of assets, typically are increased in connection with investments
in "emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, and such countries may
lack the social, political and economic stability characteristic of more
developed countries (including amplified risk of war and terrorism). Certain of
these countries have in the past failed to recognize private property rights and
have at times nationalized and expropriated the assets of private companies.
Investments in emerging markets may be considered speculative.
The currencies of certain emerging market countries have experienced
devaluations relative to the US dollar, and future devaluations may adversely
affect the value of assets denominated in such currencies. In addition, currency
hedging techniques may be unavailable in certain emerging market countries. Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation or deflation for many years, and future
inflation may adversely affect the economies and securities markets of such
countries.
In addition, unanticipated political or social developments may affect the
value of investments in emerging markets and the availability of additional
investments in these markets. Any change in the leadership or politics of
emerging market countries, or the countries that exercise a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities. The small size, limited trading volume and
relative inexperience of the securities markets in these countries may make
investments in securities traded in emerging markets illiquid and more volatile
than investments in securities traded in more developed countries. For example,
limited market size may cause prices to be unduly influenced by traders who
control large positions. The limited liquidity of securities markets in emerging
countries may also affect the Fund's ability to acquire or dispose of securities
at the price and time it wishes to do so. Accordingly, during periods of rising
securities prices in the more illiquid securities markets, the Fund's ability to
participate fully in such price increases may be limited by its investment
policy of investing not more than 15% of its total net assets in illiquid
securities. In addition, the Fund may be required to establish special custodial
or other arrangements before making investments in securities traded in emerging
markets. There may be little financial or accounting information available with
respect to issuers of emerging market securities, and it may be difficult as a
result to assess the value of prospects of an investment in such securities.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Fund's securities in such markets may
not be readily available. The Fund may suspend redemption of its shares for any
period during which an emergency exists, as determined by the SEC. Accordingly
if the Fund believes that appropriate circumstances exist, it will promptly
apply to the SEC for a determination that an emergency is present. During the
period commencing from the Fund's identification of such condition until the
date of the SEC action, the Fund's securities in the affected markets will be
valued at fair value determined in good faith by or under the direction of the
Fund's Board.
25
Certain of the foregoing risks may also apply to some extent to securities
of US issuers that are denominated in foreign currencies or that are traded in
foreign markets, or securities of US issuers having significant foreign
operations.
Sovereign Debt Risk- Investment in sovereign debt can involve a high degree
of risk. The governmental entity that controls the repayment of sovereign debt
may not be able or willing to repay the principal and/or interest when due in
accordance with the terms of such debt. A governmental entity's willingness or
ability to repay principal and interest due in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the governmental entity's policy toward the IMF, and the political constraints
to which a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt may be
requested to participate in the rescheduling of such debt and to extend further
loans to governmental entities. There is no bankruptcy proceeding by which
sovereign debt on which governmental entities have defaulted may be collected in
whole or in part. To the extent that a Fund invests in obligations issued by
emerging markets, these investments involve additional risks. Sovereign obligors
in emerging market countries are among the world's largest debtors to commercial
banks, other governments, international financial organizations and other
financial institutions. These obligors have in the past experienced substantial
difficulties in servicing their external debt obligations, which led to defaults
on certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds, and obtaining new credit for finance interest payments. Holders of
certain foreign sovereign debt securities may be requested to participate in the
restructuring of such obligations and to extend further loans to their issuers.
There can be no assurance that the foreign sovereign debt securities in which a
Fund may invest will not be subject to similar restructuring arrangements or to
requests for new credit which may adversely affect the Fund's holdings.
Forward Currency Contracts. A forward currency contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are entered
into in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers.
At or before the maturity of a forward currency contract, the Fund may
either sell a portfolio security and make delivery of the currency, or retain
the security and fully or partially
26
offset its contractual obligation to deliver the currency by purchasing a second
contract. If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that movement has
occurred in forward currency contract prices.
The precise matching of forward currency contract amounts and the value of
the securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Fund might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Currency Hedging. While the values of forward currency contracts, currency
options, currency futures and options on futures may be expected to correlate
with exchange rates, they will not reflect other factors that may affect the
value of the Fund's investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuer's creditworthiness deteriorates. Because the
value of the Fund's investments denominated in foreign currency will change in
response to many factors other than exchange rates, a currency hedge may not be
entirely successful in mitigating changes in the value of the Fund's investments
denominated in that currency over time.
A decline in the dollar value of a foreign currency in which the Fund's
securities are denominated will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved in the
future. In order to protect against such diminutions in the value of securities
it holds, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right to sell the
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby potentially increasing the
cost of the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least partially, the
effects of the adverse movements in exchange rates. Although currency hedges
limit the risk of loss due to a decline in the value of a hedged currency, at
the same time, they also limit any potential gain that might result should the
value of the currency increase.
The Fund may enter into foreign currency exchange transactions to hedge its
currency exposure in specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward currency with respect to specific
receivables or payables of the Fund generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security positions. The Fund may not
position hedge to an extent greater than the aggregate market value (at the time
of making such sale) of the hedged securities.
27
Non-Investment Grade Debt (High Yield/High Risk Bonds). The Fund may also
purchase debt securities which are rated below investment-grade (commonly
referred to as "junk bonds"), that is, rated below Baa by Moody's or below BBB
by Standard & Poor's or Fitch or a comparable rating by another NRSRO and
unrated securities judged to be of equivalent quality as determined by the
Advisor. These securities usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such securities), generally involve
greater volatility of price and risk to principal and income, and may be less
liquid, than securities in the higher rating categories. The lower the ratings
of such debt securities, the more their risks render them like equity
securities. Securities rated D may be in default with respect to payment of
principal or interest. See the Appendix to this SAI for a more complete
description of the ratings assigned by these ratings organizations and their
respective characteristics.
Issuers of such high-yield securities often are highly leveraged and may
not have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
or the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely affect the Fund's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
The Fund may have difficulty disposing of certain high-yield securities
because they may have a thin trading market. Because not all dealers maintain
markets in all high yield securities, the Fund anticipates that such securities
could be sold only to a limited number of dealers or institutional investors.
The lack of a liquid secondary market may have an adverse effect on the market
price and the Fund's ability to dispose of particular issues and may also make
it more difficult for the Fund to obtain accurate market quotations for purposes
of valuing the fund's assets. Market quotations generally are available on many
high yield issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. Adverse
publicity and investor perceptions may decrease the values and liquidity of
high-yield securities. These securities may also involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties.
Credit quality in the high-yield securities market can change suddenly and
unexpectedly, and even recently-issued credit ratings may not fully reflect the
actual risks posed by a particular high-yield security. For these reasons, it is
generally the policy of the Advisor not to rely exclusively on ratings issued by
established credit rating agencies, but to supplement such ratings with its own
independent and on-going review of credit quality. The achievement of the Fund's
investment objective by investment in such securities may be more dependent on
the
28
Advisor's credit analysis than is the case for higher quality bonds. Should the
rating of a portfolio security be downgraded, the Advisor will determine whether
it is in the best interests of the Fund to retain or dispose of such security.
Prices for high-yield securities may be affected by legislative and
regulatory developments. Also, Congress has from time to time considered
legislation which would restrict or eliminate the corporate tax deduction for
interest payments in these securities and regulate corporate restructurings.
Such legislation may significantly depress the prices of outstanding securities
of this type.
A portion of the high-yield securities acquired by the Fund will be
purchased upon issuance, which may involve special risks because the securities
so acquired are new issues. In such instances the Fund may be a substantial
purchaser of the issue and therefore have the opportunity to participate in
structuring the terms of the offering. Although this may enable the Fund to seek
to protect itself against certain of such risks, the considerations discussed
herein would nevertheless remain applicable.
Illiquid Securities and Restricted Securities. The Fund may purchase
securities that are subject to legal or contractual restrictions on resale
("restricted securities"). Generally speaking, restricted securities may be sold
(i) only to qualified institutional buyers; (ii) in a privately negotiated
transaction to a limited number of purchasers; (iii) in limited quantities after
they have been held for a specified period of time and other conditions are met
pursuant to an exemption from registration; or (iv) in a public offering for
which a registration statement is in effect under the Securities Act. Issuers of
restricted securities may not be subject to the disclosure and other investor
protection requirements that would be applicable if their securities were
publicly traded. Restricted securities are often illiquid, but they may also be
liquid.
The SEC has adopted Rule 144A which allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers.
Any such restricted securities will be considered to be illiquid for
purposes of the Fund's limitations on investments in illiquid securities unless,
pursuant to procedures adopted by the Board of Trustees of the Trust, the Fund's
adviser or subadviser has determined such securities to be liquid because such
securities are eligible for resale pursuant to Rule 144A and are readily
saleable. To the extent that qualified institutional buyers may become
uninterested in purchasing Rule 144A securities, the Fund's level of illiquidity
may increase.
Issuers of restricted securities may not be subject to the disclosure and
other investor protection requirement that would be applicable if their
securities were publicly traded. Where a registration statement is required for
the resale of restricted securities, the Fund may be required to bear all or
part of the registration expenses. The Fund may be deemed to be an "underwriter"
for purposes of the Securities Act, as amended when selling restricted
securities to the public and, in such event, the Fund may be liable to
purchasers of such securities if the registration statement prepared by the
issuer is materially inaccurate or misleading.
29
The Fund may also purchase securities that are not subject to legal or
contractual restrictions on resale, but that are deemed illiquid. Such
securities may be illiquid, for example, because there is a limited trading
market for them.
The Fund may be unable to sell a restricted or illiquid security. In
addition, it may be more difficult to determine a market value for restricted or
illiquid securities. Moreover, if adverse market conditions were to develop
during the period between the Fund's decision to sell a restricted or illiquid
security and the point at which the Fund is permitted or able to sell such
security, the Fund might obtain a price less favorable than the price that
prevailed when it decided to sell. This investment practice, therefore, could
have the effect of decreasing the level of illiquidity of the Fund.
Private Placement Commercial Paper. Commercial paper eligible for resale
under Section 4(2) of the Securities Act is offered only to accredited
investors. Rule 506 of Regulation D in the Securities Act lists investment
companies as an accredited investor. Section 4(2) paper not eligible for resale
under Rule 144A under the Securities Act shall be deemed liquid if (1) the
Section 4(2) paper is not traded flat or in default as to principal and
interest; (2) the Section 4(2) paper is rated in one of the two highest rating
categories by at least two NRSROs, or if only one NRSRO rates the security, it
is rated in one of the two highest categories by that NRSRO; and (3) the Fund's
adviser or subadviser believes that, based on the trading markets for such
security, such security can be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
security.
Borrowing. The Fund may borrow money from banks, limited by the Fund's
fundamental investment restriction (generally, 33-1/3% of its total assets
(including the amount borrowed)), including borrowings for temporary or
emergency purposes. The Fund may engage in mortgage dollar roll and reverse
repurchase agreements which may be considered a form of borrowing unless the
Fund covers its exposure by segregating or earmarking liquid assets.
Leverage. The use of leverage by the Fund creates an opportunity for
greater total return, but, at the same time, creates special risks. For example,
leveraging may exaggerate changes in the net asset value of Fund shares and in
the yield on an Index Fund's portfolio. Although the principal of such
borrowings will be fixed, the Fund's assets may change in value during the time
the borrowings are outstanding. Borrowings will create interest expenses for the
Fund which can exceed the income from the assets purchased with the borrowings.
To the extent the income or capital appreciation derived from securities
purchased with borrowed funds exceeds the interest the Fund will have to pay on
the borrowings, the Fund's return will be greater than if leverage had not been
used. Conversely, if the income or capital appreciation from the securities
purchased with such borrowed funds is not sufficient to cover the cost of
borrowing, the return to the Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
applicable Fund's adviser or subadviser in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it expects that the
benefits to the Fund's shareholders of maintaining the leveraged position will
outweigh the current reduced return.
30
Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Fund's adviser or subadviser from
managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies. However, a breach of any such covenants not cured
within the specified cure period may result in acceleration of outstanding
indebtedness and require the Fund to dispose of portfolio investments at a time
when it may be disadvantageous to do so.
Indexed Securities. The Fund may invest in indexed securities, the value of
which is linked to currencies, interest rates, commodities, indices or other
financial indicators ("reference instruments"). Most indexed securities have
maturities of three years or less.
Indexed securities differ from other types of debt securities in which the
Fund may invest in several respects. First, the interest rate or, unlike other
debt securities, the principal amount payable at maturity of an indexed security
may vary based on changes in one or more specified reference instruments, such
as an interest rate compared with a fixed interest rate or the currency exchange
rates between two currencies (neither of which need be the currency in which the
instrument is denominated). The reference instrument need not be related to the
terms of the indexed security. For example, the principal amount of a US dollar
denominated indexed security may vary based on the exchange rate of two foreign
currencies. An indexed security may be positively or negatively indexed; that
is, its value may increase or decrease if the value of the reference instrument
increases. Further, the change in the principal amount payable or the interest
rate of an indexed security may be a multiple of the percentage change (positive
or negative) in the value of the underlying reference instrument(s).
Investment in indexed securities involves certain risks. In addition to the
credit risk of the security's issuer and the normal risks of price changes in
response to changes in interest rates, the principal amount of indexed
securities may decrease as a result of changes in the value of reference
instruments. Further, in the case of certain indexed securities in which the
interest rate is linked to a reference instrument, the interest rate may be
reduced to zero, and any further declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying the indexed
securities.
Lending of Portfolio Securities. The Fund may lend its portfolio securities
to brokers, dealers and other financial institutions, provided it receives
collateral, with respect to each loan of U.S. securities, equal to at least 102%
of the value of the portfolio securities loaned, and, with respect to each loan
of non-U.S. securities, collateral of at least 105% of the value of the
portfolio securities loaned, and at all times thereafter shall require the
borrower to mark to market such collateral on a daily basis so that the market
value of such collateral does not fall below 100% of the market value of the
portfolio securities so loaned. By lending its portfolio securities, the Fund
can increase its income through the investment of the collateral. For the
purposes of this policy, the Fund considers collateral consisting of cash, U.S.
government securities or letters of credit issued by banks whose securities meet
the standards for investment by the Fund to be the equivalent of cash. From time
to time, the Fund may return to the borrower or a third party which is
unaffiliated with it, and which is acting as a "placing broker," a part of the
interest earned from the investment of collateral received for securities
loaned.
31
The SEC currently requires that the following conditions must be met
whenever portfolio securities are loaned: (1) the Fund must receive from the
borrower collateral equal to at least 100% of the value of the portfolio
securities loaned; (2) the borrower must increase such collateral whenever the
market value of the securities loaned rises above the level of such collateral;
(3) the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions payable on the loaned securities, and any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection with
the loan; and (6) while any voting rights on the loaned securities may pass to
the borrower, the Fund's board of trustees must be able to terminate the loan
and regain the right to vote the securities if a material event adversely
affecting the investment occurs. These conditions may be subject to future
modification. Loan agreements involve certain risks in the event of default or
insolvency of the other party including possible delays or restrictions upon the
Fund's ability to recover the loaned securities or dispose of the collateral for
the loan.
Investment of Securities Lending Collateral. The collateral received from a
borrower as a result of the Fund's securities lending activities will be used to
purchase both fixed-income securities and other securities with debt-like
characteristics that are rated A1 or P1 (except as noted below) on a fixed rate
or floating rate basis, including but not limited to: (a) bank obligations, such
as bank bills, bank notes, certificates of deposit, commercial paper, deposit
notes, loan participations, medium term notes, mortgage backed securities,
structured liquidity notes, and time deposits; (b) corporate obligations, such
as commercial paper, corporate bonds, investment agreements, funding agreements,
or guaranteed investment contracts entered into with, or guaranteed by an
insurance company, loan participations, master notes, medium term notes, and
second tier commercial paper (which must have a minimum rating of two of the
following: A-2, P-2 and F-2); (c) sovereigns, such as commercial paper, U.S.
Government securities (including securities issued or guaranteed as to principal
and interest by the U.S. government, its agencies, instrumentalities,
establishments or the like), sovereign obligations of non-U.S. countries that
are members of the Organization for Economic Co-operation and Development of the
European Union (including securities issued or guaranteed as to principal and
interest by the sovereign, its agencies, instrumentalities, establishments or
the like) and supranational issues; and (d) repurchase agreements, including
reverse repurchase agreements (which permitted collateral, in most cases, must
have an investment grade rating from at least two NRSROs). Except for the
investment agreements, funding agreements or guaranteed investment contracts
guaranteed by an insurance company, master notes, and medium term notes (which
are described below), these types of investments are described elsewhere in the
SAI. Collateral may also be invested in a money market mutual fund or short-term
collective investment trust.
Investment agreements, funding agreements, or guaranteed investment
contracts entered into with, or guaranteed by an insurance company are
agreements where an insurance company either provides for the investment of the
Fund's assets or provides for a minimum guaranteed rate of return to the
investor.
Master notes are promissory notes issued usually with large, creditworthy
broker-dealers on either a fixed rate or floating rate basis. Master notes may
or may not be
32
collateralized by underlying securities. If the master note is issued by an
unrated subsidiary of a broker-dealer, then an unconditional guarantee is
provided by the issuer's parent.
Medium term notes are unsecured, continuously offered corporate debt
obligations. Although medium term notes may be offered with a maturity from one
to ten years, in the context of securities lending collateral, the maturity of
the medium term note will not generally exceed two years.
Participation Interests. The Fund may purchase from financial institutions
participation interests in securities in which the Fund may invest. A
participation interest gives the Fund an undivided interest in the security in
the proportion that the Fund's participation interest bears to the principal
amount of the security. These instruments may have fixed, floating or variable
interest rates with remaining maturities of 397 days or less. If the
participation interest is unrated, or has been given a rating below that which
is permissible for purchase by the Fund, the participation interest will be
backed by an irrevocable letter of credit or guarantee of a bank, or the payment
obligation otherwise will be collateralized by US Government securities, or, in
the case of unrated participation interest, determined by the Advisor to be of
comparable quality to those instruments in which the Fund may invest. For
certain participation interests, the Fund will have the right to demand payment,
on not more than seven days' notice, for all or any part of the Fund's
participation interests in the security, plus accrued interest. As to these
instruments, the Fund generally intends to exercise its right to demand payment
only upon a default under the terms of the security.
Real Estate Investment Trusts ("REITs"). REITs are sometimes informally
characterized as equity REITs, mortgage REITs and hybrid REITs. Equity REITs
invest the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. Hybrid REITs combine the investment
strategies of equity REITs and mortgage REITs.
Investment in REITs may subject the Fund to risks associated with the
direct ownership of real estate, such as decreases in real estate values,
overbuilding, increased competition and other risks related to local or general
economic conditions, increases in operating costs and property taxes, changes in
zoning laws, casualty or condemnation losses, possible environmental
liabilities, regulatory limitations on rent and fluctuations in rental income.
Equity REITs generally experience these risks directly through fee or leasehold
interests, whereas mortgage REITs generally experience these risks indirectly
through mortgage interests, unless the mortgage REIT forecloses on the
underlying real estate. Changes in interest rates may also affect the value of
the Fund's investment in REITs. For instance, during periods of declining
interest rates, certain mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
those REITs.
Certain REITs have relatively small market capitalizations, which may tend
to increase the volatility of the market price of their securities. Furthermore,
REITs are dependent upon specialized management skills, have limited
diversification and are, therefore, subject to risks inherent in operating and
financing a limited number of projects. REITs are also subject to
33
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free pass-through of income under the Internal Revenue Code
of 1986, as amended, and to maintain exemption from the registration
requirements of the 1940 Act. By investing in REITs indirectly through the Fund,
a shareholder will bear not only his or her proportionate share of the expenses
of the Fund, but also, indirectly, similar expenses of the REITs. In addition,
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders.
Repurchase Agreements. The Fund may invest in repurchase agreements
pursuant to its investment guidelines. In a repurchase agreement, the Fund
acquires ownership of a security and simultaneously commits to resell that
security to the seller, typically a bank or broker/dealer.
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Repurchase agreements are considered by the staff of the SEC to be
loans by the Fund. Securities subject to a repurchase agreement are held in a
segregated account and, as described in more detail below, the value of such
securities is kept at least equal to the repurchase price on a daily basis. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price
upon repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Obligation itself. Obligations will be held by the
custodian or in the Federal Reserve Book Entry System.
It is not clear whether a court would consider the Obligation purchased by
the Fund subject to a repurchase agreement as being owned by the Fund or as
being collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the Obligation before repurchase of the Obligation under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the Obligation. If the court characterizes the transaction as a loan and the
Fund has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt Obligation purchased for the Fund, the
Advisor seeks to reduce the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the Obligation, in which
case the Fund may incur a loss if the proceeds to the Fund of the sale to a
third party are less than the repurchase price. However, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
Obligation to deliver additional securities so that the market value (including
interest) of all securities subject to the repurchase agreement will equal or
exceed the repurchase price.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities,
34
agrees to repurchase them at an agreed upon time and price. The Fund generally
retains the right to interest and principal payments on the security. Since the
Fund receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing (see "Borrowing"). When required by guidelines of the
SEC, the Fund will segregate or earmark permissible liquid assets to secure its
obligations to repurchase the security. At the time the Fund enters into a
reverse repurchase agreement, it will establish and maintain segregated or
earmarked liquid assets with an approved custodian having a value not less than
the repurchase price (including accrued interest). The segregated or earmarked
liquid assets will be marked-to-market daily and additional assets will be
segregated or earmarked on any day in which the assets fall below the repurchase
price (plus accrued interest). The Fund's liquidity and ability to manage its
assets might be affected when it sets aside cash or portfolio securities to
cover such commitments. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale may decline below the
price of the securities the Fund has sold but is obligated to repurchase. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act. The Fund will enter into reverse repurchase agreements only
when the Advisor believes that the interest income to be earned from the
investment of the proceeds of the transaction will be greater than the interest
expense of the transaction. Such transactions may increase fluctuation in the
market value of fund assets and their yields.
Securities Backed by Guarantees. The Fund may invest in securities backed
by guarantees from banks, insurance companies and other financial institutions.
Changes in the credit quality of these institutions could have an adverse impact
on securities they have guaranteed or backed, which could cause losses to the
Fund.
Strategic Transactions and Derivatives. The Fund may, but is not required
to, utilize various other investment strategies as described below for a variety
of purposes, such as hedging various market risks, managing the effective
maturity or duration of the fixed-income securities in the Fund's portfolio or
enhancing potential gain. These strategies may be executed through the use of
derivative contracts.
35
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors, collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit (subject to
certain limits imposed by the 1940 Act) to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and in any combination, and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Advisor's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions will not be used to alter
fundamental investment purposes and characteristics of the Fund, and the Fund
will segregate assets (or as provided by applicable regulations, enter into
certain offsetting positions) to cover its obligations under options, futures
and swaps to limit leveraging of the Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Advisor's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost
36
of the initial premium. Losses resulting from the use of Strategic Transactions
would reduce net asset value, and possibly income, and such losses can be
greater than if the Strategic Transactions had not been utilized.
Risks of Strategic Transactions Outside the US. When conducted outside the
US, Strategic Transactions may not be regulated as rigorously as in the US, may
not involve a clearing mechanism and related guarantees, and are subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions also
could be adversely affected by: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the US of data on which to
make trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the US, (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the US, and (v) lower trading volume and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate cash or
liquid assets with its custodian to the extent fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid assets at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by the Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call
37
option on an index at a time when the in-the-money amount exceeds the exercise
price, the Fund will segregate, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess. OCC issued and exchange
listed options sold by the Fund other than those above generally settle with
physical delivery, or with an election of either physical delivery or cash
settlement and the Fund will segregate an amount of cash or liquid assets equal
to the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and multiple
interest rate transactions and any combination of futures, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Advisor, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Advisor's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
General Characteristics of Futures. The Fund may enter into futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest
38
rate, currency or equity market changes, and for duration management, risk
management and return enhancement purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right in return for the premium paid to assume a position in a
futures contract and obligates the seller to deliver such position.
The Fund has claimed exclusion from the definition of the term "commodity
pool operator" adopted by the Commodity Futures Trading Commission and the
National Futures Association, which regulate trading in the futures markets.
Therefore, the Fund is not subject to commodity pool operator registration and
regulation under the Commodity Exchange Act. Futures and options on futures may
be entered into for bona fide hedging, risk management (including duration
management) or other portfolio and return enhancement management purposes to the
extent consistent with the exclusion from commodity pool operator registration.
Typically, maintaining a futures contract or selling an option thereon requires
the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the marked to market
value of the contract fluctuates. The purchase of an option on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits do
not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses, because it would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all
39
participants in the futures and options on futures contracts markets are subject
to daily variation margin calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the future markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash
40
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Advisor must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with US
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers" or broker/dealers, domestic or foreign banks or other
financial
41
institutions which have received (or the guarantors of the obligation of which
have received) a short-term credit rating of A-1 from Standard & Poor's or
P-1 from Moody's or an equivalent rating from any NRSRO or, in the case of OTC
currency transactions, are determined to be of equivalent credit quality by the
Advisor. The staff of the SEC currently takes the position that OTC options
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 15% of its net assets in
illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities including US
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on US and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell put options on securities including US
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's total assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
42
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the Fund may enter are interest rate, credit default, currency, index and
other swaps and the purchase or sale of related caps, floors and collars. The
Fund expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as the Fund will segregate
assets (or enter into offsetting positions) to cover its obligations under
swaps, the Advisor and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or
has an equivalent rating from a NRSRO or is determined to be of equivalent
credit quality by the Advisor. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
43
Credit Default Swaps. The Fund may enter into credit default swap
contracts. The Fund might use credit default swap contracts to limit or to
reduce risk exposure of the Fund to defaults of corporate and sovereign issuers
(i.e., to reduce risk when the Fund owns or has exposure to such issuers). The
Fund also might use credit default swap contracts to create direct or synthetic
short or long exposure to domestic or foreign corporate debt securities or
certain sovereign debt securities to which the Fund is not otherwise exposed.
As the seller in a credit default swap contract, the Fund would be required
to pay the par (or other agreed-upon) value of a referenced debt obligation to
the counterparty in the event of a default (or similar event) by a third party,
such as a U.S. or foreign issuer, on the debt obligation. In return, the Fund
would receive from the counterparty a periodic stream of payments over the term
of the contract, provided that no event of default (or similar event) occurs. If
no event of default (or similar event) occurs, the Fund would keep the stream of
payments and would have no payment of obligations. As the seller in a credit
default swap contract, the Fund effectively would add economic leverage to its
portfolio because, in addition to its total net assets, the Fund would be
subject to investment exposure on the notional amount of the swap.
