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Gmo Trust · N-30D · For 2/28/98

Filed On 5/8/98   ·   Accession Number 950109-98-3053   ·   SEC File 811-04347

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 5/08/98  Gmo Trust                         N-30D       2/28/98    1:1.6M                                   Donnelley R R & S..01/FA

Annual or Semi-Annual Report Mailed to Shareholders   —   Rule 30d-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: N-30D       Annual Reports                                       883   3.45M 

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GMO Asia Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Asia Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Asia Fund at February 28, 1998, the results of its operations, the changes in its net assets and the financial highlights for the period from February 18, 1998 (commencement of operations) to February 28, 1998, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provides a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 20, 1998
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GMO Asia Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Download Table] Shares Description Value ($) ------------------------------------------------------------------------------------ STOCK AND EQUIVALENTS - 64.7% China - 5.2% 898,000 First Tractor Co * 516,125 415,250 Guangdong Kelon Elec Holding Class H 463,922 1,097,000 Qingling Motor Co Ltd Class H 439,225 157,000 Shanghai Industrial Holdings 685,386 ------------- 2,104,658 ------------- Indonesia - 4.2% 791,000 Astra Agro Lestari * 308,356 172,000 International Nickel 194,350 609,000 PT Daya Guna Samudera 423,203 889,500 Tambang Timah Persero (Foreign Registered) 758,839 ------------- 1,684,748 ------------- Korea - 11.3% 8,610 Dae Duck Electronics 680,153 35,000 Hyundai Heavy Industries 955,909 123,940 LG Electronics Preferred (Non Voting) 569,228 3,700 Medison Co Ltd * 240,171 9,250 Pohang Iron & Steel 554,558 38,500 Saehan Percision 610,625 56,160 Samsung Display Devices Preferred 914,792 ------------- 4,525,436 ------------- Malaysia - 5.4% 231,000 Golden Hope Plantations Berhad 308,000 305,000 Kumpulan Guthrie Berhad 215,782 232,000 Malaysian International Ship (Alien Market) 429,279 62,000 Rothmans of Pall Mall Berhad 552,517 214,000 Sime Darby Berhad 279,510 533,000 Tan Chong Motor Holdings Berhad 378,539 ------------- 2,163,627 ------------- Phillippines - 10.1% 7,812,000 Aboitiz Equity Ventures Inc * 434,653 2,261,000 Cosmos Bottling Corp 300,333 7,181,000 Digital Telecommunications * 413,942 7,185,700 DMCI Holdings Inc * 435,824 718,000 Ionics Circuits Inc * 395,890 85,000 Manila Electric Class B 253,509 821,800 Music Corp * 319,246 46,750 Philippine Long Distance Telephone 1,259,555 6,322,000 Solid Group Inc 244,007 ------------- 4,056,959 ------------- Singapore - 12.7% 16,750 Creative Technology Ltd * 398,859 81,000 Development Bank of Singapore (Foreign Registered) 634,608 See accompanying notes to the financial statements. 1
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GMO Asia Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Singapore - continued 69,000 Natsteel Electronics * 124,294 482,000 Natsteel Ltd 666,058 103,000 Overseas Chinese Banking (Foreign Registered) 613,171 165,000 Overseas Union Bank Ltd (Foreign Registered) 620,915 113,000 Singapore Airlines Ltd (Foreign Registered) 836,521 56,000 Singapore Press Holdings (Foreign Registered) 801,481 105,000 Venture Manufacturing 401,604 ---------------- 5,097,511 ---------------- Thailand - 15.8% 12,000 Advanced Info Service Public Co Ltd 91,323 144,700 Advanced Info Service Public Co Ltd (Foreign Registered) 1,101,197 81,600 BEC World Public Co Ltd 477,104 73,900 BEC World Public Co Ltd (Foreign Registered) 432,084 635,000 Cogeneration Public Co (Foreign Registered) 662,993 77,300 Delta Electronics Public Co Ltd (Foreign Registered) 1,276,974 90,700 Electricity Generating Public Co Ltd (Foreign Registered) 237,798 435,000 International Broadcasting Plc * 363,038 100,300 KCE Electronics Plc (Foreign Registered) 744,687 450,087 Land & House Public Co Ltd (Foreign Registered) 279,346 104,876 Shinawatra Computer Public Co Ltd (Foreign Registered) 676,462 ---------------- 6,343,006 ---------------- TOTAL STOCK AND EQUIVALENTS (Cost $25,563,408) 25,975,945 ---------------- Par Value SHORT-TERM INVESTMENTS - 44.6% Cash Equivalents - 44.6% $ 17,900,000 First National Bank of Chicago Time Deposit, 5.60%, due 3/2/98 17,900,000 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $17,900,000) 17,900,000 ---------------- TOTAL INVESTMENTS - 109.3% (Cost $43,463,408) 43,875,945 Other Assets and Liabilities (net) - -9.3% (3,715,060) ---------------- TOTAL NET ASSETS - 100.0% $ 40,160,885 ================ Notes to the Schedule of Investments: * Non-income producing security. A dividend has not been declared for the twelve months ended February 28, 1998. 2 See accompanying notes to the financial statements.