As the purchaser in a credit default swap contract, the Fund would function
as the counterparty referenced in the preceding paragraph. This would involve
the risk that the investment might expire worthless. It also would involve
credit risk - that the seller may fail to satisfy its payment obligations to the
Fund in the event of a default (or similar event). As the purchaser in a credit
default swap contract, the Fund's investment would generate income only in the
event of an actual default (or similar event) by the issuer of the underlying
obligation.
Synthetic Investments. In certain circumstances, the Fund may wish to
obtain the price performance of a security without actually purchasing the
security in circumstances where, for example, the security is illiquid, or is
unavailable for direct investment or available only on less attractive terms. In
such circumstances, the Fund may invest in synthetic or derivative alternative
investments ("Synthetic Investments") that are based upon or otherwise relate to
the economic performance of the underlying securities. Synthetic Investments may
include swap transactions, notes or units with variable redemption amounts, and
other similar instruments and contracts. Synthetic Investments typically do not
represent beneficial ownership of the underlying security, usually are not
collateralized or otherwise secured by the counterparty and may or may not have
any credit enhancements attached to them. Accordingly, Synthetic Investments
involve exposure not only to the creditworthiness of the issuer of the
underlying security, changes in exchange rates and future governmental actions
taken by the jurisdiction in which the underlying security is issued, but also
to the creditworthiness and legal standing of the counterparties involved. In
addition, Synthetic Investments typically are illiquid.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties primarily in order to hedge, or manage the risk of the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon
44
by the parties, at a price set at the time of the contract. A currency swap
is an agreement to exchange cash flows based on the notional difference among
two or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations which
have received) a credit rating of A-1 or P-1 by Standard & Poor's or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps generally
will be limited to hedging involving either specific transactions or portfolio
positions except as described below. Transaction hedging is entering into a
currency transaction with respect to specific assets or liabilities of the Fund,
which will generally arise in connection with the purchase or sale of its
portfolio securities or the receipt of income therefrom. Position hedging is
entering into a currency transaction with respect to portfolio security
positions denominated or generally quoted in that currency.
The Fund generally will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for US dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. Currency hedging involves some of the same
risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived correlation between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases
45
and sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Stripped Zero Coupon Securities/Custodial Receipts. Zero coupon securities
include securities issued directly by the US Treasury, and US Treasury bonds or
notes and their unmatured interest coupons and receipts for their underlying
principal ("coupons") which have been separated by their holder, typically a
custodian bank or investment brokerage firm. A holder will separate the interest
coupons from the underlying principal (the "corpus") of the US Treasury
security. A number of securities firms and banks have stripped the interest
coupons and receipts and then resold them in custodial receipt programs with a
number of different names, including "Treasury Income Growth Receipts"
(TIGRS(TM)) and Certificate of Accrual on Treasuries (CATS(TM)). The underlying
US Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are owned ostensibly by the bearer or holder thereof), in trust
on behalf of the owners thereof. The US Treasury has facilitated transfers of
ownership of zero coupon securities by accounting separately for the beneficial
ownership of particular interest coupon and corpus payments on Treasury
securities through the Federal Reserve book-entry record keeping system. The
Federal Reserve program as established by the Treasury Department is known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Under the STRIPS program, the Fund will be able to have its
beneficial ownership of zero coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or other
evidences of ownership of the underlying US Treasury securities.
When US Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (i.e. cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
Supranational Entities. Supranational entities are international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, The Asian Development Bank and the InterAmerican
46
Development Bank. Obligations of supranational entities are backed by the
guarantee of one or more foreign governmental parties which sponsor the entity.
Trust Preferred Securities. The Fund may invest in Trust Preferred
Securities, which are hybrid instruments issued by a special purpose trust (the
"Special Trust"), the entire equity interest of which is owned by a single
issuer. The proceeds of the issuance to the Fund of Trust Preferred Securities
are typically used to purchase a junior subordinated debenture, and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.
If payments on the underlying junior subordinated debentures held by the
Special Trust are deferred by the debenture issuer, the debentures would be
treated as original issue discount ("OID") obligations for the remainder of
their term. As a result, holders of Trust Preferred Securities, such as the
Fund, would be required to accrue daily for Federal income tax purposes their
share of the stated interest and the de minimis OID on the debentures
(regardless of whether the Fund receives any cash distributions from the Special
Trust), and the value of Trust Preferred Securities would likely be negatively
affected. Interest payments on the underlying junior subordinated debentures
typically may only be deferred if dividends are suspended on both common and
preferred stock of the issuer. The underlying junior subordinated debentures
generally rank slightly higher in terms of payment priority than both common and
preferred securities of the issuer, but rank below other subordinated debentures
and debt securities. Trust Preferred Securities may be subject to mandatory
prepayment under certain circumstances. The market values of Trust Preferred
Securities may be more volatile than those of conventional debt securities.
Trust Preferred Securities may be issued in reliance on Rule 144A under the
Securities Act, and, unless and until registered, are restricted securities;
there can be no assurance as to the liquidity of Trust Preferred Securities and
the ability of holders of Trust Preferred Securities, such as the Fund, to sell
their holdings.
US Government Securities. There are two broad categories of US
Government-related debt instruments: (a) direct obligations of the US Treasury,
and (b) securities issued or guaranteed by US Government agencies.
Examples of direct obligations of the US Treasury are Treasury Bills,
Notes, Bonds and other debt securities issued by the US Treasury. These
instruments are backed by the "full faith and credit" of the United States. They
differ primarily in interest rates, the length of maturities and the dates of
issuance. Treasury bills have original maturities of one year or less. Treasury
notes have original maturities of one to ten years and Treasury bonds generally
have original maturities of greater than ten years.
Some agency securities are backed by the full faith and credit of the
United States (such as Maritime Administration Title XI Ship Financing Bonds and
Agency for International Development Housing Guarantee Program Bonds) and others
are backed only by the rights of the issuer to borrow from the US Treasury (such
as Federal Home Loan Bank Bonds and Federal National Mortgage Association
Bonds), while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. With respect to securities
supported only by the credit of the issuing agency or by an additional line of
credit with the US Treasury, there is no guarantee that the US Government will
provide support to such agencies
47
and such securities may involve risk of loss of principal and interest. US
Government Securities may include "zero coupon" securities that have been
stripped by the US Government of their unmatured interest coupons and
collateralized obligations issued or guaranteed by a US Government agency or
instrumentality.
Interest rates on US Government obligations may be fixed or variable.
Interest rates on variable rate obligations are adjusted at regular intervals,
at least annually, according to a formula reflecting then current specified
standard rates, such as 91-day US Treasury bill rates. These adjustments
generally tend to reduce fluctuations in the market value of the securities.
The government guarantee of the US Government Securities in the Fund's
portfolio does not guarantee the net asset value of the shares of the Fund.
There are market risks inherent in all investments in securities and the value
of an investment in the Fund will fluctuate over time. Normally, the value of
investments in US Government Securities varies inversely with changes in
interest rates. For example, as interest rates rise the value of investments in
US Government Securities will tend to decline, and as interest rates fall the
value of the Fund's investments will tend to increase. In addition, the
potential for appreciation in the event of a decline in interest rates may be
limited or negated by increased principal prepayments with respect to certain
Mortgage-Backed Securities, such as GNMA Certificates. Prepayments of high
interest rate Mortgage-Backed Securities during times of declining interest
rates will tend to lower the return of the Fund and may even result in losses to
the Fund if some securities were acquired at a premium. Moreover, during periods
of rising interest rates, prepayments of Mortgage-Backed Securities may decline,
resulting in the extension of the Fund's average portfolio maturity. As a
result, the Fund's portfolio may experience greater volatility during periods of
rising interest rates than under normal market conditions.
TIPS Bonds. TIPS are fixed-income securities issued by the U.S. Treasury
whose principal value is periodically adjusted according to the rate of
inflation. The U.S. Treasury uses a structure that accrues inflation into the
principal value of the bond. Inflation-indexed securities issued by the U.S.
Treasury have maturities of five, ten or thirty years, although it is possible
that securities with other maturities will be issued in the future. TIPS bonds
typically pay interest on a semi-annual basis, equal to a fixed percentage of
the inflation-adjusted amount. For example, if the Fund purchased an
inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months was
1%, the mid-year par value of the bond would be $1,010 and the first semi-annual
interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year resulted in the whole year's inflation equaling 3%, the
end-of-year par value of the bond would be $1,030 and the second semi-annual
interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently the
interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed and will fluctuate.
48
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline in
value. If interest rates rise due to reasons other than inflation (for example,
due to changes in currency exchange rates), investors in these securities may
not be protected to the extent that the increase is not reflected in the bond's
inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. There can be no assurance that the CPI-U will accurately measure the
real rate of inflation in the prices of goods and services.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity.
Warrants. The holder of a warrant has the right, until the warrant expires,
to purchase a given number of shares of a particular issuer at a specified
price. Such investments can provide a greater potential for profit or loss than
an equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
When-Issued Securities and Delayed-Delivery. The Fund may from time to time
purchase equity and debt securities on a "when-issued,""delayed delivery" or
"forward delivery" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the securities takes place at a later date. During the
period between purchase and settlement, no payment is made by the Fund to the
issuer and no interest accrues to the Fund. When the Fund purchases such
securities, it immediately assumes the risks of ownership, including the risk of
price fluctuation. Failure to deliver a security purchased on this basis may
result in a loss or missed opportunity to make an alternative investment.
To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income. While
such securities may be sold prior to the settlement date, the Fund intends to
purchase them with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time the Fund makes the commitment to
purchase a security on this basis, it will record the transaction and reflect
the
49
value of the security in determining its net asset value. The market value of
the securities may be more or less than the purchase price. The Fund will
establish a segregated account in which it will maintain cash and liquid
securities equal in value to commitments for such securities.
When the Fund agrees to purchase when-issued or delayed-delivery
securities, to the extent required by the SEC, its custodian will set aside
permissible liquid assets equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment, and in such a case the Fund may be required subsequently
to place additional assets in the segregated account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. In addition, because the Fund will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described above, the Fund's liquidity and the ability of its adviser or
subadviser to manage it might be affected in the event its commitments to
purchase "when-issued" securities ever exceed 25% of the value of its total
assets. Under normal market conditions, however, the Fund's commitment to
purchase "when-issued" or "delayed-delivery" securities will not exceed 25% of
the value of its total assets. When the Fund engages in when-issued or
delayed-delivery transactions, it relies on the other party to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
Standby Commitment Agreements. These agreements commit the Fund, for a
stated period of time, to purchase a stated amount of fixed income securities
that may be issued and sold to the Fund at the option of the issuer. The price
and coupon of the security is fixed at the time of the commitment. At the time
of entering into the agreement the Fund is paid a commitment fee, regardless of
whether or not the security is ultimately issued. The Fund enters into such
agreements for the purpose of investing in the security underlying the
commitment at a yield and price that is considered advantageous to the Fund.
There can be no assurance that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from appreciation in the value of the security during the commitment period if
the security is not ultimately issued.
The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment fee.
In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
50
Temporary Investments. Generally the Fund will be fully invested in
accordance with its investment objective and strategies. However, pending
investment of cash balances or for other cash management purposes, or if the
Fund's adviser (or subadviser) believes that business, economic, political or
financial conditions warrant, the Fund may invest, without limit, in cash or
cash equivalents, including: (1) foreign money market instruments (such as
bankers' acceptances, certificates of deposit, commercial paper, short-term
government and corporate obligations, and repurchase agreements); (2)
obligations issued or guaranteed by the U.S. government its agencies and
instrumentalities; (3) certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of commercial banks; (4) prime quality
commercial paper; (5) repurchase agreements covering any of the securities in
which the Fund may invest directly; (6) money market instruments; (7) high
quality debt securities without equity features; and (8) subject to the limits
of the 1940 Act, shares of other investment companies that invest in securities
in which the Fund may invest. Should this occur, the Fund will not be pursuing
and may not achieve its investment objective or may miss potential market
upswings.
Money Market Instruments. Money market instruments may include the
following types of instruments:
o obligations issued or guaranteed as to interest and principal by the
U.S. government, its agencies, or instrumentalities, or any federally
chartered corporation, with remaining maturities of 397 days or less;
o obligations of sovereign foreign governments, their agencies,
instrumentalities and political subdivisions, with remaining
maturities of 397 days or less;
o obligations of municipalities and states, their agencies and political
subdivisions with remaining maturities of 397 days or less;
o asset-backed commercial paper whose own rating or the rating of any
guarantor is in one of the two highest categories of any NRSRO;
o repurchase agreements;
o bank or savings and loan obligations;
o commercial paper (including asset-backed commercial paper), which are
short-term unsecured promissory notes issued by corporations in order
to finance their current operations. It may also be issued by foreign
governments, and states and municipalities. Generally the commercial
paper or its guarantor will be rated within the top two rating
categories by a NRSRO, or if not rated, is issued and guaranteed as to
payment of principal and interest by companies which at the date of
investment have a high quality outstanding debt issue;
o bank loan participation agreements representing obligations of
corporations having a high quality short-term rating, at the date of
investment, and under
51
which the Fund will look to the creditworthiness of the lender bank,
which is obligated to make payments of principal and interest on the
loan, as well as to creditworthiness of the borrower;
o high quality short-term (maturity in 397 days or less) corporate
obligations, rated within the top two rating categories by a NRSRO or,
if not rated, deemed to be of comparable quality by the applicable
adviser or subadviser;
o extendable commercial notes, which differ from traditional commercial
paper because the issuer can extend the maturity of the note up to 397
days with the option to call the note any time during the extension
period; and
o unrated short-term (maturing in 397 days or less) debt obligations
that are determined by a Fund's adviser to be of comparable quality to
the securities described above.
Securities of Investment Companies. To the extent permitted by the 1940
Act, the Fund may generally invest up to 10% of its total assets, calculated at
the time of investment, in the securities of other investment companies. No more
than 5% of a Fund's total assets may be invested in the securities of any one
investment company nor may it acquire more than 3% of the voting securities of
any other investment company. The Fund indirectly will bear its proportionate
share of any management fees paid by an investment company in which it invests
in addition to the advisory fee paid by the Fund.
Preferred Stock. Preferred stocks, like some debt obligations, are
generally fixed-income securities. Shareholders of preferred stocks normally
have the right to receive dividends at a fixed rate when and as declared by the
issuer's board of directors, but do not participate in other amounts available
for distribution by the issuing corporation. Dividends on the preferred stock
may be cumulative, and all cumulative dividends usually must be paid prior to
common shareholders of common stock receiving any dividends. Because preferred
stock dividends must be paid before common stock dividends, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stock. Preferred stocks are, however, equity securities in the sense that
they do not represent a liability of the issuer and, therefore, do not offer as
great a degree of protection of capital or assurance of continued income as
investments in corporate debt securities. Preferred stocks are generally
subordinated in right of payment to all debt obligations and creditors of the
issuer, and convertible preferred stocks may be subordinated to other preferred
stock of the same issuer.
Pay-In-Kind Bonds ("PIK Bonds") and Deferred Payment Securities. PIK bonds
pay all or a portion of their interest in the form of debt or equity securities.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. Deferred payment
securities are often sold at substantial discounts from their maturity value.
52
PIK bonds and deferred payment securities tend to be subject to greater
price fluctuations in response to changes in interest rates than are ordinary
interest-paying debt securities with similar maturities. PIK bonds and deferred
payment securities may be issued by a wide variety of corporate and governmental
issuers. Although these instruments are generally not traded on a national
securities exchange, they are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of the Fund's
limitation on investments in illiquid securities.
Loan Participations and Assignments. The Fund may purchase participations
in commercial loans. Such indebtedness may be secured or unsecured. Loan
participations typically represent direct participation in a loan to a corporate
borrower, and generally are offered by banks or other financial institutions or
lending syndicates. The Fund may participate in such syndications, or can buy
part of a loan, becoming a part lender. When purchasing loan participations, the
Fund assumes the credit risk associated with the corporate borrower and may
assume the credit risk associated with an interposed bank or other financial
intermediary. The participation interests in which the Fund intends to invest
may not be rated by any nationally recognized rating service.
A loan is often administered by an agent bank acting as agent for all
holders. The agent bank administers the terms of the loan, as specified in the
loan agreement. In addition, the agent bank is normally responsible for the
collection of principal and interest payments from the corporate borrower and
the apportionment of these payments to the credit of all institutions which are
parties to the loan agreement. Unless, under the terms of the loan or other
indebtedness, the Fund has direct recourse against the corporate borrower, the
Fund may have to rely on the agent bank or other financial intermediary to apply
appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in
the event that it fails to observe a requisite standard of care or becomes
insolvent. A successor agent bank would generally be appointed to replace the
terminated agent bank, and assets held by the agent bank under the loan
agreement should remain available to holders of such indebtedness. However, if
assets held by the agent bank for the benefit of the Fund were determined to be
subject to the claims of the agent bank's general creditors, the Fund might
incur certain costs and delays in realizing payment on a loan or loan
participation and could suffer a loss of principal and/or interest. In
situations involving other interposed financial institutions (e.g., an insurance
company or governmental agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the corporate borrower for payment of principal and
interest. If the Fund does not receive scheduled interest or principal payments
on such indebtedness, the Fund's share price and yield could be adversely
affected. Loans that are fully secured offer the Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower's obligation, or that the collateral
can be liquidated.
The Fund may invest in loan participations with credit quality comparable
to that of issuers of its securities investments. Indebtedness of companies
whose creditworthiness is
53
poor involves substantially greater risks, and may be highly speculative. Some
companies may never pay off their indebtedness, or may pay only a small fraction
of the amount owed. Consequently, when investing in indebtedness of companies
with poor credit, the Fund bears a substantial risk of losing the entire amount
invested.
For purposes of the Fund's concentration limits, the Fund generally will
treat the corporate borrower as the "issuer" of indebtedness held by the Fund.
In the case of loan participations where a bank or other lending institution
serves as a financial intermediary between the Fund and the corporate borrower,
if the participation does not shift to the Fund the direct debtor-creditor
relationship with the corporate borrower, SEC interpretations require the Fund
to treat both the lending bank or other lending institution and the corporate
borrower as "issuers". Treating a financial intermediary as an issuer of
indebtedness may restrict the Fund's ability to invest in indebtedness related
to a single financial intermediary, or a group of intermediaries engaged in the
same industry, even if the underlying borrowers represent many different
companies and industries.
Loans and other types of direct indebtedness may not be readily marketable
and may be subject to restrictions on resale. In some cases, negotiations
involved in disposing of indebtedness may require weeks to complete.
Consequently, some indebtedness may be difficult or impossible to dispose of
readily at what the Adviser believes to be a fair price. In addition, valuation
of illiquid indebtedness involves a greater degree of judgment in determining
the Fund's net asset value than if that value were based on available market
quotations, and could result in significant variations in the Fund's daily share
price. At the same time, some loan interests are traded among certain financial
institutions and accordingly may be deemed liquid. As the market for different
types of indebtedness develops, the liquidity of these instruments is expected
to improve. In addition, the Fund currently intends to treat indebtedness for
which there is no readily available market as illiquid for purposes of the
Fund's limitation on illiquid investments. Investments in loan participations
are considered to be debt obligations for purposes of the Trust's investment
restriction relating to the lending of funds or assets by the Fund.
Investments in loans through a direct assignment of the financial
institution's interests with respect to the loan may involve additional risks to
the Fund. For example, if a loan is foreclosed, the Fund could become part owner
of any collateral, and would bear the costs and liabilities associated with
owning and disposing of the collateral. In addition, it is conceivable that
under emerging legal theories of lender liability, the Fund could be held liable
as co-lender. It is unclear whether loans and other forms of direct indebtedness
offer securities law protections against fraud and misrepresentation. In the
absence of definitive regulatory guidance, the Fund relies on the Adviser's
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect the Fund.
The Fund may also enter into, or acquire participations in, delayed funding
loans and revolving credit facilities. Delayed funding loans and revolving
credit facilities are borrowing arrangements in which the lender agrees to make
loans up to a maximum amount upon demand by the borrower during a specified
term. A revolving credit facility differs from a delayed funding loan in that as
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the revolving credit facility. Delayed funding loans
and revolving credit facilities usually provide for floating or variable rates
of interest. These
54
commitments may have the effect of requiring the Fund to increase its investment
in a company at a time when it might not otherwise decide to do so (including at
a time when the company's financial condition makes it unlikely that such
amounts will be repaid). To the extent that the Fund is committed to advance
additional funds, it will at all times segregate or "earmark" assets, determined
to be liquid by the Adviser in accordance with procedures established by the
Board of Trustees, in an amount sufficient to meet such commitments.
The Fund may invest in delayed funding loans and revolving credit
facilities with credit quality comparable to that of issuers of its securities
investments. Delayed funding loans and revolving credit facilities may be
subject to restrictions on transfer, and only limited opportunities may exist to
resell such instruments. As a result, the Fund may be unable to sell such
investments at an opportune time or may have to resell them at less than fair
market value. The Fund currently intends to treat delayed funding loans and
revolving credit facilities for which there is no readily available market as
illiquid for purposes of the Fund's limitation on illiquid investments.
Participation interests in revolving credit facilities will be subject to the
limitations discussed in "Loan Participations and Assignments." Delayed funding
loans and revolving credit facilities are considered to be debt obligations for
purposes of the Trust's investment restriction relating to the lending of funds
or assets by a Fund.
Put Bonds. "Put" bonds are securities (including securities with variable
interest rates) that may be sold back to the issuer of the security at face
value at the option of the holder prior to their stated maturity. The Fund's
adviser or a subadviser intends to purchase only those put bonds for which the
put option is an integral part of the security as originally issued. The option
to "put" the bond back to the issuer prior to the stated final maturity can
cushion the price decline of the bond in a rising interest rate environment.
However, the premium paid, if any, for an option to put will have the effect of
reducing the yield otherwise payable on the underlying security. For the purpose
of determining the "maturity" of securities purchased subject to an option to
put, and for the purpose of determining the dollar weighted average maturity of
such securities, the Fund will consider "maturity" to be the first date on which
it has the right to demand payment from the issuer.
Municipal Securities. Municipal securities include debt obligations issued
by governmental entities to obtain funds for various public purposes, such as
the construction of a wide range of public facilities, the refunding of
outstanding obligations, the payment of general operating expenses, and the
extension of loans to other public institutions and facilities. Private activity
bonds that are issued by or on behalf of public authorities to finance various
privately-operated facilities are deemed to be municipal securities, only if the
interest paid thereon is exempt from federal taxes.
Other types of municipal securities include short-term General Obligation
Notes, Tax Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation
Notes, Project Notes, Tax-Exempt Commercial Paper, Construction Loan Notes and
other forms of short-term tax-exempt loans. Such instruments are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of
bond placements or other revenues. In addition, the Fund may invest in other
types of tax-exempt instruments, such as municipal bonds, private activity
bonds, and pollution control bonds.
55
Project Notes are issued by a state or local housing agency and are sold by
the Department of Housing and Urban Development. While the issuing agency has
the primary obligation with respect to its Project Notes, they are also secured
by the full faith and credit of the United States through agreements with the
issuing authority which provide that, if required, the federal government will
lend the issuer an amount equal to the principal of and interest on the Project
Notes.
The two principal classifications of municipal securities consist of
"general obligation" and "revenue" issues. The Fund may also acquire "moral
obligation" issues, which are normally issued by special purpose authorities.
There are, of course, variations in the quality of municipal securities, both
within a particular classification and between classifications, and the yields
on municipal securities depend upon a variety of factors, including the
financial condition of the issuer, general conditions of the municipal bond
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. Ratings represent the opinions of an NRSRO as to the
quality of municipal securities. It should be emphasized, however, that ratings
are general and are not absolute standards of quality, and municipal securities
with the same maturity, interest rate and rating may have different yields,
while municipal securities of the same maturity and interest rate with different
ratings may have the same yield. Subsequent to purchase, an issue of municipal
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase. The Adviser will consider such an event in
determining whether the Fund should continue to hold the obligation.
An issuer's obligations under its municipal securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal securities may be
materially adversely affected by litigation or other conditions.
Private Activity and Industrial Development Bonds. Private activity and
industrial development bonds are obligations issued by or on behalf of public
authorities to raise money to finance various privately owned or operated
facilities for business and manufacturing, housing, sports, and pollution
control. These bonds are also used to finance public facilities such as
airports, mass transit systems, ports, parking, and sewage and solid waste
disposal facilities, as well as certain other facilities or projects. The
payment of the principal and interest on such bonds is generally dependent
solely on the ability of the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property so financed as security
for such payment.
Loans. The Fund may invest in floating or adjustable rate loans ("Loans")
made to U.S. and foreign borrowers that are corporations, partnerships, or other
business entities ("Borrowers"). These Borrowers operate in a variety of
industries and geographic regions. The Fund acquires Loans from lenders such as
banks, insurance companies, finance companies, other investment companies, and
private investment funds. The Loans are loans that are typically made to
business borrowers to finance leveraged buy-outs, recapitalizations, mergers,
stock
56
repurchases, or internal growth. The Loans generally are negotiated between a
Borrower and several financial institution lenders ("Lenders") represented by
one or more Lenders acting as agent of all the Lenders ("Agent"). The Agent is
responsible for negotiating the loan agreement (the "Loan Agreement") that
establishes the terms and conditions of the Loan and the rights of the Borrower
and the Lenders. The Fund may act as one of the group of original Lenders
originating a Loan, may purchase assignments of portions of Loans from third
parties and may invest in participations in Loans.
The Loans have the most senior position in a Borrower's capital structure
or share the senior position with other senior debt securities of the Borrower.
This capital structure position generally gives holders of the Loans a priority
claim on some or all of the Borrower's assets in the event of default and
therefore the Lenders will be paid before certain other creditors of the
Borrower. The Loans also have contractual terms designed to protect Lenders.
These covenants may include mandatory prepayment out of excess cash flows,
restrictions on dividend payments, the maintenance of minimum financial ratios,
limits on indebtedness and other financial tests. Breach of these covenants
generally is an event of default and, if not waived by the Lenders, may give
Lenders the right to accelerate principal and interest payments. The Fund
generally acquires Loans of Borrowers that, among other things, in the Adviser's
judgment, can make timely payments on their Loans and that satisfy other credit
standards established by the Adviser. The Adviser performs its own independent
credit analysis of the Borrower and the collateral securing each loan in
addition to utilizing information prepared and supplied by the Agent or other
Lenders. The Loans are generally credit rated less than investment grade and may
be subject to restrictions on resale. Below investment grade fixed income
securities are securities rated BB/Ba or lower by Standard & Poor's, Fitch,
or Moody's or similarly rated by another NRSRO.
Loans involve the risk that a Fund will not receive payment of principal,
interest, and other amounts due in connection with these investments and will
depend primarily on the financial condition of the borrower. Loans that are
fully secured offer the Fund more protection than an unsecured loan in the event
of non-payment of scheduled interest or principal, although there is no
assurance that the liquidation of collateral from a secured loan would satisfy
the corporate borrower's obligation, or that the collateral can be liquidated.
Some loans or claims may be in default at the time of purchase. As the Fund may
be required to rely upon another lending institution to collect and pass onto
the Fund amounts payable with respect to the Loan and to enforce the Fund's
rights under the Loan, an insolvency, bankruptcy, or reorganization of the
lending institution may delay or prevent the Fund from receiving such amounts.
The highly leveraged nature of many such Loans may make such loans especially
vulnerable to adverse changes in economic or market conditions.
Structured Securities. A structured investment is a security whose value or
performance is linked to an underlying index or other security or asset class.
Structured investments involve the transfer of specified financial assets to a
special purpose entity, generally a corporation or trust, or the deposit of
financial assets with a custodian; and the issuance of securities or depository
receipts backed by, or representing interests in those assets.
Some structured investments are individually negotiated agreements or are
traded over-the-counter. Structured investments may be organized and operated to
restructure the investment characteristics of the underlying security. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured securities to create securities
57
with different investment characteristics, such as varying maturities, payment
priorities and interest rate provisions, and the extent of such payments made
with respect to structured securities is dependent on the extent of the cash
flow on the underlying instruments. Investments in structured securities
generally involve a class of structured securities that is either subordinated
or unsubordinated to the right of payment of another class. Subordinated
structured securities typically have higher yields and present greater risks
than unsubordinated structured securities. Structured securities are also
subject to such risks as the inability or unwillingness of the issuers of the
underlying securities to repay principal and interest, and requests by the
issuers of the underlying securities to reschedule or restructure outstanding
debt and to extend additional loan amounts.
Inverse Floating Rate Instruments. The Fund may also invest in inverse
floating rate debt instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floating rate
security may exhibit greater price volatility than a fixed rate obligation of
similar credit quality.
A floater may be considered to be leveraged to the extent that its interest
rate varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. The higher degree of leverage inherent in some floaters is
associated with greater volatility in their market values.
With respect to purchasable variable and floating rate instruments, the
Adviser will consider the earning power, cash flows and liquidity ratios of the
issuers and guarantors of such instruments and, if the instruments are subject
to a demand feature, will monitor their financial status to meet payment on
demand. Such instruments may include variable amount master demand notes that
permit the indebtedness thereunder to vary in addition to providing for periodic
adjustments in the interest rate. The absence of an active secondary market with
respect to particular variable and floating rate instruments could make it
difficult for the Fund to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during periods that the Fund is
not entitled to exercise its demand rights, and the Fund could, for these or
other reasons, suffer a loss with respect to such instruments. In determining
average-weighted portfolio maturity, an instrument will be deemed to have a
maturity equal to either the period remaining until the next interest rate
adjustment or the time the Fund involved can recover payment of principal as
specified in the instrument, depending on the type of instrument involved.
Impact of Large Redemptions and Purchases of Fund Shares
From time to time, shareholders of the Fund (which may include affiliated
and/or non-affiliated registered investment companies that invest in the Fund)
may make relatively large redemptions or purchases of Fund shares. These
transactions may cause the Fund to have to sell securities or invest additional
cash, as the case may be. While it is impossible to predict the overall impact
of these transactions over time, there could be adverse effects on the Fund's
performance to the extent that the Fund may be required to sell securities or
invest cash at times when it would not otherwise do so. These transactions could
also accelerate the realization of
58
taxable income if sales of securities resulted in capital gains or other income
and could also increase transaction costs, which may impact the Fund's expense
ratio.
Portfolio Turnover
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases and sales of portfolio securities for the year by the
monthly average value of the portfolio securities, excluding securities whose
maturities at the time of purchase were one year or less. Portfolio turnover may
involve the payment by the Fund of brokerage and other transaction costs, on the
sale of securities, as well as on the investment of the proceeds in other
securities. The greater the portfolio turnover, the greater the transaction
costs to the Fund, which could have an adverse effect on the Fund's total rate
of return. In addition, if the Fund has a high portfolio turnover rate, it may
be more likely than a low-turnover fund to generate capital gains that must be
distributed to shareholders as taxable income.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund which
cannot be changed without the vote of the majority of the outstanding shares of
the Fund. The vote of the majority of the outstanding shares means the vote of
(A) 67% or more of the voting securities present at a meeting, if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy or (B) a majority of the outstanding voting securities, whichever is less.
The Fund:
o May not purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, if, immediately after such purchase, more than 5%
of the Fund's total assets would be invested in such issuer or the
Fund would hold more than 10% of the outstanding voting securities of
the issuer, except that 25% or less of the Fund's total assets may be
invested without regard to such limitations. There is no limit to the
percentage of assets that may be invested in U.S. Treasury bills,
notes, or other obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
o May not borrow money or issue senior securities, except that the Fund
may sell securities short, enter into reverse repurchase agreements
and may otherwise borrow money and issue senior securities as and to
the extent permitted by the 1940 Act or any rule, order or
interpretation thereunder.
o May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed an underwriter within the
meaning of the Securities Act in connection with the purchase and sale
of portfolio securities.
o May not purchase or sell commodities or commodities contracts, except
to the extent disclosed in the current Prospectus or SAI of the Fund.
o May not purchase the securities of any issuer if, as a result, 25% or
more (taken at current value) of the Fund's total assets would be
invested in the securities of issuers, the principal
59
activities of which are in the same industry. This limitation does not
apply to securities issued by the U.S. government or its agencies or
instrumentalities or securities of other investment companies. The
following industries, among others, are considered separate industries
for purposes of this investment restriction: electric, natural gas
distribution, natural gas pipeline, combined electric and natural gas,
and telephone utilities, captive borrowing conduit, commercial
mortgage, residential mortgage, equipment finance, premium finance,
leasing finance, consumer finance and other finance.
o May not lend any security or make any other loan, except that the Fund
may in accordance with its investment objective and policies (i) lend
portfolio securities, (ii) purchase and hold debt securities or other
debt instruments, including but not limited to loan participations and
subparticipations, assignments, and structured securities, (iii) make
loans secured by mortgages on real property, (iv) enter into
repurchase agreements, and (v) make time deposits with financial
institutions and invest in instruments issued by financial
institutions, and enter into any other lending arrangement as and to
the extent permitted by the 1940 Act or any rule, order or
interpretation thereunder.
o May not purchase or sell real estate, except that the Fund may (i)
acquire real estate through ownership of securities or instruments and
sell any real estate acquired thereby, (ii) purchase or sell
instruments secured by real estate (including interests therein), and
(iii) purchase or sell securities issued by entities or investment
vehicles that own or deal in real estate (including interests
therein).
The Following are the Non-Fundamental Operating Policies of the Fund Which May
Be Changed by the Board of Trustees of the Trust Without Shareholder Approval:
As a matter of non-fundamental policy, the Fund currently does not intend to:
o borrow money in an amount greater than 5% of its total assets except (i)
for temporary or emergency purposes and (ii) by engaging in reverse
repurchase agreements, dollar rolls, or other investments or transactions
described in the Fund's registration statement which may be deemed to be
borrowings;
o purchase securities on margin or make short sales, except (i) short sales
against the box, (ii) in connection with arbitrage transactions, (iii) for
margin deposits in connection with futures contracts, options or other
permitted investments, (iv) that transactions in futures contracts and
options shall not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be necessary for
the clearance of securities transactions;
o purchase options, unless the aggregate premiums paid on all such options
held by the Fund at any time do not exceed 20% of its total assets; or sell
put options, if as a result, the aggregate value of the obligations
underlying such put options would exceed 50% of its total assets;
o enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect
to such futures contracts entered into on behalf of the Fund and the
premiums paid for such options on futures contracts does not exceed 5% of
the fair market value of the Fund's total assets; provided
60
that in the case of an option that is in-the-money at the time of purchase,
the in-the-money amount may be excluded in computing the 5% limit;
o purchase warrants if as a result, such securities, taken at the lower of
cost or market value, would represent more than 5% of the value of the
Fund's total assets (for this purpose, warrants acquired in units or
attached to securities will be deemed to have no value);
o lend portfolio securities in an amount greater than 33 1/3% of its total
assets; or
o acquire securities of registered open-end investment companies or
registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act.
The Fund will not purchase illiquid securities, including repurchase
agreements maturing in more than seven days, if, as a result thereof, more than
15% of the Fund's net assets, valued at the time of the transaction, would be
invested in such securities.
If any percentage restriction or requirement described above is satisfied
at the time of investment, a later increase or decrease in such percentage
resulting from a change in net asset value will not constitute a violation of
such restriction or requirement. However, should a change in net asset value or
other external events cause the Fund's investments in illiquid securities
including repurchase agreements with maturities in excess of seven days, to
exceed the limit set forth above for the Fund's investment in illiquid
securities, the Fund will act to cause the aggregate amount of such securities
to come within such limit as soon as reasonably practicable. In such event,
however, the Fund would not be required to liquidate any portfolio securities
where the Fund would suffer a loss on the sale of such securities.
Internal Revenue Code Restrictions
In addition to the investment restrictions above, the Fund must be
diversified according to Internal Revenue Code requirements. Specifically, at
each tax quarter end, the Fund's holdings must be diversified so that (a) at
least 50% of the market value of its total assets is represented by cash, cash
items (including receivables), U.S. government securities, securities of other
U.S. regulated investment companies, and other securities, limited so that no
one issuer has a value greater than 5% of the value of the Fund's total assets
and that the Fund holds no more than 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of the Fund's assets is
invested in the securities (other than those of the U.S. government or other
U.S. regulated investment companies) of any one issuer or of two or more issuers
which the Fund controls and which are engaged in the same, similar, or related
trades or businesses or the securities of one or more qualified publicly traded
partnerships.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Board of Trustees of the Trust has adopted a policy on selective
disclosure of portfolio holdings in accordance with regulations that seek to
ensure that disclosure of information about portfolio securities is in the best
interest of Fund shareholders and to address the conflicts between the interests
of Fund shareholders and its service providers. The policy
61
provides that divulging non-public portfolio holdings information to selected
parties is permissible only when the Fund has legitimate business purposes for
doing so and the recipients are subject to a duty of confidentiality, including
a duty not to trade on the non-public information. In addition, the disclosure
of the Fund's portfolio securities is permitted only where it is consistent with
the anti-fraud provisions of the federal securities laws and the Trust's or its
investment adviser's or sub-adviser's fiduciary duties. The Trust, its
investment adviser, sub-advisers or any agent, or any employee thereof (a "Fund
Representative") may not disclose the Fund's portfolio holdings information to
any person other than in accordance with the policy. For purposes of the policy,
"portfolio holdings information" means the Fund's actual portfolio holdings, as
well as non-public information about its trading strategies or pending
transactions. Neither the Fund nor a Fund Representative may solicit or accept
any compensation or other consideration in connection with the disclosure of
portfolio holdings information. A Fund Representative may provide portfolio
holdings information to third parties if such information has been included in
the Fund's public filings with the SEC or is disclosed on the Fund's publicly
accessible website. The parties receiving such information may include ratings
agencies, individual or institutional investors, or intermediaries that sell
shares of the Fund.
The Fund posts onto the Trust's internet site substantially all of its
securities holdings and its top ten portfolio holdings as of the end of each
month. Such portfolio holdings information becomes available no earlier than 15
calendar days after the end of the previous month. The Fund also discloses its
complete portfolio holdings information to the SEC using Form N-Q within 60 days
of the end of the first and third quarter ends of the Fund's fiscal year and on
Form N-CSR on the second and fourth quarter ends of the Fund's fiscal year. Form
N-Q is not required to be mailed to shareholders, but is made public through the
SEC's electronic filings. Shareholders receive either complete portfolio
holdings information or summaries of Fund portfolio holdings with their annual
and semi-annual reports.
If a Fund Representative seeks to disclose portfolio holdings information
that is not publicly available to specific recipients pursuant to circumstances
not specifically addressed by the policy, the Fund Representative must obtain
approval from the Trust's Chief Compliance Officer prior to such disclosure.
Exceptions to the portfolio holdings release policy described above can only be
authorized by the Trust's Chief Compliance Officer and will be made only when:
o The Fund has a legitimate business purpose for releasing portfolio
holdings information in advance of release to all shareholders or the
general public; and
o The recipient of the information provides written assurances that the
non-public portfolio holdings information will remain confidential and
that persons with access to the information will be prohibited from
trading based on the information.
Eligible third parties to whom portfolio holdings information may be
released in advance of general release include service providers such as the
Fund's investment adviser, sub-adviser independent registered public accounting
firm, custodian, legal counsel, financial printer and proxy voting service. In
addition, non-public portfolio holdings information may be provided to mutual
fund rating or ranking services prior to such information becoming publicly
available so long as (i) such disclosure is subject to a confidentiality
agreement and trading restrictions or (ii) the entity to which portfolio
holdings information will be provided (a) has adopted policies and/or procedures
that seek to ensure that such information will remain confidential and restrict
the entity and its employees from trading on the information and (b) prior to
disclosure, the Trust's Chief Compliance Officer receives in writing a copy of
such policies and/or procedures and determines they are acceptable.
62
The Trust's Chief Compliance Officer (the "CCO") conducts periodic reviews
of compliance with the policy and provides annually a report to the Board of
Trustees regarding the operation of the policy, exceptions and waivers granted
under the policy and any material changes recommended as a result of such
review. Additionally, the CCO will provide quarterly reports to the Board of
Trustees listing persons or entities with whom the Trust or its investment
adviser has entered into Confidentiality Agreements during the quarter. The
policy also provides that in the event of a violation of the policy, the Board
will receive a report at its next quarterly meeting about any disclosures that
were made concerning the Trust's portfolio holding which will describe to whom
and under what circumstances such disclosure was made.
63
BOARD OF TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
--------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND YEAR OF POSITION(S) HELD PRINCIPAL OCCUPATION NUMBER OF PORTFOLIOS OTHER DIRECTORSHIPS
BIRTH WITH FUND AND LENGTH DURING PAST 5 YEARS IN FUND COMPLEX* HELD BY TRUSTEE**
OF TIME SERVED OVERSEEN BY TRUSTEE
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
P. Gerald Malone *** Trustee since Mr. Malone has been 30 Aberdeen Asia-Pacific
Year of Birth: 1950 December 2007 a solicitor for more Income Fund, Inc.
than five years. He (Chairman of the
Chairman of the Board has served as a Board), Aberdeen
Minister of State in Global Income Fund
the United Kingdom (Chairman of the
Government. Mr. Board) and Aberdeen
Malone currently Australia Equity
serves as Fund, Inc.
Independent Chairman
of two London
AIM-listed companies
(healthcare and
software) and a
privately owned
pharmaceutical
company. He also
currently serves as
a director of
European Growth &
Income Trust PLC.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
Richard H. McCoy*** Trustee since Prior to retiring in 27
Year of Birth: 1942 December 2007 2003, Mr. McCoy was
Vice-Chairman,
Investment Banking,
at TD Securities
Inc. Prior to
joining TD
Securities Inc. in
May 1997, he was
Deputy Chairman of
CIBC Wood Gundy
Securities.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
Peter D. Sacks*** Trustee since Mr. Sacks has been 30 Director of Aberdeen
Year of Birth: 1945 December 2007 Managing Partner of Asia-Pacific Income
Toron Capital Fund, Inc., Aberdeen
Markets (investment Australia Equity
management) since Fund, Inc. and
1988. Aberdeen Global
Income.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
64
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
John T. Sheehy*** Trustee since Mr. Sheehy has been 30 Director of Aberdeen
Year of Birth: 1942 December 2007 Senior Managing Asia-Pacific Income
Director of B.V. Fund, Inc., Aberdeen
Murray and Company Australia Equity
(investment banking) Fund, Inc. and
since 2001, and Aberdeen Global
Managing Member of Income Fund.
The Value Group LLC
(venture capital)
since 1997.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
Warren C. Smith*** Trustee since Mr. Smith has been 27
Year of Birth: 1955 December 2007 Managing Editor of
BCA Publications
(financial
publications) since
1982.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
Jack Solan*** Trustee since Mr. Solan was Senior 27
Year of Birth: 1939 December 2007 Vice President and
President of
Strategic
Development at The
Phoenix Companies,
Inc. ("Phoenix") and
Chairman of Phoenix
Charter Oak Trust
Company from 1998
until 2004.
---------------------------- ---------------------- ---------------------- ----------------------- -----------------------
65
--------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
--------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND YEAR OF POSITION(S) HELD PRINCIPAL OCCUPATION NUMBER OF PORTFOLIOS OTHER DIRECTORSHIPS
BIRTH WITH FUND AND DURING PAST 5 YEARS IN FUND COMPLEX* HELD BY TRUSTEE**
LENGTH OF TIME OVERSEEN BY TRUSTEE
SERVED
---------------------------- --------------------- ----------------------- ---------------------- ------------------------
Gary Bartlett*** Trustee since Chief Executive 27
September 2007 Officer (2006 -
Year of Birth: 1959 present) and Director
(2005 - present),
Head of US Fixed
Income (2006 - 2007),
Aberdeen Asset
Management Inc.;
Global Head of Fixed
Income (2007 -
present), Aberdeen
Asset Management
PLC. Portfolio
manager (1992 -
2005), Deutsche Asset
Management. Vice
President (March 2008
- present), Aberdeen
Asia-Pacific Income
Fund, Inc. and
Aberdeen Global Fixed
Income Fund, Inc.
---------------------------- --------------------- ----------------------- ---------------------- ------------------------
66
---------------------------- --------------------- ----------------------- ---------------------- ------------------------
Martin Gilbert*** Trustee since Chief Executive 29 Director of Aberdeen
December 2007 Officer (1983 - Asia-Pacific Income
Year of Birth: 1959 present), Aberdeen Fund, Inc. and
Asset Management Aberdeen Global Income
PLC. Director and Fund, Inc.
Chairman (1995 -
present), Aberdeen
Asset Management
Inc. Vice President
(March 2008 -
present), President
(2004 - 2008),
Aberdeen Australia
Equity Fund, Inc.,
Aberdeen Asia-Pacific
Income Fund, Inc. and
Aberdeen Global Fixed
Income Fund, Inc.
Director (1991 -
present), Aberdeen
Asset Management Asia
Limited. Director
(2000 - present),
Aberdeen Asset
Management
Limited. Mr. Gilbert
also serves as
officer and/or
director of various
subsidiaries of
Aberdeen Asset
Management PLC.
---------------------------- --------------------- ----------------------- ---------------------- ------------------------
* The Aberdeen Fund Complex consists of the Trust which currently
consists of 27 portfolios, Aberdeen Asia-Pacific Income Fund, Inc.,
Aberdeen Australia Equity Fund, Inc. and Aberdeen Global Income Fund,
Inc.
** Directorships held in (1) any other investment companies registered
under the 1940 act, (2) any company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") or (3) any company subject to
the requirements of Section 15(d) of the Exchange Act.
*** Each Trustee may be contacted by writing to the Trustee c/o Aberdeen
Asset Management Inc., 1735 Market Street, 37th Floor, Philadelphia,
Pa19103, Attn: Lucia Sitar.
67
--------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE TRUST
--------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND YEAR OF POSITION(S) HELD PRINCIPAL OCCUPATION DURING PAST 5 YEARS
BIRTH WITH FUND AND LENGTH
OF TIME SERVED
---------------------------- ---------------------- ----------------------------------------------------------------------
Vincent J. Esposito President and Chief Currently, Head of North American Mutual Funds for Aberdeen Asset
Executive Officer Management Inc. Previously, Managing Director, Deutsche Asset
Aberdeen Asset Management Management (2003-2007); President and Principal Executive Officer of
Inc. The DWS Scudder Family of Funds, President and Chief Executive
5 Tower Bridge Officer of The Central Europe and Russia Fund, Inc., The European
300 Barr Harbor Drive, Equity Fund, Inc., The New Germany Fund, Inc. (2003-2005)
Suite 300 (registered investment companies); Vice Chairman and Director of The
West Conshohocken, PA19428 Brazil Fund, Inc., The Korea Fund and The Global Commodities Stock
Fund (2004-2005) (registered investment companies); formerly,
Year of Birth: 1956 Managing Director, Putnam Investments (1991-2002).
---------------------------- ---------------------- ----------------------------------------------------------------------
Megan Kennedy Treasurer, Chief Currently, Treasurer & CFO Collective Funds/North American Mutual
Financial Officer, Funds for Aberdeen Asset Management Inc. Ms. Kennedy joined
Aberdeen Asset Management and Principal Aberdeen Asset Management Inc. in 2005 as a Senior Fund
Inc. Accounting Officer Administrator. Ms. Kennedy was promoted to Assistant Treasurer
5 Tower Bridge (since July 2008) Collective Funds/North American Mutual Funds in February 2008 and
300 Barr Harbor Drive, promoted to Treasurer Collective Funds/North American Mutual Funds
Suite 300 in July 2008. Prior to joining Aberdeen Asset Management Inc., Ms.
West Conshohocken, PA19428 Kennedy was a Private Equity Manager with PFPC (2002-2005). Ms.
Kennedy received a Masters in Business Administration in Venture
Year of Birth: 1974 Capital and Entrepreneurial Studies from Pennsylvania State
University and graduated with a Bachelor of Science in Accounting
and Finance from Villanova University. She is a Certified Public
Accountant in the State of Pennsylvania, member of the American
Institute of Public Accountants and Pennsylvania Institute of
Certified Public Accountants, and holds a Series 7 license.
---------------------------- ---------------------- ----------------------------------------------------------------------
Jennifer Nichols Vice President Currently Head of Legal and Compliance US, Vice President and
Secretary for Aberdeen Asset Management Inc. Ms. Nichols joined
Aberdeen Asset Management Aberdeen Asset Management Inc. in October 2006. Prior to that, Ms.
Inc. Nichols was an associate attorney in the Financial Services Group of
1735 Market Street Pepper Hamilton LLP (law firm) (2003 - 2006). Ms. Nichols graduated
37th Floor in 2003 with a J.D. from the University of Virginia School of Law.
Philadelphia, PA19103 She received a Bachelor of Arts degree from Harvard University in
2000.
Year of Birth: 1978
---------------------------- ---------------------- ----------------------------------------------------------------------
Shahreza Yusof Vice President Currently, Head of U.S. Equities for Aberdeen Asset Management Inc.
Mr. Yusof was recruited by an affiliate of Aberdeen Asset Management
Aberdeen Asset Management Inc. in 1994 in Singapore. Over the years has worked on Aberdeen
Inc. Asia equities team and became investment director for Japan. Later
5 Tower Bridge Mr. Yusof moved to Aberdeen's Emerging Markets division in London.
300 Barr Harbor Drive, Mr. Yusof has been based out of the Aberdeen operations in the
Suite 300 United States since 2006. Mr. Yusof has a BS Finance & Economics
West Conshohocken, PA19428 from New York University.
Year of Birth: 1972
---------------------------- ---------------------- ----------------------------------------------------------------------
68
William Baltrus Vice President Currently, Director of U.S. Fund Services, U.S. Mutual Funds for
Aberdeen Asset Management Inc. Prior to joining Aberdeen Asset
Aberdeen Asset Management Management Inc. in November 2007, he was Vice President of
Inc. Administration for Nationwide Funds Group from 2000-2007. From 1990
5 Tower Bridge to 2000, Mr. Baltrus served as Client Services Officer and
300 Barr Harbor Drive, Relationship manager for 7 mutual fund complexes at PFPC, Inc. Mr.
Suite 300 Baltrus graduated in 1990 with a Bachelor of Science in Economics
West Conshohocken, PA19428 from The Pennsylvania State University and holds the series 6, 63
and 24 securities licenses.
Year of Birth: 1967
---------------------------- ---------------------- ----------------------------------------------------------------------
Lucia Sitar Secretary Currently, U.S. Counsel for Aberdeen Asset Management Inc. Ms.
Sitar joined Aberdeen Asset Management Inc. in July 2007. Prior to
Aberdeen Asset Management that, Ms. Sitar was an associate attorney in the Investment
Inc. Management Group of Stradley Ronon Stevens & Young LLP (law firm)
1735 Market Street (2000 - 2007). Ms. Sitar graduated in 2000 with a J.D. from The
37th Floor Dickinson School of Law of the Pennsylvania State University. She
Philadelphia, PA19103 received a Bachelor of Arts degree from Rosemont College in 1996.
Year of Birth: 1971
---------------------------- ---------------------- ----------------------------------------------------------------------
Vincent McDevitt Chief Compliance Mr. McDevitt joined the Adviser in January 2008. He has ten years
Officer (since June experience in the investment securities industry. Formerly with ING
Aberdeen Asset Management 2008) Clarion Real Estate Securities LP, Turner Investment Partners, Inc.,
Inc. and the Vanguard Group. Mr. McDevitt graduated with a BA from
5 Tower Bridge Villanova University in 1989 and with a JD from Villanova Law School
300 Barr Harbor Drive, in 1995.
Suite 300
West Conshohocken, PA19428
Year of Birth: 1966
---------------------------- ---------------------- ----------------------------------------------------------------------
Responsibilities of The Board Of Trustees
The business and affairs of the Trust are managed under the direction of
its Board of Trustees subject to the laws of the state of Delaware and the
Trust's Amended and Restated Agreement and Declaration of Trust. The Board of
Trustees sets and reviews policies regarding the operation of the Trust, and
directs the officers to perform the daily functions of the Trust.
69
BOARD OF TRUSTEES COMMITTEES
The Board of Trustees has three standing committees: Audit, Nominating and
Fund Governance, and Valuation Committees.
The Audit Committee is comprised of Messrs. Sacks, Smith and Solan. Mr.