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GMO Asia Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- At February 28, 1998, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Electronic Equipment 22.2 % Telecommunications 14.0 Communications 11.0 Metals and Mining 7.6 Banking 7.2 Food and Beverage 5.9 Machinery 5.7 Transportation 4.9 Utilities 4.4 Automotive 3.2 Construction 2.8 Consumer Goods 2.6 Financial Services 2.6 Real Estate 1.2 Miscellaneous 4.7 --------- 100.0 % See accompanying notes to the financial statements. 3
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GMO Asia Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Assets and Liabilities - February 28, 1998 --------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $43,463,408) (Note 1) $ 43,875,945 Foreign currency, at value (cost $493,095) (Note 1) 514,497 Cash 9,581 Receivable for investments sold 246,472 Receivable for Fund shares sold 10,000,000 Interest receivable 5,569 Receivable for expenses waived or borne by Manager (Note 2) 13,543 --------------- Total assets 54,665,607 --------------- Liabilities: Payable for investments purchased 14,483,094 Payable to affiliate for (Note 2): Management fee 3,209 Shareholder service fee 481 Accrued expenses 17,938 --------------- Total liabilities 14,504,722 --------------- Net assets $ 40,160,885 =============== Net assets consist of: Paid-in capital $ 39,654,636 Accumulated undistributed net investment income 110,171 Accumulated net realized loss (17,997) Net unrealized appreciation 414,075 --------------- $ 40,160,885 =============== Net assets attributable to Class III Shares $ 40,160,885 =============== Shares outstanding - Class III 3,845,283 =============== Net asset value per share - Class III $ 10.44 =============== 4 See accompanying notes to the financial statements.
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GMO Asia Fund (A Series of GMO Trust) Statement of Operations - Period from February 18, 1998 (commencement of operations) to February 28, 1998 ------------------------------------------------------------------------------- [Enlarge/Download Table] Investment income: Interest $ 17,279 ------------------ Total income 17,279 ------------------ Expenses: Management fee (Note 2) 3,209 Audit fees 11,997 Custodian fees 5,004 Transfer agent fees 693 Legal fees 90 Miscellaneous 153 Fees waived or borne by Manager (Note 2) (13,543) ------------------ 7,603 Shareholder service fee - Class III (Note 2) 481 ------------------ Net expenses 8,084 ------------------ Net investment income 9,195 ------------------ Realized and unrealized gain (loss): Net realized gain (loss) on: Investments (17,999) Foreign currency and foreign currency related transactions 100,978 ------------------ Net realized gain 82,979 ------------------ Change in net unrealized appreciation (depreciation) on: Investments 412,537 Foreign currency and foreign currency related transactions 1,538 ------------------ Net unrealized gain 414,075 ------------------ Net realized and unrealized gain 497,054 ------------------ Net increase in net assets resulting from operations $ 506,249 ================== See accompanying notes to the financial statements. 5
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GMO Asia Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from February 18, 1998 (commencement of operations) to February 28, 1998 ----------------------------- Increase (decrease) in net assets: Operations: Net investment income $ 9,195 Net realized gain 82,979 Change in net unrealized appreciation 414,075 ----------------------------- Net increase in net assets resulting from operations 506,249 ----------------------------- Net share transactions - Class III (Note 5) 39,654,636 ----------------------------- Total increase in net assets 40,160,885 Net assets: Beginning of period - ----------------------------- End of period (including accumulated undistributed net investment income of $110,171) $ 40,160,885 ============================= 6 See accompanying notes to the financial statements.