Solan serves as Chair of the Audit Committee as well as the Audit Committee
Financial Expert. The purposes of the Audit Committee are to: (a) annually
select, retain or terminate the Trust's independent auditor and, in connection
therewith, to evaluate the terms of the engagement and the qualifications and
independence of the independent auditor; (b) review in advance, and consider
approval of, any and all proposals by management or the investment adviser that
the Trust, investment adviser or their affiliated persons, employ the
independent auditor to render permissible non-audit services to the Trust and to
consider whether such services are consistent with the independent auditor's
independence; (c) meet annually with the Trust's independent auditor as
necessary to consider, among other things, (i) the Trust's annual audited
financial statements and semi-annual financial statements, (ii) any matters of
concern relating to the Trust's financial statements; (iii) the performance of
the independent auditor; and (iv) the independent auditor's comments regarding
the Trust's financial policies, procedures and internal accounting controls and
management's responses thereto; (d) review and discuss policies with respect to
risk assessment and risk management; (e) review annually with management and the
independent auditors their separate evaluations of the adequacy and
effectiveness of the Trust's system of internal controls; (f) develop, establish
and periodically review procedures for the receipt, retention and treatment of
complaints received by the Trust from any source regarding accounting, internal
accounting controls, or auditing matters; (g) review and resolve any
disagreements between management and the independent auditors regarding
financial reporting; and (h) investigate improprieties or suspected
improprieties in Trust operations and other matters within the scope of its
duties, as they are presented to the Committee or brought to the attention of
the Committee. The function of the Audit Committee is oversight; it is
management's responsibility to maintain appropriate systems for accounting and
internal control, and the independent auditors' responsibility to plan and carry
out a proper audit. The independent auditors are ultimately accountable to the
Board and the Audit Committee, as representatives of the Trust's shareholders.
Each of the members have a working knowledge of basic finance and accounting
matters and are not interested persons of the Trust, as defined in the 1940 Act.
The Nominating and Fund Governance Committee ("Nominating Committee") is
comprised of Messrs. Malone, McCoy and Sheehy. Mr. Malone serves as Chair of the
Nominating Committee. The Nominating Committee has the following powers and
responsibilities: (1) selection and nomination of all persons for election or
appointment as Trustees of the Trust (provided that nominees for independent
Trustee are recommended for selection and approval by all of the incumbent
independent Trustees then serving on the Board); (2) periodic review of the
composition of the Board to determine whether it may be appropriate to add
individuals with different backgrounds or skills from those already on the
Board; (3) implementing an annual evaluation of the performance of the Board and
its committees; (4) periodic review of the compensation paid to the Board; (5)
periodic review of Board governance procedures (including the Board's
effectiveness, Trustee retirement, Trustee investment in the Funds, the role of
the independent trustees and committees and the relationship between the
70
Board and management). The Nominating Committee reports to the full Board with
recommendations of any appropriate changes to the Board.
The Nominating Committee will consider nominees recommended by
shareholders. When considering whether to add additional or substitute Trustees
to the Board of Trustees of the Trust, the Trustees take into account any
proposals for candidates that are properly submitted to the Trust's Secretary.
Shareholders wishing to present one or more candidates for Trustee for
consideration may do so by submitting a signed written request to the Trust's
Secretary at attn: Secretary, Aberdeen Funds, 5 Tower Bridge, 300 Barr Harbor
Drive, Suite 300, West Conshohocken, Pennsylvania19428, which includes the
following information: (i) name and address of shareholder and, if applicable,
name of broker or record holder; (ii) number of shares owned; (iii) name of
Fund(s) in which shares are owned; (iv) whether the proposed candidate(s)
consent to being identified in any proxy statement utilized in connection with
the election of Trustees; (v) the name and background information of the
proposed candidates and (vi) a representation that the candidate or candidates
are willing to provide additional information about themselves, including
assurances as to their independence.
The Valuation Committee is comprised of Messrs. Sheehy, Bartlett and Solan.
Mr. Sheehy serves as Chair of the Valuation Committee. The purpose of the
Valuation Committee is to oversee the implementation and operation of the
Trust's Valuation and Liquidity Procedures. The Valuation Committee has the
following powers and responsibilities, among others, to: (a) review periodically
the actions taken by the investment adviser's pricing committee including its
determination regarding the fair value of securities for which market quotations
are not readily available, not readily determinable or unreliable and the
methodology for fair valuing portfolio securities; (b) recommend pricing
services to the Board and periodically review the performance of pricing
services; and (c) review pricing errors and the Trust's Net Asset Value Error
Correction Policy and recommend corrective action if necessary and appropriate.
The Trust commenced operation on June 23, 2008 and, as a result, the
Committees did not hold meetings in the prior fiscal year.
Ownership of Shares of the Trust
The Trust commenced operation on June 23, 2008 and prior to the date of
this Statement of Additional Information the Fund had not commenced operations.
Therefore, Trustees and Officers of the Trust did not hold any shares as of
December 31, 2007.
Compensation of Trustees
The Trustees will receive an annual board retainer, fees and reimbursement
for any reasonable expenses of attending board meetings from the Trust. Aberdeen
Asset Management Inc. ("Aberdeen" or the "Adviser") reimburses the Trust for
fees and expenses paid to Trustees who are interested persons of the Trust and
who are employees of the Adviser or its affiliates. The Compensation Table below
sets forth the total compensation that the Trust expects to pay to each
Independent Trustee, before reimbursement of expenses, during a full fiscal
year.
71
-------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
-------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Name of Trustee Estimated Pension Retirement Estimated Annual Estimated Total
Aggregate Benefits Accrued as Benefits Upon Compensation from the
Compensation from Part of Trust Expenses Retirement Fund Complex*
the Trust
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
P. Gerald Malone $37,000 None None $174,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Richard H. McCoy $27,000 None None $52,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Peter D. Sacks $27,000 None None $135,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
John T. Sheehy $27,000 None None $150,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Warren C. Smith $27,000 None None $52,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Jack Solan $32,000 None None $32,000
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
-------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE INTERESTED PERSONS (AS DEFINED IN THE 1940 ACT) OF THE TRUST
-------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Name of Trustee Estimated Pension Retirement Estimated Annual Estimated Total
Aggregate Benefits Accrued as Benefits Upon Compensation from the
Compensation from Part of Trust Expenses Retirement Fund Complex*
the Trust
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Gary Bartlett $0 None None $0
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
Martin Gilbert $0 None None $0
---------------------------- ------------------- ----------------------- ---------------------- -------------------------
* The Aberdeen Fund Complex consists of the Trust, which contains 27
portfolios, Aberdeen Asia-Pacific Income Fund, Inc., Aberdeen Australia
Equity Fund, Inc. and Aberdeen Global Income Fund, Inc.
The Trust does not maintain any pension or retirement plans for the
Officers or Trustees of the Trust.
Sales Loads
Class A shares may be sold at net asset value without payment of any sales
charge to Trustees and retired Trustees of the Trust and to directors, officers
and employees (including retired directors, officers and employees and immediate
family members of Aberdeen and its affiliates). The sales load waivers are due
to the nature of the investors and the reduced sales effort and expenses that
are needed to obtain such investment. See Waiver of Class A Sales Charges for
more information.
Code of Ethics
Federal law requires the Trust, its investment adviser and subadviser and
its affiliated principal underwriter to adopt codes of ethics which govern the
personal securities transactions of their respective personnel. Accordingly,
each such entity has adopted a Code of Ethics pursuant to which their respective
personnel may invest in securities for their personal
72
accounts (including securities that may be purchased or held by the Trust).
Copies of these Codes of Ethics are on file with the SEC and are available to
the public.
Proxy Voting Guidelines
Federal law requires the Trust, its investment adviser and subadviser to
adopt procedures for voting proxies ("Proxy Voting Guidelines") and to provide a
summary of those Proxy Voting Guidelines used to vote the securities held by the
Fund. The summary of such Proxy Voting Guidelines is attached as Appendix B to
this SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
Trust Expenses
The Trust pays the compensation of the Trustees who are not employees of
the Adviser, or its affiliates, and all expenses (other than those assumed by
the Adviser), including governmental fees, interest charges, taxes, membership
dues in the Investment Company Institute allocable to the Trust; investment
advisory fees and any Rule 12b-1 fees; fees under the Trust's Fund
Administration and Transfer Agency Agreements, which includes the expenses of
calculating the Fund's net asset values; fees and expenses of independent
certified public accountants and legal counsel of the Trust and to the
independent Trustees; expenses of preparing, printing, and mailing shareholder
reports, notices, proxy statements, and reports to governmental offices and
commissions; expenses connected with the execution, recording, and settlement of
portfolio security transactions; short sale dividend expenses; insurance
premiums; administrative services fees under an Administrative Services Plan;
fees and expenses of the custodian for all services to the Trust; expenses of
shareholder meetings; and expenses relating to the issuance, registration, and
qualification of shares of the Trust. The Adviser may, from time to time, agree
to voluntarily or contractually waive advisory fees, and if necessary reimburse
expenses, in order to limit total operating expenses for the Fund and/or
classes, as described below. These expense limitations apply to the classes
described; if a particular class is not referenced, there is no expense
limitation for that class.
Investment Adviser - Aberdeen Asset Management Inc.
Under the Investment Advisory Agreement with the Trust, Aberdeen manages
the Fund in accordance with the policies and procedures established by the
Trustees. The Fund is also subadvised by Aberdeen Asset Management Investment
Services Limited ("AAMISL"), an affiliate of Aberdeen.
Aberdeen pays the compensation of the officers of the Trust employed by
Aberdeen. Aberdeen also furnishes, at its own expense, all necessary
administrative services, office space, equipment, and clerical personnel for
servicing the investments of the Trust and maintaining its investment advisory
facilities, and executive and supervisory personnel for managing the investments
and effecting the portfolio transactions of the Trust. In addition, Aberdeen
pays, out of its legitimate profits, broker-dealers, trust companies, transfer
agents and
73
other financial institutions in exchange for their selling of shares of the
Trust's series or for recordkeeping or other shareholder related services.
The Investment Advisory Agreement also specifically provides that Aberdeen,
including its directors, officers, and employees, shall not be liable for any
error of judgment, or mistake of law, or for any loss arising out of any
investment, or for any act or omission in the execution and management of the
Trust, except for willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of reckless disregard of its obligations
and duties under the Agreement. The Agreement continues in effect for an initial
period of one year and thereafter shall continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by the Trustees, or by vote of a majority of the outstanding voting
securities of the Trust, and, in either case, by a majority of the Trustees who
are not parties to the Agreement or interested persons of any such party. The
Agreement terminates automatically in the event of its "assignment," as defined
under the 1940 Act. It may be terminated as to the Fund without penalty by vote
of a majority of the outstanding voting securities of the Fund, or by either
party, on not less than 60 days written notice. The Agreement further provides
that Aberdeen may render similar services to others.
Aberdeen, located at 1735 Market Street, 37th Floor, Philadelphia, PA19103, is wholly owned by Aberdeen Asset Management PLC, a corporation organized
under the laws of Scotland. Gary Bartlett, Trustee of the Trust, is also the
Chief Executive Officer of Aberdeen and Martin Gilbert, Trustee of the Trust, is
also the Chief Executive Officer of Aberdeen Asset Management PLC.
For services provided under the Investment Advisory Agreement, Aberdeen
receives an annual fee paid monthly based on average daily net assets of the
Fund according to the following schedule:
Assets Advisory Fee
-------------------------------------------- -------------------
$0 up to $500 million 0.325%
-------------------------------------------- -------------------
$500 million up to $1 billion 0.305%
-------------------------------------------- -------------------
$1 billion up to $5 billion 0.285%
-------------------------------------------- -------------------
$5 billion or more 0.255%
-------------------------------------------- -------------------
Limitation of Fund Expenses
In the interest of limiting the expenses of the Fund, Aberdeen may from
time to time waive some or all of its investment advisory fee or reimburse other
fees for the Fund. In this regard, Aberdeen has voluntarily agreed to limit its
expenses for a two year period from the inception of the Fund and has also
entered into a written expense limitation agreement with the Trust on behalf of
the Fund (the "Expense Limitation Agreement"). Pursuant to the Expense
Limitation Agreement, Aberdeen has agreed to waive or limit its fees and to
assume other expenses to the extent necessary to limit the total annual
operating expenses of each Class of the Fund to the limits described below. This
limit excludes certain Fund expenses, including any taxes, interest, brokerage
fees, short sale dividend expenses, Acquired Fund Fees and Expenses
74
and administrative services fees. Please note that the waiver of such fees will
cause the total return and yield of the Fund to be higher than they would
otherwise be in the absence of such a waiver.
Aberdeen may request and receive reimbursement from the Fund for the
advisory fees waived or limited and other expenses reimbursed by the Adviser
pursuant to the Expense Limitation Agreement at a later date when the Fund has
reached a sufficient asset size to permit reimbursement to be made without
causing the total annual operating expense ratio of the Fund to exceed the
limits in the Expense Limitation Agreement. No reimbursement will be made by the
Fund unless: (i) the Fund's assets exceed $100 million; (ii) the total annual
expense ratio of the Class making such reimbursement is less than the limit set
forth below; (iii) the payment of such reimbursement is approved by the Board of
Trustees on a quarterly basis; and (iv) the payment of such reimbursement is
made no more than three years from the fiscal year in which the corresponding
waiver or reimbursement to the Fund was made. Except as provided for in the
Expense Limitation Agreement, reimbursement of amounts previously waived or
assumed by the Adviser is not permitted.
Until at least February 28, 2009, Aberdeen has agreed contractually to
waive advisory fees and, if necessary, reimburse expenses in order to limit
total annual fund operating expenses, excluding any taxes, interest, brokerage
fees, short sale dividend expenses, Acquired Fund Fees and Expenses and
administrative services fees for the Fund as follows:
----------------------------------- ---------------------------------
Class Expense Limitation for Class
----------------------------------- ---------------------------------
Class A 0.85%
----------------------------------- ---------------------------------
Class B 1.60%
----------------------------------- ---------------------------------
Class C 1.60%
----------------------------------- ---------------------------------
Class R 1.10%
----------------------------------- ---------------------------------
Class S 0.60%
----------------------------------- ---------------------------------
Institutional Service Class 0.60%
----------------------------------- ---------------------------------
Institutional Class 0.60%
----------------------------------- ---------------------------------
Investment Advisory Fees
Prior to the date of this SAI, the Fund had not commenced operations and,
therefore, no investment advisory fees were incurred.
Subadviser
AAMISL, a United Kingdom corporation and U.S. registered investment
adviser, serves as subadviser to the Fund. AAMISL is an affiliate of the
Adviser. AAMISL is located at One Bow Churchyard, London, England EC4M9HH.
Subject to the supervision of the Adviser and the Trustees, AAMISL manages
a portion of the assets of the Fund in accordance with the Fund's investment
objectives and policies. AAMISL makes investment decisions for the Fund and in
connection with such investment decisions places purchase and sell orders for
securities. For the investment
75
management services they provide to the Fund, AAMISL receives annual fees from
the Adviser, calculated at an annual rate based on the average daily net assets
of the Fund, as follows:
Assets Subadvisory Fee
---------------------------------------- ------------------
$0 up to $500 million 0.04875%
---------------------------------------- ------------------
$500 million up to $1 billion 0.04575%
---------------------------------------- ------------------
$1 billion up to $5 billion 0.04275%
---------------------------------------- ------------------
$5 billion or more 0.03825%
---------------------------------------- ------------------
A discussion regarding the basis for the Board of Trustees approval of the
investment advisory contracts of the Fund will be available in future reports to
the shareholders.
Portfolio Managers
Appendix C contains the following information regarding the portfolio
manager(s) identified in the Fund's Prospectus: (i) a description of the
portfolio manager's compensation structure and (ii) information regarding other
accounts managed by the portfolio managers and potential conflicts of interest
that might arise from the management of multiple accounts. Because the Fund is
new, the portfolio managers do not own shares of any of the Fund.
Distributor
The Trust and Aberdeen Fund Distributors LLC (the "distributor") have
entered into to a distribution agreement whereby Aberdeen Fund Distributors LLC
will act as principal underwriter for the Trust's shares. Vincent J. Esposito,
President and CEO of the Trust, is CEO of the distributor. The principal
business address of Aberdeen Fund Distributors LLC is 300 Barr Harbor Drive,
West Conshohocken, PA19428.
Under the distribution agreement, the distributor must use reasonable
efforts, consistent with its other business, in connection with the continuous
offering of shares of the Trust. The distributor has no obligation to sell any
specific quantity of Fund shares. Unless otherwise terminated, the distribution
agreement has an initial term of two years and thereafter will remain in effect
from year to year for successive annual periods if approved at least annually by
(i) the Trust's Board of Trustees or by the vote of a majority of the
outstanding shares of the Fund, and (ii) the vote of a majority of the Trustees
of the Trust who are not parties to the distribution agreement or interested
persons (as defined in the 1940 Act) of any party to the distribution agreement,
cast in person at a meeting called for the purpose of voting on such approval.
The distribution agreement may be terminated in the event of any assignment, as
defined in the 1940 Act.
The distributor may enter into arrangements with various financial
institutions through which a shareholder may purchase or redeem shares. The
distributor may enter into agreements with selected broker-dealers, banks or
other financial institutions for distribution of shares of the Fund. If
applicable to a class of the Trust's Shares as described below, the
76
distributor may receive distribution fees from the Fund as authorized by the
Distribution and Service Plan described below.
The distributor also receives the proceeds of contingent deferred sales
charges ("CDSC") imposed on certain redemptions of Class B and Class C shares
(and certain Class A shares).
The distributor reallows to dealers 3.75% of sales charges on Class A
shares of the Fund, 4.00% on Class B and 1.00% on Class C shares of the Fund.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1 of
the 1940 Act with respect to certain classes of shares. The Plan permits the
Fund to compensate the Fund's distributor for expenses associated with the
distribution of certain classes of shares of the Fund. Although actual
distribution expenses may be more or less, under the Plan the Fund pay the
distributor an annual fee in an amount that will not exceed the following
amounts:
o 0.25% of the average daily net assets of Class A shares of the Fund
(distribution or service fee);
o 1.00% of the average daily net assets of Class B and Class C shares
for the Fund (0.25% service fee); and
o 0.50% of the average daily net assets of the Class R Shares of the
Fund (0.25% of which must be either a distribution or service fee).
As required by Rule 12b-1, the Plan was approved by the Board of Trustees,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plan (the "Independent Trustees"). The Plan was approved for the Fund by the
Board of Trustees and may be amended from time to time upon approval by vote of
a majority of the Trustees, including a majority of the Independent Trustees,
cast in person at a meeting called for that purpose. The Plan may be terminated
as to a Class of the Fund by vote of a majority of the Independent Trustees, or
by vote of a majority of the outstanding shares of that Class. Any change in the
Plan that would materially increase the distribution cost to a Class requires
shareholder approval. The Trustees will review, quarterly, a written report of
such costs and the purposes for which such costs have been incurred. The Plan
may be amended by vote of the Trustees including a majority of the Independent
Trustees, cast in person at a meeting called for that purpose. For so long as
the Plan is in effect, selection and nomination of those Trustees who are not
interested persons of the Trust shall be committed to the discretion of such
disinterested persons. All agreements with any person relating to the
implementation of the Plan may be terminated at any time on 60 days' written
notice without payment of any penalty, by vote of a majority of the Independent
Trustees or by a vote of the majority of the outstanding Shares of the
applicable Class. The Plan will continue in effect for successive one-year
periods, provided that each such continuance is specifically approved (i) by the
vote of a majority of the Independent Trustees, and (ii) by a vote of a majority
of the entire Board of Trustees cast in person at a meeting called for that
purpose. The Board of Trustees has a duty to request and evaluate such
information as may be reasonably necessary for them to make an informed
determination of whether the Plan should be implemented or continued. In
77
addition the Trustees in approving the Plan as to the Fund must determine that
there is a reasonable likelihood that the Plan will benefit the Fund and its
Shareholders.
The Board of Trustees of the Trust believes that the Plan is in the best
interests of the Fund since it encourages Fund growth and maintenance of Fund
assets. As the Fund grows in size, certain expenses, and therefore total
expenses per share, may be reduced and overall performance per share may be
improved.
The distributor will enter into, from time to time, agreements with
selected dealers pursuant to which such dealers will provide certain services in
connection with the distribution and shareholder servicing of the Fund's shares
including, but not limited to, those discussed above. The Adviser or an
affiliate of the Adviser may pay additional amounts from its own resources to
dealers or other financial intermediaries, for aid in distribution or for aid in
providing administrative services to shareholders.
Administrative Services Plan
Under the terms of an Administrative Services Plan, the Fund is permitted
to enter into Servicing Agreements with servicing organizations, such as
broker-dealers and financial institutions, who agree to provide certain
administrative support services in connection with the Class A, Class R and
Institutional Service Class shares of the Fund. Such administrative support
services include, but are not limited to, the following: establishing and
maintaining shareholder accounts, processing purchase and redemption
transactions, arranging for bank wires, performing shareholder sub-accounting,
answering inquiries regarding the Fund, providing periodic statements showing
the account balance for beneficial owners or for plan participants or contract
holders of insurance company separate accounts, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding to the Trust executed proxies and obtaining such other information
and performing such other services as may reasonably be required. With respect
to the Class R shares, these types of administrative support services will be
exclusively provided for retirement plans and their plan participants.
As authorized by the particular Administrative Services Plan for the Fund,
the Trust has entered into Servicing Agreements for the Fund pursuant to which
the Fund's distributor has agreed to provide certain administrative support
services in connection with the applicable Fund shares held beneficially by its
customers. In consideration for providing administrative support services, the
Fund's distributor and other entities with which the Trust may enter into
Servicing Agreements will receive a fee, computed at the annual rate of up to
0.25% of the average daily net assets of the Class A, R or Institutional Service
Class shares of the Fund.
Fund Administration
Under the terms of a Fund Administration Agreement, Aberdeen Asset
Management Inc. (the "Adviser") provides various administrative and accounting
services, including daily valuation of the Fund's shares, preparation of
financial statements, tax returns, and regulatory reports, and presentation of
quarterly reports to the Board of Trustees. The
78
Adviser is located at 1735 Market Street, 37th Floor, Philadelphia, Pennsylvania19103. The Trust shall pay fees to the Administrator, as set forth directly
below, for the provision of services. Fees will be computed daily and payable
monthly on the first business day of each month, or as otherwise set forth
below.
Asset-Based Annual Fee
o 0.045% of the first $500 million in aggregate net assets of all Funds
of the Trust, plus
o 0.03% of aggregate net assets of all Funds of the Trust in excess of
$500 million up to $2 billion; plus
o 0.015% of the aggregate net assets of all Funds of the Trust in excess
of $2 billion.
The asset-based fees are subject to an annual minimum fee equal to the
number of Funds of the Trust multiplied by $25,000.
Out of Pocket Expenses and Miscellaneous Charges
The Trust will also be responsible for out-of-pocket expenses and
miscellaneous services fees and charges (including, but not limited to, the cost
of the pricing services that the Administrator utilizes and any networking fees
paid as out-of-pocket expenses) reasonably incurred by the Administrator or its
subcontractors in providing services to the Trust. All fees and expenses shall
be paid by the Trust to the Administrator on behalf of the Fund.
Sub-Administrator, Transfer Agent and Fund Accountant
The Trust has entered into a Services Agreement with Citi Fund Services
Ohio, Inc. ("Citi"), 3435 Stelzer Road, Columbus, Ohio43219, a wholly owned
subsidiary of Citibank, N.A., whereby Citi provides transfer agent, dividend
disbursement agent, and fund accounting services. The Adviser has also entered
into a Sub-Administration Agreement with Citi whereby Citi will assist the
Adviser in providing certain of the administration services for the Fund. For
the services provided by Citi to the Trust and the Adviser, the Trust and the
Adviser each pay Citi an annual fee at the following rates based on the average
daily net assets of the aggregate of all the Funds of the Trust that Citi
provides such services for:
o 0.045% of the first $500 million in aggregate net assets of all Funds
of the Trust; plus
o 0.03% of the aggregate net assets of all Funds of the Trust in excess
of $500 million up to $2 billion; plus
o 0.015% of the aggregate net assets of all Funds of the Trust in excess
of $2 billion.
The asset based fees are subject to an annual minimum fee equal to the
number of Funds of the Trust multiplied by $25,000.
The Fund also pays separate fees to Citi with respect to the services Citi
provides as transfer agent, dividend disbursing agent and fund accounting.
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Custodian
JPMorgan Chase Bank, 270 Park Avenue, New York, NY10017, is the custodian
for the Fund and makes all receipts and disbursements under a Custody Agreement.
Legal Counsel
Stradley Ronon Stevens & Young LLP, 2600 One Commerce Square,
Philadelphia, PA19103, serves as the Trust's legal counsel.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York10017-6204, serves as the Independent Registered Public Accounting Firm for the
Trust.
BROKERAGE ALLOCATION
The Adviser (or a subadviser) is responsible for decisions to buy and sell
securities and other investments for the Fund, the selection of brokers and
dealers to effect the transactions and the negotiation of brokerage commissions,
if any. In transactions on stock and commodity exchanges in the United States,
these commissions are negotiated, whereas on foreign stock and commodity
exchanges these commissions are generally fixed and are generally higher than
brokerage commissions in the United States. In the case of securities traded on
the over-the-counter markets or for securities traded on a principal basis,
there is generally no commission, but the price includes a spread between the
dealer's purchase and sale price. This spread is the dealer's profit. In
underwritten offerings, the price includes a disclosed, fixed commission or
discount. Most short term obligations are normally traded on a "principal"
rather than agency basis. This may be done through a dealer (e.g., a securities
firm or bank) who buys or sells for its own account rather than as an agent for
another client, or directly with the issuer.
Except as described below, the primary consideration in portfolio security
transactions is best execution of the transaction i.e., execution at the most
favorable prices and in the most effective manner possible. "Best execution"
encompasses many factors affecting the overall benefit obtained by the client
account in the transaction including, but not necessarily limited to, the price
paid or received for a security, the commission charged, the promptness,
availability and reliability of execution, the confidentiality and placement
accorded the order, and customer service. Therefore, "best execution" does not
necessarily mean obtaining the best price alone but is evaluated in the context
of all the execution services provided. Both the Adviser and the subadviser have
complete freedom as to the markets in and the broker-dealers through which they
seek this result.
Subject to the primary consideration of seeking best execution and as
discussed below, securities may be bought or sold through broker-dealers who
have furnished statistical, research, and other information or services to the
adviser or a subadviser. In placing orders with such broker-dealers, the Adviser
or the subadviser will, where possible, take into account the comparative
usefulness of such information. Such information is useful to the Adviser or a
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subadviser even though its dollar value may be indeterminable, and its receipt
or availability generally does not reduce the Adviser's or a subadviser's normal
research activities or expenses.
There may be occasions when portfolio transactions for the Fund are
executed as part of concurrent authorizations to purchase or sell the same
security for trusts or other accounts (including other mutual funds) served by
the Adviser or a subadviser or by an affiliated company thereof. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to the Fund, they are affected only when the Adviser or the
subadviser believes that to do so is in the interest of the Fund. When such
concurrent authorizations occur, the executions will be allocated in an
equitable manner.
In purchasing and selling investments for the Fund, it is the policy of
each of the Adviser and the subadviser to obtain best execution through
responsible broker-dealers. The determination of what may constitute best
execution in a securities transaction by a broker involves a number of
considerations, including the overall direct net economic result to the Fund
(involving both price paid or received and any commissions and other costs
paid), the efficiency with which the transaction is effected, the ability to
effect the transaction at all when a large block is involved, the availability
of the broker to stand ready to execute possibly difficult transactions in the
future, the professionalism of the broker, and the financial strength and
stability of the broker. These considerations are judgmental and are weighed by
the Adviser or the subadviser in determining the overall reasonableness of
securities executions and commissions paid. In selecting broker-dealers, the
Adviser or a subadviser will consider various relevant factors, including, but
not limited to, the size and type of the transaction; the nature and character
of the markets for the security or asset to be purchased or sold; the execution
efficiency, settlement capability, and financial condition of the
broker-dealer's firm; the broker-dealer's execution services, rendered on a
continuing basis; and the reasonableness of any commissions.
The Adviser and the subadviser may cause the Fund to pay a broker-dealer
who furnishes brokerage and/or research services a commission that is in excess
of the commission another broker-dealer would have received for executing the
transaction if it is determined, pursuant to the requirements of Section 28(e)
of the Exchange Act, that such commission is reasonable in relation to the value
of the brokerage and/or research services provided. Such research services may
include, among other things, analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy,
analytic or modeling software, market data feeds and historical market
information. Any such research and other information provided by brokers to the
Adviser or a subadviser is considered to be in addition to and not in lieu of
services required to be performed by it under its investment advisory or
subadvisory agreement, as the case may be. The fees paid to the Adviser and the
subadviser pursuant to their respective investment advisory or subadvisory
agreement are not reduced by reason of its receiving any brokerage and research
services. The research services provided by broker-dealers can be useful to the
Adviser or a subadviser in serving their other clients. All research services
received from the brokers to whom commissions are paid are used collectively,
meaning such services may not actually be utilized in connection with each
client account that may have provided the commission paid to the brokers
providing such services. The Adviser and the subadviser are prohibited from
considering the broker-dealers sale of shares of any fund for which it serves as
investment adviser or subadviser, except as may be specifically permitted by
law.
81
The Adviser may direct security transactions to brokers providing brokerage
and research services to the benefit of all Aberdeen clients, including the
Fund.
Under the 1940 Act, "affiliated persons" of the Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
the Fund may purchase securities from underwriting syndicates of which a
Subadviser or any of its affiliates, as defined in the 1940 Act, is a member
under certain conditions, in accordance with Rule 10f-3 under the 1940 Act.
The Fund contemplates that, consistent with the policy of obtaining best
execution, brokerage transactions may be conducted through "affiliated brokers
or dealers," as defined in the 1940 Act. Under the 1940 Act, commissions paid by
the Fund to an "affiliated broker or dealer" in connection with a purchase or
sale of securities offered on a securities exchange may not exceed the usual and
customary broker's commission. Accordingly, it is the Fund's policy that the
commissions to be paid to an affiliated broker-dealer must, in the judgment of
the Adviser or the subadviser, be (1) at least as favorable as those that would
be charged by other brokers having comparable execution capability and (2) at
least as favorable as commissions contemporaneously charged by such broker or
dealer on comparable transactions for the broker's or dealer's unaffiliated
customers. The Adviser and the subadviser do not necessarily deem it practicable
or in the Fund's best interests to solicit competitive bids for commissions on
each transaction. However, consideration regularly is given to information
concerning the prevailing level of commissions charged on comparable
transactions by other brokers during comparable periods of time.
ADDITIONAL INFORMATION ON PURCHASES AND SALES
Class A Sales Charges
The charts below show the Class A sales charges, which decrease as the
amount of your investment increases.
------------------------------ ----------------------------- --------------------------------- --------------------------
AMOUNT OF PURCHASE SALES CHARGE AS % OF SALES CHARGE AS % OF AMOUNT DEALER COMMISSION
OFFERING PRICE INVESTED
------------------------------ ----------------------------- --------------------------------- --------------------------
less than $100,000 4.25% 4.44% 3.75%
------------------------------ ----------------------------- --------------------------------- --------------------------
$100,000 up to $250,000 3.50 3.63 3.00
------------------------------ ----------------------------- --------------------------------- --------------------------
$250,000 up to $500,000 2.50 2.56 2.00
------------------------------ ----------------------------- --------------------------------- --------------------------
$500,000 up to $1 million 2.00 2.04 1.75
------------------------------ ----------------------------- --------------------------------- --------------------------
$1 million or more None None None
------------------------------ ----------------------------- --------------------------------- --------------------------
Using the initial net asset value per share the maximum offering price of
the Fund of the Fund's Class A Shares would be as follows:
Net Asset Value Maximum Sales Charge Offering Price to the Public
$10.00 4.25% $10.43
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Waiver of Class A Sales Charges
You may qualify for a reduced Class A sales charge if you own or are
purchasing shares of the Fund. You may also qualify for a waiver of the Class A
sales charges. To receive the reduced or waived sales charge, you must inform
Customer Service or your broker or other intermediary at the time of your
purchase that you qualify for such a reduction or waiver. If you do not inform
Customer Service or your intermediary that you are eligible for a reduced or
waived sales charge, you may not receive the discount or waiver that you are
entitled to. You may have to produce evidence that you qualify for a reduced
sales charge or waiver before you will receive it.
The sales charge applicable to Class A shares may be waived for the
following purchases:
1) shares sold to other registered investment companies affiliated with
Aberdeen,
2) shares sold:
a) to any pension, profit sharing, or other employee benefit plan
for the employees of Aberdeen, any of its affiliated companies,
or investment advisory clients and their affiliates;
b) to any endowment or non-profit organization;
c) 401(k) plans, 457 plans, 403(b) plans, profit sharing and money
purchase pension plans, defined benefit plans, nonqualified
deferred compensation plans and other retirement accounts;
d) to any life insurance company separate account registered as a
unit investment trust;
e) to Trustees and retired Trustees of the Trust;
f) to directors, officers, full-time employees, sales
representatives and their employees, and retired directors,
officers, employees, and sale representatives, their spouses
(including domestic partners), children or immediate relatives
(immediate relatives include mother, father, brothers, sisters,
grandparents, grandchildren, ("Immediate Relatives")), and
Immediate Relatives of deceased employees of any member of the
Aberdeen, or any investment advisory clients of the Adviser and
its affiliates;
g) to directors, officers, and full-time employees, their spouses
(including domestic partners), children or Immediate Relatives
and Immediate Relatives of deceased employees of any sponsor
group which may be affiliated with Aberdeen;
h) to any qualified pension or profit sharing plan established by a
Aberdeen sales representative for himself/herself and his/her
employees;
i) to any person who pays for the shares with the proceeds from
sales of Class D shares of a Fund if the new fund purchased does
not have Class D shares and Class A shares are purchased instead.
83
3) Class A shares sold:
a) to any person purchasing through an account with an unaffiliated
brokerage firm having an agreement with the distributor to waive
sales charges for those persons;
b) to any directors, officers, full-time employees, sales
representatives and their employees, their spouses (including
domestic partners), children or Immediate Relatives, or any
investment advisory clients of a broker-dealer having a
dealer/selling agreement with the distributor;
4) to employer-sponsored retirement plans including pension, profit
sharing or deferred compensation plans which are qualified under
Sections 401(a), 403(b) or 457 of the Internal Revenue Code.
Reduction of Sales Charges
Reduction of Class A Sales Charges
Shareholders can reduce or eliminate Class A shares' initial sales charge
through one or more of the discounts described below:
o A Larger Investment. The sales charge decreases as the amount of your
investment increases.
o Rights of Accumulation. You and members of your family who live at the
same address can add the current value of your Class A, Class B and
Class C investments in the Aberdeen Funds, that you currently own or
are currently purchasing to the value of your Class A purchase,
possibly reducing the sales charge. To the extent you are eligible to
purchase Class D shares of a Aberdeen Fund, these purchases may also
be combined.
o No Sales Charge on a Repurchase. If you sell Fund shares from your
account, we allow you a one-time privilege to reinvest some or all of
the proceeds in shares of the same class. You will not pay a sales
charge on Class A and Class D shares that you buy within 30 days of
selling Class A or Class D shares of an equal or greater amount if you
have already paid a sales charge. Remember, if you realize a gain or a
loss on your sale of shares, the transaction is taxable and
reinvestment will not affect the amount of capital gains tax that is
due. If you realize a loss on your sale and you reinvest, some or all
of the loss may not be allowed as a tax deduction depending on the
amount you reinvest.
o Letter Of Intent Discount. State in writing that during a 13-month
period you or a group of family members who live at the same address
will purchase or hold at least $50,000 in Class A or Class D shares
and your sales charge will be based on the total amount you intend to
invest. You can also combine your purchase of Class B and Class C
Shares to fulfill your Letter of Intent. The letter may be backdated
up to 90 days to include previous purchases for determining your sales
charge. Your Letter of Intent is not a binding obligation to buy
shares of the Fund; it is merely a statement of intent.
84
Class B Shares of the Fund and CDSC
The Fund's distributor or Adviser compensates broker-dealers and financial
intermediaries for sales of Class B shares from its own resources at the rate of
4.00% of such sales. A CDSC, payable to the Trust's distributor, will be imposed
on any redemption of Class B shares which causes the current value of your
account to fall below the total amount of all purchases made during the
preceding six years. The CDSC is never imposed on dividends, whether paid in
cash or reinvested, or on appreciation over the initial purchase price. The CDSC
applies only to the lesser of the original investment or current market value.
Where the CDSC is imposed, the amount of the CDSC will depend on the number
of years since you made the purchase payment from which an amount is being
redeemed, according to the following table:
Sale Within Sales Charge
------------------------- -------------------
1 Year 4%
2 Years 3%
3 Years 3%
4 Years 2%
5 Years 2%
6 Years 1%
7 Years or More 0%
For purposes of calculating the CDSC, it is assumed that the oldest Class
B, as the case may be, remaining in your account will be sold first.
For the daily dividend Fund your money will earn daily dividends through
the date of liquidation. If you redeem all of your shares in the Fund, you will
receive a check representing the value of your account, less any applicable CDSC
calculated as of the date of your withdrawal, plus all daily dividends credited
to your account through the date of withdrawal.
Automatic Withdrawal Plan (AWP) on Class B Shares
You will not be charged a CDSC on redemptions if you redeem 12% or less of
your account value in a single year. See the section entitled "SystematicInvestment Strategies" for more information.
Conversion Features for Class B Shares
Class B shares which have been outstanding for seven years will
automatically convert to Class A shares in the next month following the seventh
anniversary of the date on which such Class B shares were purchased. Such
conversion will be on the basis of the relative net asset values of the two
classes, without the imposition of a sales charge or other charge except that
the lower 12b-1 fee applicable to Class A shares shall thereafter be applied to
such converted shares.
85
Because the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of the conversion, a shareholder may
receive fewer Class A shares than the number of Class B shares converted,
although the dollar value of the amount converted will be the same.
Reinvestments of dividends and distributions in Class B shares will not be
considered a new purchase for purposes of the conversion feature and will
convert to Class A shares in the same proportion as the number of the
shareholder's Class B shares converting to Class A shares bears to the
shareholder's total Class B shares not acquired through dividends and
distributions.
If you effect one or more exchanges among Class B shares of the Fund during
the seven-year period, the holding period for shares so exchanged will be
counted toward such period.
Class A Finder's Fee and Corresponding CDSC
There are no front-end sales charges for purchases of Class A shares of the
Fund of $1 million or more. An investor may purchase $1 million or more of Class
A shares in one or more of the Aberdeen Funds and avoid the front-end sales
charge. However, unless an investor is otherwise eligible to purchase Class A
shares without a sales charge, the investor will pay a CDSC if he or she redeems
such Class A shares within 18 months of the date of purchase. With respect to
such purchases, the distributor or the Fund's Adviser may pay dealers a finders'
fee (as described below) on investments made in Class A shares with no initial
sales charge. The CDSC covers the finder's fee paid by the distributor or the
Adviser to the selling dealer. For the selling dealer to be eligible for the
finders' fee, the following requirements apply:
o The purchase can be made in any combination of the Funds of the Trust.
The amount of the finder's fee will be determined based on the
particular combination of the Funds purchased. The applicable finder's
fee will be determined on a pro rata basis to the purchase of each
particular Fund.
o The shareholder will be subject to a CDSC for shares redeemed in any
redemption within the first 18 months of purchase.
The CDSC will equal the amount of the finder's fee paid out to the dealer
as described in the chart below. The applicable CDSC will be determined on a pro
rata basis according to the amount of the redemption from each particular Fund.
The Class A CDSC will not exceed the aggregate amount of the finder's fee the
distributor or Adviser paid to the selling dealer on all purchases of Class A
shares of all Funds an investor made that were subject to the Class A CDSC.
86
Amount of Finder's Fee/Contingent Deferred Sales Charge
Amount of Purchase Amount of CDSC
$1 Million up to $4 Million 0.75%
$4 Million up to $25 Million 0.50%
$25 Million or More 0.25%
CDSC for Class C Shares
You will pay a CDSC of 1.00% if you sell your Class C shares within the
first year after you purchased the shares. The distributor or the Fund's Adviser
compensates broker-dealers and financial intermediaries for sales of Class C
shares from its own resources at the rate of 1.00% of sales of Class C shares of
the Fund.
Other Dealer Compensation
In addition to the dealer commissions and payments under its 12b-1 Plan,
from time to time, the Adviser and/or its affiliates may make payments for
distribution and/or shareholder servicing activities out of their past profits
and other of their own resources. The Adviser and/or its affiliates may make
payments for marketing, promotional, or related services provided by dealers and
other financial intermediaries, and may be in exchange for factors that include,
without limitation, differing levels or types of services provided by the
intermediary, the expected level of assets or sales of shares, the placing of
some or all of the Funds of the Trust on a preferred or recommended list, access
to an intermediary's personnel, and other factors. The amount of these payments
is determined by the Adviser.
In addition to these payments described above, the Adviser or its
affiliates may offer other sales incentives in the form of sponsorship of
educational or client seminars relating to current products and issues,
assistance in training and educating the intermediary's personnel, and/or
entertainment or meals. These payments also may include, at the direction of a
retirement plan's named fiduciary, amounts to intermediaries for certain plan
expenses or otherwise for the benefit of plan participants and beneficiaries. As
permitted by applicable law, the Adviser or its affiliates may pay or allow
other incentives or payments to intermediaries.
The payments described above are often referred to as "revenue sharing
payments." The recipients of such payments may include:
o the distributor and other affiliates of the Adviser,
o broker-dealers,
o financial institutions, and
o other financial intermediaries through which investors may purchase
shares of the Fund.
Payments may be based on current or past sales; current or historical
assets; or a flat fee for specific services provided. In some circumstances,
such payments may create an incentive for an intermediary or its employees or
associated persons to recommend or sell shares of the Fund to you instead of
shares of funds offered by competing fund families.
87
Class R Shares
Class R shares generally are available only to 401(k) plans, 457 plans,
403(b) plans, profit sharing and money purchase pension plans, defined benefit
plans, non-qualified deferred compensation plans and other retirement accounts
(collectively, "retirement plans") whereby the retirement plan or the retirement
plan's financial service firm has an agreement with the Fund's distributor to
utilize Class R shares in certain investment products or programs. Class R
shares are generally available to small and mid sized retirement plans having at
least $1 million in assets. In addition, Class R shares also are generally
available only to retirement plans where Class R shares are held on the books of
the Fund through omnibus accounts (either at the plan level or at the level of
the financial services firm) and where the plans are introduced by an
intermediary, such as a broker, third party administrator, registered investment
adviser or other retirement plan service provider. Class R shares are not
available to retail or institutional non-retirement accounts, traditional and
Roth IRAs, Coverdell Education Savings Accounts, SEPs, SAR-SEPs, one person
Keogh plans, SIMPLE IRAs, or individual 403(b) plans, or through 529 Plan
accounts.
A retirement plan's intermediaries can help determine which class is
appropriate for that retirement plan. If a retirement plan qualifies to purchase
other shares of the Fund, one of these other classes may be more appropriate
than Class R shares. Specifically if a retirement plan eligible to purchase
Class R shares is otherwise qualified to purchase Class A shares at net asset
value or at a reduced sales charge or to purchase Institutional Service Class or
Institutional Class shares, one of these classes may be selected where the
retirement plan does not require the distribution and administrative support
services typically required by Class R share investors and/or the retirement
plan's intermediaries have elected to forgo the level of compensation that Class
R shares provide. Plan fiduciaries should consider their obligations under ERISA
in determining which class is an appropriate investment for a retirement plan. A
retirement plan's intermediaries may receive different compensation depending
upon which class is chosen.
Redemptions
The Fund may delay forwarding redemption proceeds for up to seven days if
the investor redeeming shares is engaged in excessive trading, or if the amount
of the redemption request otherwise would be disruptive to efficient portfolio
management, or would adversely affect the Fund. The Fund may also assess
redemption fees on shares held less than 15 days as set forth in the Fund's
current prospectus. Those fees are 2.00% of the total redemption amount and are
paid directly to the Fund to offset brokerage commissions, market impact and
other costs associated with short-term trading of Fund shares. Certain
intermediaries cannot assess and collect redemption fees from their accounts. To
the extent redemption fees cannot be collected on particular transactions and
excessive short-term trading occurs, the remaining shareholders bear the expense
of such trading.
In-Kind Redemptions
The Fund generally plans to redeem their shares for cash with the following
exceptions. As described in its Prospectus, the Fund reserves the right, in
circumstances where in its sole discretion it determines that cash redemption
payments would be undesirable, taking into
88
account the best interests of all fund shareholders, to honor any redemption
request by transferring some of the securities held by the Fund directly to you
(an "in-kind redemption").
The Trust has elected to be governed by Rule 18f-1 under the 1940 Act
pursuant to which the Trust is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the Fund's net asset value during any 90-day
period for any one shareholder.
The Trust's Board of Trustees has adopted procedures for redemptions
in-kind by a shareholder including affiliated persons of the Fund. Affiliated
persons of the Fund include shareholders who are affiliates of the Fund's
investment adviser and shareholders of the Fund owning 5% or more of the
outstanding shares of the Fund. These procedures provide that a redemption
in-kind shall be effected at approximately the shareholder's proportionate share
of the distributing Fund's current net assets, so that redemptions will not
result in the dilution of interests of the remaining shareholders. The
procedures also require that the distributed securities be valued in the same
manner as they are valued for purposes of computing the Fund's net asset value
and that any redemption in-kind made by an affiliated party does not favor such
affiliate to the detriment of any other shareholder. The Trust's Chief Financial
Officer or his designee must determine that the redemption is in the best
interests of the Fund. Use of the redemption in-kind procedures will allow the
Fund to avoid having to sell significant portfolio assets to raise cash to meet
the shareholder's redemption request - thus limiting the potential adverse
effect on the Fund's net asset value.
Medallion Signature Guarantee
A medallion signature guarantee is required if: (1) your account address
has changed within the last 15 calendar days; (2) the redemption check is made
payable to anyone other than the registered shareholder; (3) the proceeds are
sent to a bank account not previously designated or changed within the past 10
business days; (4) proceeds are mailed to an address other than the address of
record; or (5) the redemption proceeds are being wired to bank for which
instructions are currently not on your account. The distributor reserves the
right to require a medallion signature guarantee in other circumstances, without
notice. Based on the circumstances of each transaction, the distributor reserves
the right to require that your signature be guaranteed by an authorized agent of
an "eligible guarantor institution," which includes, but is not limited to,
certain banks, credit unions, savings associations, and member firms of national
securities exchanges. A medallion signature guarantee is designed to protect the
shareholder by helping to prevent an unauthorized person from redeeming shares
and obtaining the proceeds. A notary public is not an acceptable guarantor. In
certain special cases (such as corporate or fiduciary registrations), additional
legal documents may be required to ensure proper authorizations. If the
distributor decides to require signature guarantees in all circumstances,
shareholders will be notified in writing prior to implementation of the policy.
The distributor, at its discretion, may waive the requirement for a signature
guarantee.
Accounts With Low Balances
If the value of your account falls below $2,000 ($1,000 for IRA accounts)
for any reason, including market fluctuation, you are generally subject to a $5
quarterly fee, which is
89
deposited into the Fund to offset the expenses of small accounts. We will sell
shares from your account quarterly to cover the fee.
We reserve the right to sell the rest of your shares and close your account
if you make a sale that reduces the value of your account to less than $2,000
($1,000 for IRA accounts). Before the account is closed, we will give you notice
and allow you 60 days to purchase additional shares to avoid this action. We do
this because of the high cost of maintaining small accounts.
VALUATION OF SHARES
The net asset value per share ("NAV") for the Fund is determined as of the
close of regular trading on the New York Stock Exchange (usually 4 p.m. Eastern
Time) on each day that the Exchange is (a "Business Day") open and on such other
days as the Board of Trustees determines (together, the "Valuation Time").
However, to the extent that the Fund's investments are traded in markets that
are open when the New York Stock Exchange is closed, the value of the Fund's
investments may change on days when shares cannot be purchased or redeemed.
The Fund will not compute NAV on customary business holidays, including New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and other
days when the New York Stock Exchange is closed.
The Fund reserves the right to not determine NAV when: (i) the Fund has not
received any orders to purchase, sell or exchange shares and (ii) changes in the
value of the Fund's portfolio do not affect the Fund's NAV.
The offering price for orders placed before the close of the Exchange, on
each business day the Exchange is open for trading, will be based upon
calculation of the NAV at the close of regular trading on the Exchange. For
orders placed after the close of regular trading on the Exchange, or on a day on
which the Exchange is not open for trading, the offering price is based upon NAV
at the close of the Exchange on the next day thereafter on which the Exchange is
open for trading. The NAV of a share of the Fund on which offering and
redemption prices are based is the NAV of the Fund, divided by the number of
shares outstanding, with the result adjusted to the nearer cent. The NAV of the
Fund is determined by subtracting the liabilities of the Fund from the value of
its assets (chiefly composed of investment securities). The NAV per share of a
class is computed by adding the value of all securities and other assets in the
Fund's portfolio allocable to such class, deducting any liabilities allocable to
such class and any other liabilities charged directly to that class and dividing
by the number of shares outstanding in such class.
Securities for which market quotations are readily available are valued at
current market value as of Valuation Time. Valuation Time will be as of the
close of regular trading on the New York Stock Exchange (usually 4 P.M. Eastern
Time). Equity securities are valued at the last quoted sale price, or if there
is no sale price, the last quoted bid price provided by an independent pricing
service approved by the Board of Trustees. Securities traded on NASDAQ
90
are valued at the NASDAQ Official Closing Price. Prices are taken from the
primary market or exchange in which each security trades.
Debt and other fixed income securities (other than short-term obligations)
are valued at the bid price quoted by an independent pricing agent, the use of
which has been approved by the Board of Trustees. In the event such quotes are
not available from such pricing agents, or if such quotes are deemed to be
inconsistent with the current market value of the security, then the security
shall be valued at a dealer bid, if available. Short term debt securities such
as commercial paper and U.S. treasury bills, having a remaining maturity of 60
days or less are considered to be "short term" and are valued at amortized cost
which approximates market value. The pricing service activities and results are
reviewed by an officer of the Fund.
Securities for which market quotations are not readily available, or for
which an independent pricing service does not provide a value or provides a
value that does not represent fair value in the judgment of the Fund's
investment adviser or designee, are valued at fair value under procedures
approved by the Fund's Board of Trustees. Fair value determinations are required
for securities whose value is affected by a significant event that will
materially affect the value of a domestic or foreign security and which occurs
subsequent to the time of the close of the principal market on which such
domestic or foreign security trades but prior to the calculation of the Fund's
NAV. Significant events that could affect a large number of securities in a
particular market may include, but are not limited to: situations relating to
one or more single issuers in a market sector; significant fluctuations in U.S.
or foreign markets; market dislocations; market disruptions or market closings;
equipment failures; natural or man-made disasters or act of God; armed
conflicts; governmental actions or other developments; as well as the same or
similar events which may affect specific issuers or the securities markets even
though not tied directly to the securities markets. Other significant events
that could relate to a single issuer may include, but are not limited to:
corporate actions such as reorganizations, mergers and buy-outs; corporate
announcements, including those relating to earnings, products and regulatory
news; significant litigation; low trading volume; trading limits; or
suspensions.
The Fund values foreign securities at fair value in the circumstances
described below. Generally, trading in foreign securities markets is completed
each day at various times prior to the Valuation Time. In addition, foreign
securities trading generally or in a particular country or countries may not
take place on all Business Days. Furthermore, trading may take place in various
foreign markets on days which are not Business Days and days on which the Fund's
NAV is not calculated. "Fair value" prices will be used with respect to foreign
securities for which an independent pricing agent is able to provide automated
daily fair values. Those securities for wich an independent pricing agent is not
able to provide automated daily fair values shall continue to be valued at the
last sale price at the close of the exchange on which the security is
principally traded. Fair value prices are intended to reflect more accurately
the value of those securities at the time the Fund's NAV is calculated. Fair
value prices are used because many foreign markets operate at times that do not
coincide with those of the major U.S. markets. Events that could affect the
values of foreign portfolio holdings may occur between the close of the foreign
market and the time of determining the NAV, and would not otherwise be reflected
in the NAV. Due to the time differences between the closings of the relevant
foreign securities exchanges and the Valuation Time for the Fund, the Fund will
also fair value their foreign investments when the market quotations for the
foreign investments either are not readily available, are unreliable or may be
affected by a significant event and, therefore, do not represent fair value.