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GMO Asia Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout the period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from February 18, 1998 (commencement of operations) to February 28, 1998 ------------------------ Net asset value, beginning of period $ 10.00 ------------------------ Income (loss) from investment operations: Net investment income 0.01(b) Net realized and unrealized gain 0.43 ------------------------ Total from investment operations 0.44 ------------------------ Net asset value, end of period $ 10.44 ======================== Total Return (a) 4.40% Ratios/Supplemental Data: Net assets, end of period (000's) $ 40,161 Net expenses to average daily net assets 2.52%* Net investment income to average daily net assets 2.86%* Portfolio turnover rate 1.48% Average broker commission rate per equity share (c) $ 0.0036 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01 * Annualized (a) Calculation excludes subscription and redemption fees. The total return would have been lower had certain expenses not been waived during the period shown. (b) Computed using average shares outstanding throughout the period. (c) The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 7
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GMO Asia Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 ------------------------------------------------------------------------------ 1. Significant accounting policies GMO Asia Fund (the "Fund"), which commenced operations on February 18, 1998, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks long-term capital appreciation through investment in and exposure to equity and equity-related securities of issuers in countries in Asia. The Fund offers four classes of shares: Class I, Class II, Class III, and Class IV. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. At February 28, 1998, Class III was the only active class of shares of the Fund. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. 8
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GMO Asia Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 9
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GMO Asia Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- [Enlarge/Download Table] Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------------------------- -------------------------------------- -------------------------------------- $100,976 $(100,976) - Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is 1.20% of the amount invested. In the case of cash redemptions, the fee is .40% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" and redemption fees are included as part of each class' "shares repurchased", respectively, as summarized in Note 5. For the period ended February 28, 1998, the Fund received $475,856 in purchase premiums and no redemption fees. There is no premium for reinvested distributions. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 10
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GMO Asia Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of 1.00% of average daily net assets. In addition, the Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, .15% for Class III shares, and .105% for Class IV shares. GMO has agreed to waive a portion of its fee until further notice to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed .81% of average daily net assets. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the portfolio. Payments made by the Manager to the Consultant will not affect the amounts payable by the Fund to the Manager or the Fund's expense ratio. For the period ended February 28, 1998, the Fund incurred no Trustees' fees. 3. Purchase and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 1998 aggregated $25,827,963 and $246,556, respectively. At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held was as follows: [Enlarge/Download Table] Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ------------------------- ---------------------------- --------------------------- ---------------------------- $43,463,654 $696,844 $284,553 $412,291 4. Principal shareholders At February 28, 1998, 88% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 11
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GMO Asia Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including purchase premiums and redemption fees received by the Fund, were as follows: [Enlarge/Download Table] Period from February 18, 1998 (commencement of operations) to February 28, 1998 ----------------------------------------- Class III: Shares Amount ----------------- -------------------- Shares sold 3,845,283 $ 39,654,636 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased - - ----------------- -------------------- Net increase 3,845,283 $ 39,654,636 ================= ==================== 12
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GMO Asia Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- The Fund has elected to defer to March 1, 1998 post-October losses of $17,753. 13
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GMO International Core Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO International Core Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Core Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 23, 1998
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 96.0% Australia - 5.4% 7,341 Adelaide Brighton Ltd 6,251 75,400 Amalgamated Holdings Ltd 316,416 415,000 Amcor Ltd 1,812,227 3,198,875 Australia and New Zealand Banking Group Ltd 22,010,259 23,500 Australian Gas & Light 187,310 546,134 Australian National Industries Ltd 465,067 3,873,567 Boral Ltd 9,394,368 385,100 Broken Hill Proprietary Ltd 3,804,066 1,131,740 Burns Philp & Co Ltd 185,039 241,769 Caltex Australia Ltd 774,114 180,350 Capcount Property Trust 125,321 301,000 Capital Property Trust 490,084 421,800 Capral Aluminum Ltd 890,789 92,500 Coca-Cola Amatil Ltd 797,148 3,363,187 Coles Myer Ltd 17,458,724 171,700 Comalco Ltd 753,291 255,687 Commonwealth Bank of Australia 3,178,909 528,162 Consolidated Rutile Ltd * 208,690 101,149 Cortecs Plc * 299,749 20,500 Coventry Group Ltd 82,397 107,900 CRA Ltd 1,417,213 42,400 CSL Ltd 327,556 4,030,696 CSR Ltd 13,372,590 637,700 Cultus Petroleum * 1,138,215 331,600 Email Ltd 745,478 54,082 Energy Resources of Australia Class A 160,269 418,331 Foodland Associated 3,149,117 2,955,972 Fosters Brewing Group Ltd 6,544,707 51,090 G E Crane Holdings Ltd 426,362 7,600 Gandel Retail Trust 6,006 1,036,428 General Property Trust Units 2,033,472 4,060,131 Goodman Fielder Ltd 7,025,549 350,107 Hardie (James) Industries Ltd 1,087,607 110,300 Incitec Ltd 404,414 223,000 Jupiters Ltd 437,526 92,500 KLZ Ltd 126,031 45,600 Macquarie Bank Ltd 428,697 95,380 Metal Manufactures Ltd 142,951 3,433,779 MIM Holdings Ltd 1,918,195 250,588 Mirvac Ltd 401,176 37,694 Mount Leyshon Gold Mines 38,519 846,170 National Australia Bank Ltd 11,702,002 91,000 National Food Ltd 171,103 418,650 National Mutual Property Trust 362,211 See accompanying notes to the financial statements. 1
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Australia - continued 5,748,507 News Corp Ltd 36,616,193 1,505,911 Normandy Mining Ltd 1,497,817 303,639 North Broken Hill Peko Ltd 824,934 97,100 Oil Search Ltd 188,526 1,469,260 Pacific Dunlop Ltd 2,602,427 323,100 Pasminco Ltd 359,002 4,973,770 Pioneer International Ltd 14,400,618 121,421 PMP Communications Ltd 253,944 147,300 Portman Mining Ltd 235,818 1,818,579 Qantas Airways Ltd 3,109,656 231,082 QCT Resources Ltd 197,883 147,607 Rothmans Holdings Ltd 892,949 1,558,992 Santos Ltd 5,995,347 1,513,239 Schroders Property 2,742,178 228,069 Sea World Property Trust 180,232 75,300 Seven Network Ltd 270,341 145,640 Simsmetal Ltd 828,464 172,500 Southcorp Holdings Ltd 639,285 484,400 Sydney Harbour Casinos Preferred * 468,596 111,684 Ticor Ltd * 66,955 18,199 W H Soul Pattison & Co Ltd 371,942 243,348 Walker Corp 149,203 117,900 Westfarmers Ltd 1,138,929 1,847,108 Westfield Trust Units 4,001,529 692,691 Westpac Banking Corp 4,803,899 149,000 Westpac Property Trust 193,877 241,500 Woodside Petroleum Ltd 1,487,278 ------------- 201,325,007 ------------- Austria - 2.1% 4,004 Allgemeine Baugesellschaft AG Preferred 7.00% 119,165 57,077 Austrian Airlines * 1,434,949 81,148 Bank Austria AG Preferred * 5,325,890 34,193 Bank Austria AG (Participating Certificate) 2,016,520 107,516 Bank Austria AG * 7,358,769 2,608 Bau