When the Fund uses fair value pricing, the values assigned to the Foreign Equity
Fund's foreign investments may not be the quoted or published prices of the
investments on their primary markets or exchanges.
91
The Trust may suspend the right of redemption for such periods as are
permitted under the 1940 Act and under the following unusual circumstances: (a)
when the New York Stock Exchange is closed (other than weekends and holidays) or
trading is restricted; (b) when an emergency exists, making disposal of
portfolio securities or the valuation of net assets not reasonably practicable;
or (c) during any period when the SEC has by order permitted a suspension of
redemption for the protection of shareholders.
SYSTEMATIC INVESTMENT STRATEGIES
Automatic Asset Accumulation - This is a systematic investment strategy
which combines automatic monthly transfers from your personal checking account
to your mutual fund account with the concept of Dollar Cost Averaging. With this
strategy, you invest a fixed amount monthly over an extended period of time,
during both market highs and lows. Dollar Cost Averaging can allow you to
achieve a favorable average share cost over time since your fixed monthly
investment buys more shares when share prices fall during low markets, and fewer
shares at higher prices during market highs. Although no formula can assure a
profit or protect against loss in a declining market, systematic investing has
proven a valuable investment strategy in the past.
Once you have opened an account with at least $1,000, you can contribute to
an Automatic Asset Accumulation plan for as little as $50 a month in the Fund.
Automatic Asset Transfer - This systematic investment plan allows you to
transfer $25 or more to one Fund from another Fund systematically, monthly or
quarterly, after Fund minimums have been met. The money is transferred on the
25th day of the month as selected or on the preceding business day. Dividends of
any amount can be moved automatically from one Fund to another at the time they
are paid. This strategy can provide investors with the benefits of Dollar Cost
Averaging through an opportunity to achieve a favorable average share cost over
time. With this plan, your fixed monthly or quarterly transfer from the Fund to
any other Fund you select buys more shares when share prices fall during low
markets and fewer shares at higher prices during market highs. Although no
formula can assure a profit or protect against loss in a declining market,
systematic investing has proven a valuable investment strategy in the past.
Automatic Withdrawal Plan ("AWP") ($50 or More) - You may have checks for
any fixed amount of $50 or more automatically sent bi-monthly, monthly,
quarterly, semi-annually or annually, to you (or anyone you designate) from your
account. Complete the appropriate section of the New Account Form or contact
your financial intermediary or the Fund. Your account value must meet the
minimum initial investment amount at the time the program is established. This
program may reduce and eventually deplete your account. Generally, it is not
advisable to continue to purchase Class A or Class C shares subject to a sales
charge while simultaneously redeeming shares under the program. The $50 minimum
is waived for required minimum distributions from individual retirement
accounts.
For Class B shares, you will not be charged a CDSC on redemptions if you
redeem 12% or less of your account value in a single year. For each AWP payment,
assets that are not
92
subject to a CDSC, such as appreciation on shares and shares acquired through
reinvestment of dividends and/or capital gains distributions, will be redeemed
first and will count toward the 12% limit. If there is an insufficient amount of
assets not subject to a CDSC to cover a particular AWP payment, shares subject
to the lowest CDSC will be redeemed next until the 12% limit is reached. Any
dividends and/or capital gains distributions taken in cash by a shareholder who
receives payments through AWP will also count toward the 12% limit. In the case
of AWP, the 12% limit is calculated at the time of an automatic redemption is
first made, and is recalculated at the time each additional automatic redemption
is made.
NOTE: If you are withdrawing more shares than your account receives in
dividends, you will be decreasing your total shares owned, which will reduce
your future dividend potential.
INVESTOR PRIVILEGES
The Fund offers the following privileges to shareholders. Additional
information may be obtained by calling toll free at 866-667-9231.
No Sales Charge On Reinvestments - All dividends and capital gains will be
automatically reinvested free of charge in the form of additional shares within
the same Fund and class or another specifically requested Fund (but the same
class) unless you have chosen to receive them in cash on your application.
Unless requested in writing by the shareholder, the Trust will not mail checks
for dividends and capital gains of less than $5 but instead they will
automatically be reinvested in the form of additional shares.
Exchange Privilege - The exchange privilege is a convenient way to exchange
shares from one Fund to another Fund in order to respond to changes in your
goals or in market conditions. The registration of the account to which you are
making an exchange must be exactly the same as that of the Fund account from
which the exchange is made, and the amount you exchange must meet the applicable
minimum investment of the Fund being purchased. The exchange privilege may be
limited due to excessive trading or market timing of Fund shares.
Exchanges Among Funds. Exchanges may be made among any of the Aberdeen
Funds within the same class of shares (except for any other Fund not currently
accepting purchase orders), so long as both accounts have the same registration,
and your first purchase in the new Fund meets the new Fund's minimum investment
requirement.
Because Class R shares of the Fund are held within retirement plans,
exchange privileges with other Class R shares of the Aberdeen Funds may not be
available unless the Class R shares of the other Aberdeen Funds are also
available within a plan. Please contact your retirement plan administrator for
information on how to exchange your Class R shares within your retirement plan.
Generally, there is no sales charge for exchanges of Class B, Class C,
Class D, Class X, Class Y, Institutional Service Class or Institutional Class
shares. However, if your exchange involves certain Class A shares, you may have
to pay the difference between the sales charges if a higher sales charge applies
to the Fund into which you are exchanging. If you
93
exchange your Class A shares of the Fund that are subject to a CDSC into another
Aberdeen Fund and then redeem those Class A shares within 18 months of the
original purchase, the applicable CDSC will be the CDSC for the original Fund.
If you wish to purchase shares of the Fund or class for which the exchange
privilege does not apply, you will pay any applicable CDSC at the time you
redeem your shares and pay any applicable front-end load on the new Fund you are
purchasing unless a sales charge waiver otherwise applies.
Exchanges May Be Made In The Following Convenient Ways:
By Telephone
Automated Voice Response System - You can automatically process exchanges
for the Fund by calling 866-667-9231, 24 hours a day, seven days a week.
However, if you declined the option on the application, you will not have this
automatic exchange privilege. This system also gives you quick, easy access to
mutual fund information. Select from a menu of choices to conduct transactions
and hear fund price information, mailing and wiring instructions as well as
other mutual fund information. You must call our toll free number by the
Valuation Time to receive that day's closing share price. The Valuation Time is
the close of regular trading of the New York Stock Exchange, which is usually
4:00 p.m. Eastern Time.
Customer Service Line - By calling 866-667-9231, you may exchange shares by
telephone. Requests may be made only by the account owner(s). You must call our
toll free number by the Valuation Time to receive that day's closing share
price.
The Fund may record all instructions to exchange shares. The Fund reserves
the right at any time without prior notice to suspend, limit or terminate the
telephone exchange privilege or its use in any manner by any person or class.
The Fund will employ the same procedure described under "Buying, Selling
and Exchanging Fund Shares" in the Prospectus to confirm that the instructions
are genuine.
The Fund will not be liable for any loss, injury, damage, or expense as a
result of acting upon instructions communicated by telephone reasonably believed
to be genuine, and the Fund will be held harmless from any loss, claims or
liability arising from its compliance with such instructions. These options are
subject to the terms and conditions set forth in the Prospectus and all
telephone transaction calls may be recorded. The Fund reserves the right to
revoke this privilege at any time without notice to shareholders and request the
redemption in writing, signed by all shareholders.
By Mail or Fax - Write or fax to Aberdeen Funds, P.O. Box 183148, Columbus, Ohio43218-3148 or fax to 866-923-4269. Please be sure that your letter or facsimile
is signed exactly as your account is registered and that your account number and
the Fund from which you wish to make the exchange are included. For example, if
your account is registered "John Doe and Mary Doe", "Joint Tenants With Right of
Survivorship,' then both John and Mary must sign the exchange request. The
exchange will be processed effective the date the signed letter or fax is
received. Fax requests received after the Valuation Time will be processed as of
the next business day. The Fund reserves the right to require the original
document if you use the fax method.
94
By On Line Access - Log on to our website, www.aberdeeninvestments.com, 24 hours
a day, seven days a week, for easy access to your mutual fund accounts. Once you
have reached the website, you will be instructed on how to select a password and
perform transactions. You can choose to receive information on the Fund as well
as your own personal accounts. You may also perform transactions, such as
purchases, redemptions and exchanges. The Fund may terminate the ability to buy
Fund shares on its website at any time, in which case you may continue to
exchange shares by mail, wire or telephone pursuant to the Prospectus.
INVESTOR SERVICES
Automated Voice Response System - Our toll free number 866-667-9231 will
connect you 24 hours a day, seven days a week to the system. Through a selection
of menu options, you can conduct transactions, hear fund price information,
mailing and wiring instructions and other mutual fund information.
Toll Free Information And Assistance - Customer service representatives are
available to answer questions regarding the Fund and your account(s) between the
hours of 8 a.m. and 9 p.m. Eastern Time (Monday through Friday).
Retirement Plans - Shares of the Fund may be purchased for Self-Employed
Retirement Plans, Individual Retirement Accounts (IRAs), Roth IRAs, Coverdell
Education Savings Accounts, IRAs, Simplified Employee Pension Plans, Corporate
Pension Plans, Profit Sharing Plans and Money Purchase Plans.
Shareholder Confirmations - You will receive a confirmation statement each
time a requested transaction is processed. However, no confirmations are mailed
on certain pre-authorized, systematic transactions, or IRAs. Instead, these will
appear on your next consolidated statement.
Consolidated Statements - Shareholders of the Fund receive quarterly
statements as of the end of March, June, September and December. Please review
your statement carefully and notify us immediately if there is a discrepancy or
error in your account.
For shareholders with multiple accounts, your consolidated statement will
reflect all your current holdings in the Fund. Your accounts are consolidated by
social security number and zip code. Accounts in your household under other
social security numbers may be added to your statement at your request. Only
transactions during the reporting period will be reflected on the statements. An
annual summary statement reflecting all calendar-year transactions in all your
Fund will be sent after year-end.
Average Cost Statement - This statement may aid you in preparing your tax
return and in reporting capital gains and losses to the IRS. If you redeemed any
shares during the calendar year, a statement reflecting your taxable gain or
loss for the calendar year (based on the average cost you paid for the redeemed
shares) will be mailed to you following each year-end. Average cost can only be
calculated on accounts opened on or after January 1, 1984.
95
Fiduciary accounts and accounts with shares acquired by gift, inheritance,
transfer, or by any means other than a purchase cannot be calculated.
Average cost is one of the IRS approved methods available to compute gains
or losses. You may wish to consult a tax advisor on the other methods available.
The average cost information will not be provided to the IRS.
Shareholder Reports - All shareholders will receive reports semi-annually
detailing the financial operations of the Fund.
Prospectus - An updated prospectus will be mailed to you at least annually.
Undeliverable Mail - If mail from the Fund to a shareholder is returned as
undeliverable on two or more consecutive occasions, the Fund will not send any
future mail to the shareholder unless it receives notification of a correct
mailing address for the shareholder. With respect to any redemption checks or
dividend/capital gains distribution checks that are returned as undeliverable or
not presented for payment within six months, the Trust reserves the right to
reinvest the check proceeds and any future distributions in shares of the Fund
at the then-current NAV of the Fund until the Fund receives further instructions
from the shareholder.
ADDITIONAL INFORMATION
Description of Shares
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest of each Fund and to divide
or combine such shares into a greater or lesser number of shares without thereby
exchanging the proportionate beneficial interests in the Trust. Each share of a
Fund represents an equal proportionate interest in that Fund with each other
share. The Trust reserves the right to create and issue a number of different
funds. Shares of each Fund would participate equally in the earnings, dividends,
and assets of that particular fund. Upon liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets of such Fund available for
distribution to shareholders.
The Trust presently offers the following 27 series of shares of beneficial
interest, without par value and with the various classes listed:
-------------------------------------------------- -------------------------------------------------------------
FUND SHARE CLASS
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Optimal Allocations Fund: Growth Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Optimal Allocations Fund: Moderate Growth Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Optimal Allocations Fund: Moderate Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------
Aberdeen Optimal Allocations Fund: Specialty Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Optimal Allocations Fund: Defensive Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen China Opportunities Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Developing Markets Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Global Financial Services Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Health Sciences Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Natural Resources Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Technology and Communications Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Global Utilities Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen International Equity Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Select Mid Cap Growth Fund Class A, Class B, Class C, Class D, Class R, Institutional
Service Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Select Equity Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Small Cap Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Select Small Cap Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Tax-Free Income Fund Class A, Class B, Class C, Class D, Class X, Class Y
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Select Growth Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Equity Long-Short Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
97
----------------------------------------------------------------------------------------------------------------
Aberdeen Select Worldwide Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Hedged Core Equity Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Market Neutral Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Small Cap Opportunities Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Small Cap Growth Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Small Cap Value Fund Class A, Class B, Class C, Class R, Institutional Service
Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
Aberdeen Core Plus Income Fund Class A, Class B, Class C, Class R, Class S, Institutional
Service Class, Institutional Class
-------------------------------------------------- -------------------------------------------------------------
You have an interest only in the assets of the Fund whose shares you own.
Shares of a particular class are equal in all respects to other shares of that
class. In the event of liquidation of a Fund, shares of the same class will
share pro rata in the distribution of the net assets of the Fund with all other
shares of that class. All shares are without par value and when issued and paid
for, are fully paid and nonassessable by the Trust. Shares may be exchanged or
converted as described in this SAI and in the Prospectus but will have no other
preference, conversion, exchange or preemptive rights.
Voting Rights
Shareholders of each class of shares have one vote for each share held and
a proportionate fractional vote for any fractional share held. An annual or
special meeting of shareholders to conduct necessary business is not required by
the Declaration of Trust, the 1940 Act or other authority except, under certain
circumstances, to amend the Declaration of Trust, the Investment Advisory
Agreement, fundamental investment objectives, fundamental investment policies
and fundamental investment restrictions, to elect and remove Trustees, to
reorganize the Trust or any series or class thereof and to act upon certain
other business matters. In regard to sale of assets; the change of fundamental
investment objectives, policies and restrictions; the approval of an Investment
Advisory Agreement; or any other matter for which a shareholder vote is sought,
the right to vote is limited to the holders of shares of the particular Fund
affected by the proposal. In addition, holders of shares subject to a Rule 12b-1
fee will vote as a class and not with holders of any other class with respect to
the approval of the Distribution Plan.
To the extent that such a meeting is not required, the Trust does not
intend to have an annual or special meeting of shareholders.
98
ADDITIONAL GENERAL TAX INFORMATION FOR THE FUNDBuying a Dividend
If you are a taxable investor and invest in the Fund shortly before the
record date of a taxable distribution, the distribution will lower the value of
the Fund's shares by the amount of the distribution, and you will in effect
receive some of your investment back, but in the form of a taxable distribution.
Multi-Class Fund
The Fund calculates dividends and capital gain distributions the same way
for each class. The amount of any dividends per share will differ, however,
generally due to the difference in the distribution and service (Rule 12b-1) and
administrative services fees applicable to each class.
Distributions of Net Investment Income
The Fund receives income generally in the form of interest on its
investments in portfolio securities. This income, less expenses incurred in the
operation of the Fund, constitutes its net investment income from which
dividends may be paid to you. If you are a taxable investor, any distributions
by the Fund from such income will be taxable to you at ordinary income tax
rates, whether you take them in cash or in additional shares.
Distributions of Capital Gains
The Fund may derive capital gain and loss in connection with sales or other
dispositions of its portfolio securities. Distributions derived from the excess
of net short-term capital gain over net long-term capital loss will be taxable
to you as ordinary income. Distributions paid from the excess of net long-term
capital gain over net short-term capital loss will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gain realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Returns of Capital
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold. Any return of capital in excess of your
basis, however, is taxable as a capital gain.
99
Investment in Foreign Securities
The Fund is permitted to invest in foreign securities as described above.
Accordingly, the Fund may be subject to foreign withholding taxes on income from
certain foreign securities. This, in turn, could reduce the Fund's distributions
paid to you.
Effect of foreign debt investments on distributions. Most foreign exchange
gains realized on the sale of debt securities are treated as ordinary income for
federal income tax purposes by the Fund. Similarly, foreign exchange losses
realized on the sale of debt securities generally are treated as ordinary
losses. These gains when distributed are taxable to you as ordinary income, and
any losses reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or decrease the Fund's
ordinary income distributions to you, and may cause some or all of the Fund's
previously distributed income to be classified as a return of capital.
PFIC securities. The Fund may invest in securities of foreign entities that
could be deemed for federal income tax purposes to be passive foreign investment
companies ("PFICs"). In general, a PFIC is any foreign corporation if 75% or
more of its gross income for its taxable year is passive income, or 50% or more
of its average assets (by value) are held for the production of passive income.
When investing in PFIC securities, the Fund intends to mark-to-market these
securities under certain provisions of the Code and recognize any unrealized
gains as ordinary income at the end of the Fund's fiscal and excise (described
below) tax years. Deductions for losses are allowable only to the extent of any
current or previously recognized gains. These gains (reduced by allowable
losses) are treated as ordinary income that the Fund is required to distribute,
even though it has not sold or received dividends from these securities. You
should also be aware that the designation of a foreign security as a PFIC
security will cause its income dividends to fall outside of the definition of
qualified foreign corporation dividends. These dividends generally will not
qualify for the reduced rate of taxation on qualified dividends when distributed
to you by the Fund. In addition, if the Fund is unable to identify an investment
as a PFIC and thus does not make a mark-to-market election, the Fund may be
subject to U.S. federal income tax (the effect of which might be mitigated by
making a mark-to-market election in the year prior to the sale) on a portion of
any "excess distribution" or gain from the disposition of such shares even if
such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on the
Fund in respect of deferred taxes arising from such distributions or gains.
Information on the Amount and Tax Character of Distributions
The Fund will inform you of the amount and character of your distributions
at the time they are paid, and will advise you of the tax status of such
distributions for federal income tax purposes shortly after the close of each
calendar year. If you have not held Fund shares for a full year, the Fund may
designate and distribute to you, as ordinary income or capital gains, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the Fund. Taxable distributions
declared by the Fund in December to shareholders of record in such month, but
paid in January, are taxable to you as if they were paid in December.
100
Election to be Taxed as a Regulated Investment Company
The Fund has elected, or intends to elect, to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code ("Code") and
intends to so qualify during the current fiscal year. As a regulated investment
company, the Fund generally is not subject to entity level federal income tax on
the income and gains it distributes to you. The Board of Trustees reserves the
right not to distribute the Fund's net long-term capital gain or not to maintain
the qualification of the Fund as a regulated investment company if it determines
such a course of action to be beneficial to shareholders. If net long-term
capital gain is retained, the Fund would be taxed on the gain at the highest
corporate tax rate, and shareholders would be notified that they are entitled to
a credit or refund for the tax paid by the Fund. If the Fund fails to qualify as
a regulated investment company, the Fund would be subject to federal and state,
corporate taxes on its taxable income and gains, and distributions to you will
be treated as taxable dividend income to the extent of the Fund's earnings and
profits.
In order to qualify as a regulated investment company for federal income
tax purposes, the Fund must meet certain asset diversification, income and
distribution specific requirements, including:
(i) The Fund must maintain a diversified portfolio of securities, wherein
no security, including the securities of a qualified publicly traded partnership
(other than U.S. government securities and securities of other regulated
investment companies) can exceed 25% of the Fund's total assets, and, with
respect to 50% of the Fund's total assets, no investment (other than cash and
cash items, U.S. government securities and securities of other regulated
investment companies) can exceed 5% of the Fund's total assets or 10% of the
outstanding voting securities of the issuer;
(ii) The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities, or
currencies, and net income derived from an interest in a qualified publicly
traded partnership; and
(iii) The Fund must distribute to its shareholders at least 90% of its
investment company taxable income and net tax-exempt income for each of its
fiscal years.
Excise Tax Distribution Requirements
To avoid a 4% federal excise tax, the Code requires the Fund to distribute
to you by December 31 of each year, at a minimum, the following amounts: 98% of
its taxable ordinary income earned during the calendar year; 98% of its capital
gain net income earned during the twelve-month period ending October 31; and
100% of any undistributed amounts from the prior year. The Fund intends to
declare and pay these distributions in December (or to pay them in January, in
which case you must treat them as received in December) but can give no
assurances that its distributions will be sufficient to eliminate all taxes.
101
Sales, Exchanges and Redemption of Fund Shares
Sales, exchanges and redemptions (including redemptions in kind) of Fund
shares are taxable transactions for federal and state income tax purposes. If
you redeem your Fund shares, the Internal Revenue Service requires you to report
any gain or loss on your redemption. If you held your shares as a capital asset,
the gain or loss that you realize will be a capital gain or loss and will be
long-term or short-term, generally depending on how long you have held your
shares. Any redemption/exchange fees you incur on shares redeemed or exchanged
within 90 days after the date they were purchased will decrease the amount of
any capital gain (or increase any capital loss) you realize on the sale or
exchange.
Redemptions at a loss within six months of purchase. Any loss incurred on a
redemption or exchange of shares held for six months or less will be treated as
long-term capital loss to the extent of any long-term capital gain distributed
to you by the Fund on those shares.
Wash sales. All or a portion of any loss that you realize on a redemption
of your Fund shares will be disallowed to the extent that you buy other shares
in the Fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares.
Deferral of basis-- Class A shares only. In reporting gain or loss on the
sale of your Fund shares, you may be required to adjust your basis in the shares
you sell under the following circumstances:
IF:
o In your original purchase of Fund shares, you received a reinvestment
right (the right to reinvest your sales proceeds at a reduced or with
no sales charge),
o You sell some or all of your original shares within 90 days of their
purchase, and
o You reinvest the sales proceeds in the Fund or in another fund, and
the sales charge that would otherwise apply is reduced or eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the
sales charge that you paid for your original shares is excluded from your tax
basis in the shares sold and added to your tax basis in the new shares.
Conversion of Class B shares into Class A shares. The automatic conversion
of Class B Shares into Class A Shares at the end of approximately seven years
after purchase will be tax-free for federal income tax purposes. Shareholders
should consult their tax advisors regarding the state and local tax consequences
of the conversion of Class B Shares into Class A Shares, or any other conversion
or exchange of shares.
U.S. Government Securities
Income earned on certain U.S. government obligations is exempt from state
and local personal income taxes if earned directly by you. States also grant
tax-free status to
102
dividends paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment or reporting
requirements that must be met by the Fund. Income on investments by the Fund in
certain other obligations, such as repurchase agreements collateralized by U.S.
government obligations, commercial paper and federal agency-backed obligations
(e.g., GNMA) or FNMA obligations), generally does not qualify for tax-free
treatment. The rules on exclusion of this income are different for corporations.
Qualified Dividend Income for Individuals
For individual shareholders, a portion of the dividends paid by the Fund
may be qualified dividend income, which is eligible for taxation at long-term
capital gain rates. This reduced rate generally is available for dividends paid
by the Fund out of dividends earned on the Fund's investment in stocks of
domestic corporations and qualified foreign corporations. Either none or only a
nominal portion of the dividends paid by the Fund will be qualified dividend
income because the Fund invests primarily in debt instruments. Income dividends
from interest earned by the Fund on debt securities will continue to be taxed at
the higher ordinary income tax rates.
Both the Fund and the investor must meet certain holding period
requirements to qualify Fund dividends for this treatment. Specifically, the
Fund must hold the stock for at least 61 days during the 121-day period
beginning 60 days before the stock becomes ex-dividend. Similarly, investors
must hold their Fund shares for at least 61 days during the 121-day period
beginning 60 days before the Fund distribution goes ex-dividend. The ex-dividend
date is the first date following the declaration of a dividend on which the
purchaser of stock is not entitled to receive the dividend payment. When
counting the number of days you held your Fund shares, include the day you sold
your shares but not the day you acquired these shares.
While the income received in the form of a qualified dividend is taxed at
the same rates as long-term capital gains, such income will not be considered as
a long-term capital gain for other federal income tax purposes. For example, you
will not be allowed to offset your long-term capital losses against qualified
dividend income on your federal income tax return. Any qualified dividend income
that you elect to be taxed at these reduced rates also cannot be used as
investment income in determining your allowable investment interest expense. For
other limitations on the amount of or use of qualified dividend income on your
income tax return, please contact your personal tax advisor.
After the close of its fiscal year, the Fund will designate the portion of
its ordinary dividend income that meets the definition of qualified dividend
income taxable at reduced rates. If 95% or more of the Fund's income is from
qualified sources, it will be allowed to designate 100% of its ordinary income
distributions as qualified dividend income.
Dividends-Received Deduction for Corporations
For corporate shareholders, a portion of the dividends paid by the Fund may
qualify for the dividends-received deduction. The portion of dividends paid by
the Fund that so qualifies will be designated each year in a notice mailed to
the Fund's shareholders, and cannot exceed the gross amount of dividends
received by the Fund from domestic (U.S.) corporations
103
that would have qualified for the dividends-received deduction in the hands of
the Fund if the Fund was a regular corporation. Either none or only a nominal
portion of the dividends paid by the Fund will be eligible for the corporate
dividends-received deduction because the Fund invests primarily in debt
instruments.
The availability of the dividends-received deduction is subject to certain
holding period and debt financing restrictions imposed under the Code on the
corporation claiming the deduction. The amount that the Fund may designate as
eligible for the dividends-received deduction will be reduced or eliminated if
the shares on which the dividends earned by the Fund were debt-financed or held
by the Fund for less than a minimum period of time, generally 46 days during a
91-day period beginning 45 days before the stock becomes ex-dividend. Similarly,
if your Fund shares are debt-financed or held by you for less than a 46-day
period then the dividends-received deduction for Fund dividends on your shares
may also be reduced or eliminated. Even if designated as dividends eligible for
the dividends-received deduction, all dividends (including any deducted portion)
must be included in your alternative minimum taxable income calculation.
Investment in Complex Securities
The Fund may invest in complex securities that could be subject to numerous
special and complex tax rules. These rules could accelerate the recognition of
income by the Fund (possibly causing the Fund to sell securities to raise the
cash for necessary distributions) and/or defer the Fund's ability to recognize a
loss, and, in limited cases, subject the Fund to U.S. federal income tax. These
rules could also affect whether gain or loss recognized by the Fund is treated
as ordinary or capital, or as interest or dividend income. These rules could,
therefore, affect the amount, timing or character of the income distributed to
you by the Fund. For example:
Derivatives. The Fund is permitted to invest in certain options, futures,
forwards or foreign currency contracts. If the Fund makes these investments,
under certain provisions of the code, it may be required to mark-to-market these
contracts and recognize for federal income tax purposes any unrealized gains and
losses at its fiscal year end even though it continues to hold the contracts.
Under these provisions, gains or losses on the contracts generally would be
treated as 60% long-term and 40% short-term gains or losses, but gains or losses
on certain foreign currency contracts would be treated as ordinary income or
losses. In determining its net income for excise tax purposes, the Fund also
would be required to mark-to-market these contracts annually as of October 31
(for capital gain net income and ordinary income arising from certain foreign
currency contracts), and to realize and distribute any resulting income and
gains.
Short sales and securities lending transactions. The Fund's entry into a
short sale transaction or an option or other contract could be treated as the
"constructive sale" of an "appreciated financial position," causing it to
realize gain, but not loss, on the position. Additionally, the Fund's entry into
securities lending transactions may cause the replacement income earned on the
loaned securities to fall outside of the definition of qualified dividend
income. This replacement income generally will not be eligible for reduced rates
of taxation on qualified dividend income.
104
Tax straddles. The Fund's investment in options, futures, forwards, or
foreign currency contracts in connection with certain hedging transactions could
cause it to hold offsetting positions in securities. If the Fund's risk of loss
with respect to specific securities in its portfolio is substantially diminished
by the fact that it holds other securities, the Fund could be deemed to have
entered into a tax "straddle" or to hold a "successor position" that would
require any loss realized by it to be deferred for tax purposes.
Convertible debt. Convertible debt is ordinarily treated as a "single
property" consisting of a pure debt interest until conversion, after which the
investment becomes an equity interest. If the security is issued at a premium
(i.e., for cash in excess of the face amount payable on retirement), the
creditor-holder may amortize the premium over the life of the bond. If the
security is issued for cash at a price below its face amount, the
creditor-holder must accrue original issue discount in income over the life of
the debt.
Securities purchased at discount. The Fund is permitted to invest in
securities issued or purchased at a discount such as zero coupon, deferred
interest or payment-in-kind (PIK) bonds that could require it to accrue and
distribute income not yet received. If it invests in these securities, the Fund
could be required to sell securities in its portfolio that it otherwise might
have continued to hold in order to generate sufficient cash to make these
distributions.
Credit default swap agreements. The Fund may enter into credit default swap
agreements. The rules governing the tax aspects of swap agreements that provide
for contingent nonperiodic payments of this type are in a developing stage and
are not entirely clear in certain aspects. Accordingly, while the Fund intends
to account for such transactions in a manner deemed to be appropriate, the IRS
might not accept such treatment. The Fund intends to monitor developments in
this area. Certain requirements that must be met under the Code in order for the
Fund to qualify as a regulated investment company may limit the extent to which
the Fund will be able to engage in credit default swap agreements.
Investment in taxable mortgage pools (excess inclusion income). The Fund
may invest in U.S.-qualified REITs that hold residual interests in real estate
mortgage investment conduits (REMICs) or which are, or have certain wholly-owned
subsidiaries that are, "taxable mortgage pools." Under a Notice issued by the
IRS, the Code and Treasury regulations to be issued, a portion of the Fund's
income from a U.S.-qualified REIT that is attributable to the REIT's residual
interest in a REMIC or equity interests in a taxable mortgage pool (referred to
in the Code as an excess inclusion) will be subject to federal income tax in all
events. The excess inclusion income of a regulated investment company, such as
the Fund, will be allocated to shareholders of the regulated investment company
in proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest or,
if applicable, taxable mortgage pool directly. In general, excess inclusion
income allocated to shareholders (i) cannot be offset by net operating losses
(subject to a limited exception for certain thrift institutions), (ii) will
constitute unrelated business taxable income (UBTI) to entities (including a
qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh
plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially
requiring such an entity that is allocated excess inclusion income, and
otherwise might not be required to file a tax return, to file a tax return and
pay tax on such income, and (iii) in the case of a non-U.S. shareholder, will
not qualify for any reduction in U.S. federal withholding tax. In
105
addition, if at any time during any taxable year a "disqualified organization"
(which generally includes certain cooperatives, governmental entities and
tax-exempt organizations that are not subject to tax on UBTI) is a record holder
of a share in a regulated investment company, then the regulated investment
company will be subject to a tax equal to that portion of its excess inclusion
income for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. The
Notice imposes certain reporting requirements upon regulated investment
companies that have excess inclusion income. While the Fund does not intend to
invest in U.S.-qualified REITs, a substantial portion of the assets of which
generates excess inclusion income, there can be no assurance that the Fund will
not allocate to shareholders excess inclusion income.
The rules concerning excess inclusion income are complex and unduly
burdensome in their current form, and the Fund is awaiting further guidance from
the IRS on how these rules are to be implemented. Shareholders should talk to
their tax advisors about whether an investment in the Fund is a suitable
investment given the potential tax consequences of the Fund's receipt and
distribution of excess inclusion income.
Investments in securities of uncertain tax character. The Fund may invest
in securities the U.S. federal income tax treatment of which may not be clear or
may be subject to recharacterization by the IRS. To the extent the tax treatment
of such securities or the income from such securities differs from the tax
treatment expected by the Fund, it could affect the timing or character of
income recognized by the Fund, requiring the Fund to purchase or sell
securities, or otherwise change its portfolio, in order to comply with the tax
rules applicable to regulated investment companies under the Code.
Backup Withholding
By law, the Fund must withhold a portion of your taxable dividends and
sales proceeds unless you:
o provide your correct social security or taxpayer identification
number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When
withholding is required, the amount will be 28% of any dividends or proceeds
paid. The special U.S. tax certification requirements applicable to non-U.S.
investors are described under the "Non-U.S. Investors" heading below.
Non-U.S. Investors
Non-U.S. investors (shareholders who, as to the United States, are a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership) may be subject to U.S. withholding and estate tax and are
subject to special U.S. tax certification requirements. Non-U.S. investors
should consult their tax advisors about the applicability of U.S. tax
withholding and the use of the appropriate forms to certify their status.
106
In general. The United States imposes a flat 30% withholding tax (or a
withholding tax at a lower treaty rate) on U.S. source dividends, including on
income dividends paid to you by the Fund, subject to an exemption for dividends
designated as capital gain dividends. However, notwithstanding such exemption
from U.S. withholding at the source, any dividends and distributions of income
and capital gains, including the proceeds from the sale of your Fund shares,
will be subject to backup withholding at a rate of 28% if you fail to properly
certify that you are not a U.S. person.
Capital gain dividends. In general, capital gain dividends designated by
the Fund and paid from long-term capital gains (other than gain realized on
disposition of U.S. real property interests) are not subject to U.S. withholding
tax unless you are a nonresident alien individual present in the United States
for a period or periods aggregating 183 days or more during the taxable year.
Short-term capital gain and interest-related dividends - exemptions have
expired. The exemptions from U.S. withholding for short-term capital gain and
interest-related dividends paid by the Fund to non-U.S. investors terminated and
are no longer be available for dividends paid by the Fund with respect to its
taxable years beginning after October 31, 2008, unless such exemptions are
reinstated. Even if such exemptions are reinstated, the Fund or intermediary may
not support such exemptions. The Fund reserves the right to not designate
interest-related or short-term capital gain dividends. Additionally, any such
designation by the Fund of interest-related or short-term capital gain dividends
may not be passed through to shareholders by intermediaries who have assumed tax
reporting responsibilities for this income in managed or omnibus accounts due to
systems limitations or operational constraints.
Effectively connected income. If you hold your Fund shares in connection
with a U.S. trade or business, your income and gains will be considered
effectively connected income and taxed in the U.S. on a net basis, in which case
you may be required to file a nonresident U.S. income tax return.
Investment in U.S. real property. The Fund may invest in equity securities
of corporations that invest in U.S. real property, including REITs. The sale of
a U.S. real property interest (USRPI) by a REIT in which the Fund invests may
trigger special tax consequences to the Fund's non-U.S. shareholders.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) makes
non-U.S. persons subject to U.S. tax on disposition of a USRPI as if he or she
were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code
provides a look-through rule for distributions of FIRPTA gain by a regulated
investment company (RIC), such as the Fund, from a REIT as follows:
o The RIC is classified as a qualified investment entity. A RIC is
classified as a "qualified investment entity" with respect to a
distribution to a non-US person which is attributable directly or
indirectly to a distribution from a REIT if, in general, more than 50%
of the RIC's assets consists of interests in REITs and U.S. real
property holding corporations; and
107
o You are a non-U.S. shareholder that owns more than 5% of a class of
Fund shares at any time during the one-year period ending on the date
of the distribution.
o If these conditions are met, the Fund distributions to you are treated
as gain from the disposition of a USRPI, causing the distributions to
be subject to U.S. withholding tax at a rate of 35%, and requiring
that you file a nonresident U.S. income tax return.
o In addition, even if you do not own more than 5% of a class of Fund
shares, but the Fund is a qualified investment entity, the Fund
distributions to you will be taxable as ordinary dividends (rather
than as a capital gain or short-term capital gain dividend) subject to
withholding at 30% or lower treaty rate.
Because the Fund expects to invest less than 50% of its assets at all
times, directly or indirectly in U.S. real property interests, it expects that
neither gain on the sale or redemption of Fund shares nor Fund dividends and
distributions would be subject to FIRPTA reporting and tax withholding.
U.S. estate tax. An individual who, at the time of death, is a Non-U.S.
shareholder will nevertheless be subject to U.S. federal estate tax with respect
to shares at the graduated rates applicable to U.S. citizens and residents,
unless a treaty exception applies. If a treaty exemption is available, a
decedent's estate may nonetheless need to file a U.S. estate tax return to claim
the exemption in order to obtain a U.S. federal transfer certificate. The
transfer certificate will identify the property (i.e., Fund shares) as to which
the U.S. federal estate tax lien has been released. In the absence of a treaty,
there is a $13,000 statutory estate tax credit (equivalent to U.S. situs assets
with a value of $60,000). For estates with U.S. situs assets of not more than
$60,000, the Fund may accept, in lieu of a transfer certificate, an affidavit
from an appropriate individual evidencing that decedent's U.S. situs assets are
below this threshold amount. Transfers by gift of shares of the Fund by a
non-U.S. shareholder who is a nonresident alien individual will not be subject
to U.S. federal gift tax. The tax consequences to a non-U.S. shareholder
entitled to claim the benefits of an applicable tax treaty may be different from
those described herein.
U.S tax certification rules. Special U.S. tax certification requirements
apply to non-U.S. shareholders both to avoid U.S. back up withholding imposed at
a rate of 28% and to obtain the benefits of any treaty between the United States
and the shareholder's country of residence. In general, a non-U.S. shareholder
must provide a Form W-8 BEN (or other applicable Form W-8) to establish that you
are not a U.S. person, to claim that you are the beneficial owner of the income
and, if applicable, to claim a reduced rate of, or exemption from, withholding
as a resident of a country with which the United States has an income tax
treaty. A Form W-8 BEN provided without a U.S. taxpayer identification number
will remain in effect for a period beginning on the date signed and ending on
the last day of the third succeeding calendar year unless an earlier change of
circumstances makes the information on the form incorrect.
The tax consequences to a Non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Non-U.S. shareholders are urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in the Fund,
including the applicability of foreign tax.
108
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this SAI. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein. Rules of state and local taxation of ordinary income,
qualified dividend income and capital gain dividends may differ from the rules
for U.S. federal income taxation described above. Distributions may also be
subject to additional state, local and foreign taxes depending on each
shareholder's particular situation. Non-U.S. shareholders may be subject to U.S.
tax rules that differ significantly from those summarized above. Shareholders
are urged to consult their tax advisers as to the consequences of these and
other state and local tax rules affecting investment in the Fund.
This discussion of "ADDITIONAL GENERAL TAX INFORMATION FOR THE FUND" is not
intended or written to be used as tax advice and does not purport to deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. You should consult your own tax advisor
regarding your particular circumstances before making an investment in the Fund.
MAJOR SHAREHOLDERS
Prior to the date of this SAI, the Fund had not yet commenced operations
and the Fund did not have any shareholders.
FINANCIAL STATEMENTS
A copy of the Fund's annual reports (when available) may be obtained upon
request and without charge by writing or by calling Citi, at the telephone
number on the back cover of the Fund's Prospectus. The annual report for the
fiscal year ending October 31, 2008 will become available to shareholders in
December 2008. The semi-annual report for the fiscal period ended April 30, 2008
will become available to Shareholders in June 2009.
109
APPENDIX ADEBT RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting.
INVESTMENT GRADE
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
A-1
SPECULATIVE GRADE
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated "BB" is less vulnerable to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments.
B - Debt rated "B" has a greater vulnerability to default than obligations
rated BB but currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
CCC - Debt rated "CCC" is currently vulnerable to default, and is dependent
upon favorable business, financial, and economic conditions to meet timely
payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC - Debt rated "CC" typically is currently highly vulnerable to
nonpayment.
C - Debt rated "C" signifies that a bankruptcy petition has been filed, but
debt service payments are continued.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period. The "D"
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa
A-2
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
STATE AND MUNICIPAL NOTES
Excerpts from Moody's, description of state and municipal note ratings:
MIG-1- Notes bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing from
established and board-based access to the market for refinancing, or both.
MIG-2- Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
A-3
MIG-3- Notes bearing this designation are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding grade.
Market access for refinancing, in particular, is likely to be less well
established.
FITCH, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security
ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered investment grade and representing the lowest
expectation of credit risk. The obligor has an exceptionally strong capacity for
timely payment of financial commitments, a capacity that is highly unlikely to
be adversely affected by foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
This rating indicates a very strong capacity for timely payment of financial
commitments, a capacity that is not significantly vulnerable to foreseeable
events.
A Bonds considered to be investment grade and represent a low expectation
of credit risk. This rating indicates a strong capacity for timely payment of
financial commitments. This capacity may, nevertheless, be more vulnerable to
changes in economic conditions or circumstances than long term debt with higher
ratings.
BBB Bonds considered to be in the lowest investment grade and indicates
that there is currently low expectation of credit risk. The capacity for timely
payment of financial
A-4
commitments is considered adequate, but adverse changes in economic conditions
and circumstances are more likely to impair this capacity.
BB Bonds are considered speculative. This rating indicates that there is a
possibility of credit risk developing, particularly as the result of adverse
economic changes over time; however, business or financial alternatives may be
available to allow financial commitments to be met. Securities rated in this
category are not investment grade.
B Bonds are considered highly speculative. This rating indicates that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
CCC, CC Bonds are considered a high default risk. Default is a real and C
possibility. Capacity for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C" rating signal imminent default.
DDD, DD Bonds are in default. Such bonds are not meeting current and D
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
A-5
B - Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grade period.
STANDARD & POOR'S NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity factors and
market-access risks unique to notes. Notes maturing in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating.
The following criteria will be used in making the assessment:
1. Amortization schedule - the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note.
2. Source of payment - the more the issue depends on the market for its
refinancing, the more likely it is to be considered a note.
Note rating symbols and definitions are as follows:
SP-1 - Strong capacity to pay principal and interest. Issues determined to
possess very strong capacity to pay principal and interest are given a plus (+)
designation.
SP-2 - Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 - Speculative capacity to pay principal and interest.
MOODY'S SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions on the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior capacity
for repayment of senior short-term debt obligations. Prime-1 repayment capacity
will normally be
A-6
evidenced by the following characteristics: (I) leading market positions in well
established industries, (II) high rates of return on funds employed, (III)
conservative capitalization structures with moderate reliance on debt and ample
asset protection, (IV) broad margins in earnings coverage of fixed financial
charges and high internal cash generation, and (V) well established access to a
range of financial markets and assured sources of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong capacity
for repayment of short-term promissory obligations. This will normally 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
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the prime rating
categories.
MOODY'S NOTE RATINGS
MIG 1/VMIG 1 - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 - This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4 - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG - This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
A-7
FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ - Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 - Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2 - Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
A-8
APPENDIX B - PROXY VOTING GUIDELINES SUMMARIES
Aberdeen Asset Management Inc. and
Aberdeen Asset Management Investment Services Limited
Summary of Proxy Voting Guidelines
GENERAL
The Board of Trustees of Aberdeen Funds (the "Trust") has approved the
delegation of the authority to vote proxies relating to the securities held in
the Fund to the Fund's investment adviser and sub-adviser, after the Board
reviewed and considered the proxy voting policies and procedures used by the
investment adviser and sub-adviser of the Fund. The adviser and sub-adviser use
an independent service provider, as described below.
Aberdeen Asset Management Inc.'s ("Aberdeen") goal in performing this
service is to make proxy voting decisions: (i) to vote or not to vote proxies in
a manner that serves the best economic interests of the Fund; and (ii) that
avoid the influence of conflicts of interest. To implement this goal, Aberdeen
has adopted proxy voting guidelines (the "Proxy Voting Guidelines") to assist it
in making proxy voting decisions and in developing procedures for effecting
those decisions. The Proxy Voting Guidelines are designed to ensure that where
Aberdeen has the authority to vote proxies, all legal, fiduciary, and
contractual obligations will be met.
The Proxy Voting Guidelines address a wide variety of individual topics,
including, among other matters, shareholder voting rights, anti-takeover
defenses, board structures and the election of directors, executive and director
compensation, reorganizations, mergers, and various shareholder proposals.
The proxy voting records for the year ended June 30, 2008 of the Funds will
be made available to shareholders on the Trust's website and the SEC's website
before August 31, 2008.
HOW PROXIES ARE VOTED
Aberdeen has delegated to Institutional Shareholder Services ("ISS"), an
independent service provider, the administration of proxy voting for Fund
portfolio securities directly managed by Aberdeen. ISS, a Delaware corporation,
provides proxy-voting services to many asset managers on a global basis. A
committee of Aberdeen personnel has reviewed, and will continue to review
annually, the relationship with ISS and the quality and effectiveness of the
various services provided by ISS.
Specifically, ISS assists Aberdeen in the proxy voting and corporate
governance oversight process by developing and updating the "ISS Proxy Voting
Guidelines," which are incorporated into the Proxy Voting Guidelines, and by
providing research and analysis, recommendations regarding votes, operational
implementation, and recordkeeping and reporting
B-1
services. Aberdeen's decision to retain ISS is based principally on the view
that the services that ISS provides, subject to oversight by Aberdeen, generally
will result in proxy voting decisions which serve the best economic interests of
Clients. Aberdeen has reviewed, analyzed, and determined that the ISS Proxy
Voting Guidelines are consistent with the views of Aberdeen on the various types
of proxy proposals. When the ISS Proxy Voting Guidelines do not cover a specific
proxy issue and ISS does not provide a recommendation: (i) ISS will notify
Aberdeen; and (ii) Aberdeen will use its best judgment in voting proxies on
behalf of the Clients. A summary of the ISS Proxy Voting Guidelines is set forth
below.
CONFLICTS OF INTEREST
Aberdeen does not engage in investment banking, administration or
management of corporate retirement plans, or any other activity that is likely
to create a potential conflict of interest. In addition, because Fund proxies
are voted by ISS pursuant to the pre-determined ISS Proxy Voting Guidelines,
Aberdeen generally does not make an actual determination of how to vote a
particular proxy, and, therefore, proxies voted on behalf of the Fund do not
reflect any conflict of interest. Nevertheless, the Proxy Voting Guidelines
address the possibility of such a conflict of interest arising.
The Proxy Voting Guidelines provide that, if a proxy proposal were to
create a conflict of interest between the interests of a Fund and those of
Aberdeen (or between a Fund and those of any of Aberdeen's affiliates), then the
proxy should be voted strictly in conformity with the recommendation of ISS. To
monitor compliance with this policy, any proposed or actual deviation from a
recommendation of ISS must be reported to the chief counsel for Aberdeen. The
chief counsel for Aberdeen then will provide guidance concerning the proposed
deviation and whether a deviation presents any potential conflict of interest.
If Aberdeen then casts a proxy vote that deviates from an ISS recommendation,
the affected Fund (or other appropriate Fund authority) will be given a report
of this deviation.
CIRCUMSTANCES UNDER WHICH PROXIES WILL NOT BE VOTED
Aberdeen, through ISS, shall attempt to process every vote for all domestic
and foreign proxies that they receive; however, there may be cases in which
Aberdeen will not process a proxy because it is impractical or too expensive to
do so. For example, Aberdeen will not process a proxy in connection with a
foreign security if the cost of voting a foreign proxy outweighs the benefit of
voting the foreign proxy, when Aberdeen has not been given enough time to
process the vote, or when a sell order for the foreign security is outstanding
and proxy voting would impede the sale of the foreign security. Also, Aberdeen
generally will not seek to recall the securities on loan for the purpose of
voting the securities unless Aberdeen determines that the issue presented for a
vote warrants recalling the security.
DELEGATION OF PROXY VOTING TO SUB-ADVISERS TO FUNDS
For any Fund that is directly managed by a sub-adviser, the Trustees of the
Fund and Aberdeen have delegated proxy voting authority to the sub-adviser. The
sub-adviser has provided its proxy voting policies to the Board of Trustees of
the Trust and Aberdeen for their
B-2
respective review and these proxy voting policies are described below. The
sub-adviser is required (1) to represent quarterly to Aberdeen that all proxies
of the Fund advised by the sub-adviser were voted in accordance with the
sub-adviser's proxy voting policies as provided to Aberdeen and (2) to confirm
that there have been no material changes to the sub-adviser's proxy voting
policies.
2007 ISS Proxy Voting Guidelines Summary
The following is a concise summary of the ISS proxy voting policy guidelines for
2007.
1. Auditors
Vote CASE-BY-CASE on shareholder proposals on auditor rotation, taking into
account these factors:
o Tenure of the audit firm
o Establishment and disclosure of a renewal process whereby the auditor
is regularly evaluated for both audit quality and competitive price
o Length of the rotation period advocated in the proposal
o Significant audit-related issues
o Number of audit committee meetings held each year
o Number of financial experts serving on the committee
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Generally, vote CASE-BY-CASE. But WITHHOLD votes from:
o Insiders and affiliated outsiders on boards that are not at least
majority independent
o Directors who sit on more than six boards, or on more than two public
boards in addition to their own if they are CEOs of public companies
o Directors who adopt a poison pill without shareholder approval since
the company's last annual meeting and there is no requirement to put
the pill to shareholder vote within 12 months of its adoption??
o Directors who serve on the compensation committee when there is a
negative correlation between chief executive pay and company
performance (fiscal year end basis)
o Directors who have failed to address the issue(s) that resulted in any
of the directors receiving more than 50% withhold votes out of those
cast at the previous board election
B-3
Classification/Declassification of the Board
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
Independent Chairman (Separate Chairman/CEO)
Vote FOR shareholder proposals asking that the chairman and CEO positions be
separated (independent chairman), unless the company has a strong countervailing
governance structure, including a lead director, two-thirds independent board,
all independent key committees, and established governance guidelines.
Additionally, the company should not have underperformed its peers.
Majority of Independent Directors/Establishment of Committees
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the ISS definition of
independence.
Open Access (shareholder resolution)
Vote CASE-BY-CASE basis, taking into account the ownership threshold proposed in
the resolution and the proponent's rationale.
3. Shareholder Rights
Shareholder Ability to Act by Written Consent
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
Shareholder Ability to Call Special Meetings
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
Supermajority Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
B-4
Cumulative Voting
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
Confidential Voting
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election. In proxy contests, support confidential voting proposals only if
dissidents agree to the same policy that applies to management.
4. Proxy Contests
Voting for Director Nominees in Contested Elections
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the factors that include the long-term financial performance,
management's track record, qualifications of director nominees (both slates),
and an evaluation of what each side is offering shareholders.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also
recommend voting for reimbursing proxy solicitation expenses.
5. Poison Pills
Vote FOR shareholder proposals that ask a company to submit its poison pill for
shareholder ratification. Review on a CASE-BY-CASE basis shareholder proposals
to redeem a company's poison pill and management proposals to ratify a poison
pill.
6. Mergers and Corporate Restructurings
Vote CASE-BY-CASE on mergers and corporate restructurings based on such features
as the fairness opinion, pricing, strategic rationale, and the negotiating
process.
7. Reincorporation Proposals
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
thegovernance provisions, and a comparison of the
B-5
jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh
any neutral or negative governance changes.
8. Capital Structure
Common Stock Authorization
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
Dual-class Stock
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
o It is intended for financing purposes with minimal or no dilution to
current shareholders
o It is not designed to preserve the voting power of an insider or
significant shareholder
9. Executive and Director Compensation
ISS applies a quantitative methodology, but for Russell 3000 companies will also
apply a pay-for-performance overlay in assessing equity-based compensation
plans.
Vote AGAINST a plan if the cost exceeds the allowable cap.
Vote FOR a plan if the cost is reasonable (below the cap) unless any of the
following conditions apply:
o The plan expressly permits repricing of underwater options without
shareholder approval; or
o There is a disconnect between the CEO's pay and performance (an
increase in pay and a decrease in performance), the main source for
the pay increase is equity-based, and the CEO participates in the plan
being voted on; or
o The company's most recent three-year burn rate is excessive and is an
outlier within its peer group.
A company that has triggered the burn rate policy may avoid an AGAINST vote
recommendation, if it commits to meet the industry average burn rate over the
next three years. The above general voting guidelines for pay for performance
may change if the compensation committee members can demonstrate improved
performance in an additional public filing such as a DEFA 14A or 8K. To
demonstrate improved performance, committee members should
B-6
review all components of a CEO's compensation and prepare a tally sheet with
dollar amounts under various payout scenarios. The committee should also have
the sole authority to hire and fire outside compensation consultants.
Director Compensation
Before recommending a vote FOR a director equity plan, ISS will review the
company's proxy statement for the following qualitative features:
o Stock ownership guidelines (a minimum of three times the annual cash
retainer)
o Vesting schedule or mandatory holding/deferral period (minimum vesting
of three years for stock options or restricted stock)
o Balanced mix between cash and equity
o Non-employee directors should not receive retirement
benefits/perquisites
o Detailed disclosure of cash and equity compensation for each director
Management Proposals Seeking Approval to Reprice Options
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
o Historic trading patterns
o Rationale for the repricing
o Value-for-value exchange
o Option vesting
o Term of the option
o Exercise price
o Participation
o Treatment of surrendered options
Qualified Employee Stock Purchase Plans
Vote on qualified employee stock purchase plans on a CASE-BY-CASE basis.
Vote FOR qualified employee stock purchase plans where all of the following
apply:
o Purchase price is at least 85 percent of fair market value,
o Offering period is 27 months or less, and
o Potential voting power dilution (VPD) is 10 percent or less.
B-7
Vote AGAINST qualified employee stock purchase plans where any of the opposite
conditions occur.
Nonqualified Employee Stock Purchase Plans
Vote on nonqualified employee stock purchase plans on a CASE-BY-CASE basis.
Vote FOR nonqualified plans with all the following features:
o Broad-based participation
o Limits on employee contribution (a fixed dollar amount or a percentage
of base salary)
o Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from
market value
o No discount on the stock price on the date of purchase since there is
a company matching contribution
Vote AGAINST nonqualified employee stock purchase plans if they do not meet the
above criteria.
B-8
APPENDIX C - PORTFOLIO MANAGERS
DESCRIPTION OF COMPENSATION STRUCTURE
Aberdeen Asset Management Inc. ("Adviser") and Aberdeen Asset Management
Investment Services Limited ("AAMISL")
The Adviser and AAMISL compensate the Fund's portfolio managers for their
management of the Fund. The Fund's portfolio managers' compensation consists of
an industry competitive salary and a year-end discretionary cash bonus based on
client service, asset growth and the performance of the Fund.
Other Managed Accounts
The following chart summarizes information regarding accounts other than
the Fund for which each portfolio manager has day-to-day management
responsibilities. Accounts are grouped into the following three categories: (1)
mutual funds; (2) other pooled investment vehicles; and (3) other accounts. To
the extent that any of these accounts pay advisory fees that are based on
account performance ("performance-based fees"), information on those accounts is
provided separately.
----------------------------- ------------------------------------------------------------------------------
Name of Portfolio Manager Number of Accounts Managed by Each Portfolio Manager and Total Assets by
Category (as of [August 31], 2008)
----------------------------- ------------------------------------------------------------------------------
Aberdeen Asset Management Inc.
------------------------------------------------------------------------------------------------------------
Keith Bachman Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
Warren Davis III Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
Christopher Gagnier Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
C-1
------------------------------------------------------------------------------------------------------------
Neil Moriarty Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
Daniel Taylor Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
Timothy Vile Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
----------------------------- ------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Aberdeen Asset Management Investment Services Limited
------------------------------------------------------------------------------------------------------------
Brett Diment Mutual Funds: [ ] accounts, $[ ] total assets ([ ] account, $[ ] total
assets for which the advisory fee is based on performance)
Other Pooled Investment
Vehicles: [ ] accounts, $[ ] total assets (both for which the advisory
fee is based on performance)
Other Accounts: [ ] account, $[ ] total assets
------------------------------ ------------------------------------------------------------------------------
POTENTIAL CONFLICTS OF INTEREST
Aberdeen Asset Management Inc. and Aberdeen Asset Management Investment Services
Limited
The portfolio managers' management of "other accounts" may give rise to
potential conflicts of interest in connection with their management of the
Fund's investments, on the one hand, and the investments of the other accounts,
on the other. The other accounts may have the same investment objective as the
Fund. Therefore, a potential conflict of interest may
C-2
arise as a result of the identical investment objectives, whereby the portfolio
manager could favor one account over another. However, the Adviser believes that
these risks are mitigated by the fact that: (i) accounts with like investment
strategies managed by a particular portfolio manager are generally managed in a
similar fashion, subject to exceptions to account for particular investment
restrictions or policies applicable only to certain accounts, differences in
cash flows and account sizes, and similar factors; and (ii) portfolio manager
personal trading is monitored to avoid potential conflicts. In addition, the
Adviser has adopted trade allocation procedures that require equitable
allocation of trade orders for a particular security among participating
accounts.
In some cases, another account managed by the same portfolio manager may
compensate Aberdeen based on the performance of the portfolio held by that
account. The existence of such a performance-based fee may create additional
conflicts of interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another potential conflict could include instances in which securities
considered as investments for the Fund also may be appropriate for other
investment accounts managed by the Adviser or its affiliates. Whenever decisions
are made to buy or sell securities by the Fund and one or more of the other
accounts simultaneously, the Adviser may aggregate the purchases and sales of
the securities and will allocate the securities transactions in a manner that it
believes to be equitable under the circumstances. As a result of the
allocations, there may be instances where the Fund will not participate in a
transaction that is allocated among other accounts. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to the Fund from time to time, it is the opinion of the
Adviser that the benefits from the Adviser organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. The
Trust has adopted policies that are designed to eliminate or minimize conflicts
of interest, although there is no guarantee that procedures adopted under such
policies will detect each and every situation in which a conflict arises.
C-3
PART C: OTHER INFORMATION
Item 23. Exhibits
(a) (1) Amended and Restated Agreement and Declaration of Trust of Registrant
is attached hereto as Exhibit EX-99.a.1.
(a) Amendment No. 1 to the Amended and Restated Agreement and
Declaration of Trust of Registrant is incorporated by reference
to Exhibit EX-99.a.1.a. of Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A filed on June23, 2008 ( Accession Number 0001193125-08-138324) ("Post
Effective Amendment No. 2").
(b) Form of Certificate of Establishment and Designation of
Additional Series and Share Classes of Aberdeen Funds
establishing the Aberdeen Core Plus Fixed Income Fund is attached
hereto as Exhibit EX-99.a.1.b.
(2) Certificate of Trust of Registrant, as filed with the Office of the
Secretary of State of the State of Delaware on September 27, 2007, is
incorporated by reference to the Registrant's initial Registration
Statement on Form N-1A filed on October 12, 2007 (Accession Number
0001137439-07-000471).
(b) Amended and Restated By-Laws of Registrant are incorporated by reference to
Pre-effective Amendment No. 1 to the Registrant's initial Registration
Statement on Form N-1A filed on January 18, 2008 (Accession Number
0001386893-08-000026).
(c) (1) See Article III, "Shares," and Article V, "Shareholders' Voting Powers
and Meetings," of Registrant's Amended and Restated Agreement and
Declaration of Trust.
(2) See Article II, "Meetings of Shareholders," of Registrant's Amended
and Restated By-Laws.
(d) (1) Investment Advisory Agreement between Registrant and Aberdeen Asset
Management Inc. ("AAMI") is incorporated by reference to Exhibit EX-99.d.1.
of Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(a) Form of Schedule A to the Investment Advisory Agreement between
Registrant and AAMI is attached hereto as Exhibit EX-99.d.1.a.
(2) Subadvisory Agreement between AAMI and Gartmore Global Partners is
incorporated by reference to Exhibit EX-99.d.2. of Post-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form
N-1A filed on June 23, 2008.
(3) Subadvisory Agreement between AAMI and NorthPointe Capital LLC is
incorporated by reference to Exhibit EX-99.d.3. of Post-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form
N-1A filed on June 23, 2008.
(4) Subadvisory Agreement between AAMI and Credit Suisse Asset Management,
LLC is incorporated by reference to Exhibit EX-99.d.4. of
Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(5) Subadvisory Agreement between AAMI and Security Investors, LLC is
incorporated by reference to Exhibit EX-99.d.5. of Post-Effective
Amendment No. 2 to the Registrant's Registration Statement on Form
N-1A filed on June 23, 2008.
(6) Subadvisory Agreement between AAMI and Aberdeen Asset Management Asia
Limited is incorporated by reference to Exhibit EX-99.d.6. of
Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(7) Subadvisory Agreement between AAMI and Aberdeen Asset Management
Investment Services Limited is incorporated by reference to Exhibit
EX-99.d.7. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(a) Form of Exhibit A to the Subadvisory Agreement between AAMI and
Aberdeen Asset Management Investment Services Limited is attached
hereto as Exhibit EX-99.d.7.a.
(e) (1) Underwriting Agreement between Registrant and Aberdeen Fund
Distributors, LLC is incorporated by reference to Exhibit EX-99.e.1. of
Post-Effective Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A filed on June 23, 2008.
(a) Form of Schedule A to the Underwriting Agreement between
Registrant and Aberdeen Fund Distributors is attached hereto as
Exhibit EX-99.e.1.a.
(2) Form of Dealer Agreement is incorporated by reference to Exhibit
EX-99.e.2. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(f) Not Applicable.
(g) (1) Global Custody Agreement between Registrant and JPMorgan Chase Bank,
National Association is incorporated by reference to Exhibit EX-99.g.1. of
Post-Effective Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A filed on June 23, 2008.
(a) Form of Schedule 6 to the Global Custody Agreement between
Registrant and JPMorgan Chase Bank, National Association is
attached hereto as Exhibit EX-99.g.1.a.
(2) Mutual Fund Rider to the Global Custody Agreement between Registrant
and JPMorgan Chase Bank, National Association is incorporated by
reference to Exhibit EX-99.g.2. of Post-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-1A filed on June 23,2008.
(h) (1) Fund Administration Agreement between Registrant and AAMI is
incorporated by reference to Exhibit EX-99.h.1. of Post-Effective Amendment
No. 2 to the Registrant's Registration Statement on Form N-1A filed on June23, 2008.
(a) Form of Exhibit B to the Fund Administration Agreement between
Registrant and AAMI is attached hereto as Exhibit EX-99.h.1.a.
(2) Services Agreement between Registrant and Citi Fund Services Ohio,
Inc. is incorporated by reference to Exhibit EX-99.h.2. of
Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(a) Amendment to Services Agreement is incorporated by reference to
Exhibit EX-99.h.2.a. of Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A filed on June23, 2008.
(b) Compliance Services Amendment to Services Agreement and
Sub-Administration Agreement is incorporated by reference to
Exhibit EX-99.h.2.b. of Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A filed on June23, 2008.
(c) Form of Schedule A to Services Agreement between Registrant and
Citi Fund Services Ohio, Inc. is attached hereto as Exhibit
EX-99.h.2.c.
(d) Portal Services Amendment to Services Agreement is attached
hereto as Exhibit EX-99.h.2.d.
(3) Sub-Administration Agreement between AAMI and Citi Fund Services Ohio,
Inc. is incorporated by reference to Exhibit EX-99.h.3. of
Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(a) Amendment to Sub-Administration Agreement is incorporated by
reference to Exhibit EX-99.h.3.a. of Post-Effective Amendment No.
2 to the Registrant's Registration Statement on Form N-1A filed
on June 23, 2008.
(b) Compliance Services Amendment to Services Agreement and
Sub-Administration Agreement is incorporated by reference to
Exhibit EX-99.h.2.b. of Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on Form N-1A filed on June23, 2008.
(c) Form of Schedule A to the Sub-Administration Agreement between
AAMI and Citi Fund Services Ohio, Inc. is attached hereto as
Exhibit EX-99.h.3.c.
(4) Administrative Services Plan is incorporated by reference to Exhibit
EX-99.h.4. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(a) Form of Exhibit A to the Administrative Services Plan is attached
hereto as Exhibit EX-99.h.4.a.
(5) Form of Servicing Agreement is incorporated by reference to Exhibit
EX-99.h.5. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(a) Form of Exhibit A to the Servicing Agreement is attached hereto
as Exhibit EX-99.h.5.a.
(6) Expense Limitation Agreement is incorporated by reference to Exhibit
EX-99.h.6. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(a) Form of Exhibit A to the Expense Limitation Agreement is attached
hereto as Exhibit EX-99.h.6.a
(7) Website Services Agreement between Registrant, AAMI and Citi Fund
Services Ohio, Inc. is incorporated by reference to Exhibit EX-99.h.7.
of Post-Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-1A filed on June 23, 2008.
(a) Form of Schedule D to the Website Services Agreement is attached
hereto as Exhibit EX-99.h.7.a.
(i) Opinion and Consent of Counsel that shares will be legally issued, fully
paid and non-assessable for initial 26 Funds (Stradley Ronon Stevens &
Young, LLP) is incorporated by reference hereto as Exhibit EX-99.i of
Post-Effective Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A filed on June 23, 2008.
(j) Consent of Counsel is attached hereto as Exhibit EX-99.j.
(k) Not Applicable.
(l) Initial Capital Agreement between Registrant and AAMI is incorporated by
reference to Pre-effective Amendment No. 2 to the Registrant's initial
Registration Statement on Form N-1A filed on February 5, 2008 (Accession
No. 000137439-08-000064).
(m) (1) Distribution Plan is incorporated by reference to Exhibit EX-99.m. of
Post-Effective Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A filed on June 23, 2008.
(2) Form of Distribution Plan adding the Aberdeen Core Plus Income Fund is
attached hereto as Exhibit EX-99.m.2.
(n) (1) Rule 18f-3 Plan is incorporated by reference to Exhibit EX-99.n. of
Post-Effective Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A filed on June 23, 2008.
(2) Form of Rule 18f-3 Plan adding the Aberdeen Core Plus Income Fund is
attached hereto as Exhibit EX-99.n.2.
(o) Reserved.
(p) (1) Code of Ethics of Registrant is incorporated by reference to Exhibit
EX-99.p.1. of Post-Effective Amendment No. 2 to the Registrant's
Registration Statement on Form N-1A filed on June 23, 2008.
(2) Code of Ethics of Aberdeen Asset Management Inc., Aberdeen Asset
Management Investment Services Limited and Aberdeen Asset Management
Asia Limited is incorporated by reference to Pre-effective Amendment
No. 1 to the Registrant's initial Registration Statement on Form N-1A
filed on January 18, 2008.
(3) Code of Ethics of Gartmore Global Partners is incorporated by
reference to Pre-effective Amendment No. 1 to the Registrant's initial
Registration Statement on Form N-1A filed on January 18, 2008.
(4) Code of Ethics of NorthPointe Capital LLC is incorporated by reference
to Pre-effective Amendment No. 1 to the Registrant's initial
Registration Statement on Form N-1A filed on January 18, 2008.
(5) Code of Ethics of Credit Suisse Asset Management, LLC incorporated by
reference to Pre-effective Amendment No. 1 to the Registrant's initial
Registration Statement on Form N-1A filed on January 18, 2008.
(6) Code of Ethics of Security Investors, LLC is incorporated by reference
to Pre-effective Amendment No. 1 to the Registrant's initial
Registration Statement on Form N-1A filed on January 18, 2008.
(7) Code of Ethics of Aberdeen Fund Distributors LLC is incorporated by
reference to Exhibit EX-99.p.7. of Post-Effective Amendment No. 2 to
the Registrant's Registration Statement on Form N-1A filed on June 23,2008.
(q) (1) Powers of Attorney with respect to the Trust for P. Gerald Malone,
Warren C. Smith, Richard H. McCoy, Jack Solan, Peter D. Sacks, Martin
Gilbert, John T. Sheehy and Gary Bartlett are incorporated by reference to
Exhibit EX-99.q.1. Pre-effective Amendment No. 1 to the Registrant's
initial Registration Statement on Form N-1A filed on January 18, 2008.
(2) Powers of Attorney with respect to the Trust for William Baltrus,
Vincent Esposito, Joseph Malone, Jennifer Nichols and Lucia Sitar are
incorporated by reference to Exhibit EX-99.q.2. Pre-effective
Amendment No. 1 to the Registrant's initial Registration Statement on
Form N-1A filed on January 18, 2008.
(3) Power of Attorney with respect to the Trust for Megan Kennedy is
attached hereto as Exhibit EX-99.q.3.
Item 24. Persons Controlled by or under Common Control with Registrant.
No person is controlled by or under common control with the Registrant.
Item 25. Indemnification
(a) Article VII, Section 2 of the Registrant's Agreement and Declaration
of Trust ("Trust Declaration") provides that the Registrant (the
"Trust"), out of the Trust Property, shall indemnify and hold harmless
each and every officer and trustee from and against any and all claims
and demands whatsoever arising out of or related to such officer's or
trustee's performance of his or her duties as an officer or trustee of
the Trust. This limitation on liability applies to events occurring at
the time a person serves as a trustee or officer of the Trust whether
or not such person is a trustee or officer at the time of any
proceeding in which liability is asserted. Nothing in the Trust
Declaration shall indemnify, hold harmless or protect any officer or
trustee from or against any liability to the Trust or any shareholder
to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such person's office (such conduct
referred to herein as "Disqualifying Conduct").
For the purpose of this indemnification and limitation of liability,
"Agent" means any person who is or was a trustee, officer, employee or
other agent of the Trust or is or was serving at the request of the
Trust as a trustee, director, officer, employee or other agent of
another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise; "Proceeding" means any threatened, pending
or completed action or proceeding, whether civil, criminal,
administrative or investigative. To the fullest extent that
limitations on the liability of Agents are permitted by the Delaware
Statutory Trust Act, as amended, and other applicable law, the Agents
shall not be responsible or liable in any event for any act or
omission of any other Agent of the Trust or any investment adviser or
principal underwriter of the Trust. No amendment or repeal of Article
VII of the Trust Declaration regarding indemnification shall adversely
affect any right or protection of an Agent that exists at the time of
such amendment or repeal.
(b) The Registrant's Trust Declaration provides that to the fullest extent
permitted by applicable law, the officers and Trustees shall be
entitled and have the authority to purchase with Trust Property,
insurance for liability and for all expenses reasonably incurred or
paid or expected to be paid by a Trustee or officer in connection with
any claim, action, suit or proceeding in which such Person becomes
involved by virtue of such Person's capacity or former capacity with
the Trust, whether or not the Trust would have the power to indemnify
such Person against such liability under the provisions of Article VII
of the Trust Declaration.
(c) In addition, indemnification against certain liabilities of the
Registrant's trustees and officers and the Registrant's sub-advisers,
administrator, principal underwriter and custodian are provided in:
(1) Section 7(b) of the Investment Advisory Agreement between the
Registrant and Aberdeen Asset Management, Inc. ("AAMI") (2) Section
10(b) of the Sub-Advisory Agreements among the Registrant, AAMI and
each of the following sub-advisers; (a) Credit Suisse Asset
Management, LLC; (b) Gartmore Global Partners; (c) Security Investors,
LLC; (d) NorthPointe Capital LLC; (e) Aberdeen Asset Management Asia
Limited and (f) Aberdeen Asset Management Investment Services Limited;
(3) Section 9(a) and (b) of the Underwriting Agreement between the
Registrant and Aberdeen Fund Distributors LLC; (4) Section 10(a) and
(b) of the Services Agreement between the Registrant and Citi Fund
Services Ohio, Inc. and (g) Section 7.1(c) of the Global Custody
Agreement between the Registrant and JP Morgan Chase Bank, N.A.
Generally, such indemnification does not apply to any liabilities by
reason of willful misfeasance, bad faith or gross negligence and
reckless disregard of duties. These Agreements are incorporated herein
by references to Item 23.
Item 26. Business and Other Connections of the Investment Adviser.
The Registrant's investment adviser, Aberdeen Asset Management Inc. ("AAMI"), is
a Delaware corporation. In addition to providing investment advisory services to
registered management investment companies, AAMI provides investment advisory
services to individual accounts. Additional information as to AAMI and the
directors and officers of AAMI is included in AAMI's Form ADV filed with the
U.S. Securities and Exchange Commission ("SEC") (File No. 801-49966), which is
incorporated herein by reference and sets forth the officers and directors of
AAMI and information as to any business, profession, vocation or employment of a
substantial nature engaged in by AAMI and such officers and directors during the
past two years.
The Registrant's subadviser, Gartmore Global Partners ("GGP"), is a Delaware
partnership. Additional information as to GGP and the directors and officers of
GGP is included in GGP's Form ADV filed with the SEC (File No. 801-48811), which
is incorporated herein by reference and sets forth the officers and directors of
GGP and information as to any business, profession, vocation or employment of a
substantial nature engaged in by GGP and such officers and directors during the
past two years.
The Registrant's subadviser, NorthPointe Capital LLC ("NorthPointe"), is a
Delaware limited liability company. Additional information as to NorthPointe and
the directors and officers of NorthPointe is included in NorthPointe's Form ADV
filed with the SEC (File No. 801-57064), which is incorporated herein by
reference and sets forth the officers and directors of NorthPointe and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by NorthPointe and such officers and directors
during the past two years.
The Registrant's subadviser, Credit Suisse Asset Management, LLC ("Credit
Suisse"), is a Delaware limited liability company. Additional information as to
Credit Suisse and the directors and officers of Credit Suisse is included in
Credit Suisse's Form ADV filed with the SEC (File No. 801-37170), which is
incorporated herein by reference and sets forth the officers and directors of
Credit Suisse and information as to any business, profession, vocation or
employment of a substantial nature engaged in by Credit Suisse and such officers
and directors during the past two years.
The Registrant's subadviser, Security Investors, LLC, is a limited liability
company. Additional information as to Security Investors, LLC and the directors
and officers of Security Investors, LLC is included in Security Investors, LLC's
Form ADV filed with the SEC (File No. 801-8008), which is incorporated herein by
reference and sets forth the officers and directors of Security Investors, LLC
and information as to any business, profession, vocation or employment of a
substantial nature engaged in by Security Investors, LLC and such officers and
directors during the past two years.
The Registrant's subadviser, Aberdeen Asset Management Investment Services
Limited ("AAMISL"), is a United Kingdom corporation. Additional information as
to AAMISL and the directors and officers of AAMISL is included in AAMISL's Form
ADV filed with the SEC (File No. 801-12880), which is incorporated herein by
reference and sets forth the officers and directors of AAMISL and information as
to any business, profession, vocation or employment of a substantial nature
engaged in by AAMISL and such officers and directors during the past two years.
The Registrant's subadviser, Aberdeen Asset Management Asia Limited ("AAMAL"),
is a Singapore corporation. Additional information as to AAMAL and the directors
and officers of AAMAL is included in AAMAL's Form ADV filed with the SEC (File
No. 801-62020), which is incorporated herein by reference and sets forth the
officers and directors of AAMAL and information as to any business, profession,
vocation or employment of a substantial nature engaged in by AAMAL and such
officers and directors during the past two years.
Item 27. Principal Underwriters.
(a) Aberdeen Fund Distributors LLC (the "Distributor") does not act as
principal underwriter for any other investment companies.
(b)
Name Position with Underwriter Position with Registrant
------------------------------ ---------------------------------- ----------------------------------------
Vincent Esposito Chief Executive Officer President and Chief Executive Officer
5 Tower Bridge
300 Barr Harbor Drive, Suite
300
West Conshohocken, PA19428
Christopher Brown Chief Compliance Officer, Chief None
Financial Officer and Financial
5 Tower Bridge Operations Principal
300 Barr Harbor Drive,
Suite 300
West Conshohocken, PA19428
(c) Not Applicable.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder will be maintained at the offices of Citi Fund Services Ohio, Inc.:
3435 Stelzer Road, Columbus, Ohio43219 and 100 Summer Street, 15th Floor,
Boston, Massachusetts02110 with the exception of those maintained by the
Registrant's investment adviser, Aberdeen Asset Management Inc. at 1735 Market
Street, 37th Floor, Philadelphia, PA19103.
Item 29. Management Services.
Not Applicable.
Item 30. Undertakings.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the provisions described in response to Item 25, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is,
therefore, 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 proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"Securities Act") and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 3/5 to this
registration statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Philadelphia, and the Commonwealth of Pennsylvania on
the 25th day of August, 2008.
Aberdeen Funds
Registrant
By: Vincent Esposito(1)
Vincent Esposito
President of Aberdeen Funds
Pursuant to the requirements of the Securities Act, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
Name Title Date
------------------- ----------------------------------------- -----------------
Gary Bartlett(1) Trustee August 25, 2008
Gary Bartlett
Vincent Esposito(1) President and Chief Executive Officer August 25, 2008Vincent Esposito
Megan Kennedy (1) Treasurer, Chief Financial Officer And August 25, 2008
Megan Kennedy Principal Accounting Officer
P. Gerald Malone(1) Chairman of the Board August 25, 2008
P. Gerald Malone
Richard H. McCoy(1) Trustee August 25, 2008
Richard H. McCoy
Peter D. Sacks(1) Trustee August 25, 2008
Peter D. Sacks
John T. Sheehy(1) Trustee August 25, 2008
John T. Sheehy
Warren C. Smith(1) Trustee August 25, 2008
Warren C. Smith
Jack Solan(1) Trustee August 25, 2008
Jack Solan
Martin Gilbert(1) Trustee August 25, 2008
Martin Gilbert
By: /s/Lucia SitarLucia Sitar
Attorney In Fact
(1) Pursuant to a power of attorney incorporated herein by reference.
EXHIBITS INDEX
EXHIBITS EXHIBIT NO.
------------------------------------------------------------------------------------ --------------
Amended and Restated Agreement and Declaration of Trust EX-99.a.1.
Form of Certificate of Establishment and Designation of Additional Series and EX-99.a.1.b.
Share Classes of Aberdeen Funds establishing the Aberdeen Core Plus Fixed Income
Fund
Form of Schedule A to the Investment Advisory Agreement between Registrant and AAMI EX-99.d.1.a.
Form of Exhibit A to the Subadvisory Agreement between AAMI and Aberdeen Asset EX-99.d.7.a.
Management Investment Services Limited
Form of Schedule A to the Underwriting Agreement between Registrant and Aberdeen EX-99.e.1.a.
Fund Distributors
Form of Schedule 6 to the Global Custody Agreement between Registrant and JPMorgan EX-99.g.1.a.
Chase Bank, National Association
Form of Exhibit B to the Fund Administration Agreement between Registrant AAMI EX-99.h.1.a.
Form of Schedule A to the Services Agreement between Registrant and Citi Fund EX-99.h.2.c.
Services Ohio, Inc.
Portal Services Amendment to the Services Agreement EX-99.h.2.d.
Form of Schedule A to the Sub-Administration Agreement between Registrant and Citi EX-99.h.3.c.
Fund Services Ohio, Inc.
Form of Exhibit A to the Administrative Services Plan EX-99.h.4.a.
Form of Exhibit A to the Servicing Agreement EX-99.h.5.a.
Form of Exhibit A to the Expense Limitation Agreement EX-99.h.6.a.
Form of Schedule D to the Website Services Agreement EX-99.h.7.a
Consent of Counsel EX-99.j.
Form of Distribution Plan EX-99.m.2.
Form of Rule 18f-3 Plan EX-99.n.2.
Power of Attorney for Megan Kennedy EX-99.q.3.
Dates Referenced Herein and Documents Incorporated by Reference
⇒ 