Holdings AG 153,602 31,724 Bau Holdings AG Preferred 2.42% (Non Voting) 1,510,643 47,397 Brau Union AG 2,784,085 13,732 EA-Generali AG 4,497,676 1,599 EA-Generali AG Preferred 6.00% 303,064 26,029 EVN Energie-Versorgung Niederoesterreich AG 3,657,213 6,937 Interunfall Versicherung AG 1,062,157 338 Mayr-Melnhof Karton AG (Bearer) 19,589 40,756 OEMV AG 4,938,013 21,231 Oesterreichische Brau Beteiligungs AG 1,243,777 131,571 Oesterreichische Elektrizitaetswirtschafts AG 13,833,905 2 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Austria - continued 153,919 Oesterreichische Laenderbank AG 10,427,463 39,886 Oesterreichische Laenderbank AG Preferred 2.34% (Non Voting) 2,720,877 134,470 Radex-Heraklith AG 5,402,728 3,029 Strabag Oesterreich AG 153,013 269,783 Voest-Alpine Stahl AG 10,621,694 39 Wiener Allianz Versicherungs AG 4,597 ------------- 79,589,389 ------------- Canada - 3.8% 115,319 Abitibi Consolidated Inc 1,644,925 118,900 Anderson Exploration Ltd * 1,403,591 52,000 Avenor Inc 1,101,641 80,900 BC Telecom Inc 2,742,806 317,704 BCE Inc 11,273,620 55,400 Biochem Pharma Inc * 1,245,687 600 Bombardier Inc Class A 13,006 259,300 Bombardier Inc Class B 5,575,365 49,800 Canadian Hotel Inc 3,093,363 181,500 Canadian Tire Corp Ltd Class A 4,342,532 70,000 Canfor Corp 501,704 167,511 Cominco Ltd 2,824,905 70,200 Cott Corp 601,792 505,200 Dofasco Inc 8,856,930 411,118 Domtar Inc 3,134,336 132,500 Donohue Inc Class A 2,662,755 75,400 Edperbrascan Corp Class A Ltd (Voting Shares) 1,425,191 1,500 Extendicare (Voting Shares) * 16,759 184,707 Fletcher Challenge Ltd Class A 2,465,961 263,002 Gulf Canada Resources Ltd * 1,543,103 58,700 Hollinger Inc 598,075 72,510 Hudsons Bay Co 1,401,135 184,500 Imasco Ltd 7,020,114 82,707 Imperial Oil Ltd 4,878,792 171,100 Inco Ltd 2,975,600 234,000 Inmet Mining Ltd * 830,341 105,235 Laidlaw Inc 1,534,361 424,319 Macmillan Bloedel Ltd 5,351,879 32,200 Magna International Class A 1,940,168 59,100 MDS Inc Class B 1,287,356 417,000 Methanex Corp * 3,398,939 90,500 Molson Co Ltd Class A 1,624,758 162,400 Moore Corporation Ltd 2,533,310 111,700 Newbridge Networks Corp * 2,617,570 231,004 Norcen Energy Resource 3,205,796 504,100 Nova Corp of Alberta 5,561,164 117,100 Nova Scotia Power Inc 1,563,363 See accompanying notes to the financial statements. 3
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Canada - continued 25,500 Potash Corp of Saskatchewan 2,280,065 124,300 Provigo Inc * 816,643 58,200 Quebecor Inc Class B 1,128,707 49,500 Ranger Oil Ltd 318,255 87,800 Rogers Cantel Mobile Communications Class B * 817,447 140,400 Seagram Ltd 5,327,337 47,300 Suncor Energy Inc 1,736,588 113,906 Teck Corp Class B 1,636,776 151,700 Telus Corp 3,816,084 53,900 Thomson Corp 1,613,421 224,800 Transalta Corp 3,783,129 262,000 Transcanada Pipelines Ltd 5,881,952 83,401 United Dominion Industries Ltd 2,391,012 198,900 Westcoast Energy Inc 5,031,374 10,900 Weston (George) Ltd 919,088 ------------- 142,290,571 ------------- Finland - 0.4% 69,000 Amer Group Class A * 1,377,420 7,800 Cultor OY Class 1 465,710 662,500 Enso OY Class R 5,987,424 21,000 Finnair Class A 190,552 25,838 Instrumentarium OY Class A 1,453,601 28,800 Kesko OY 470,392 37,900 Metra AB Class A 990,436 8,000 Metra AB Class B 202,530 113,200 Partek OY 1,931,075 217,071 Rautaruukki OY 1,819,988 2,400 Stockmann AB Class A 198,610 87,100 Valmet OY 1,307,219 ------------- 16,394,957 ------------- France - 9.1% 32,259 Accor SA 7,448,562 13,507 Air Liquide L Shares 2,182,681 67,221 Alcatel Alsthom Cie Generale d'Electricite SA 8,743,118 223,091 Assurances Generales De France (Bearer) 12,108,482 364,843 Banque Nationale de Paris 22,049,058 280 Bongrain 126,452 7,480 Bouygues 1,049,049 2,779 Canal Plus 585,533 11,745 Ciments Francais 605,453 9,432 Club Mediterranee SA Rights 3/11/98 * 13,708 9,432 Club Mediterranee SA * 700,130 11,808 Compagnie Generale d'Industrie et de Participations 5,078,647 110,669 Credit Commercial de France 8,180,337 4 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- France - continued 34,257 Credit Local de France SA 4,371,259 121,293 Credit Lyonnais * 8,864,045 26,382 Credit National 1,603,045 188,650 Elf Aquitaine SA 21,469,713 71,422 Elf Sanofi SA 8,093,144 77,038 Eridania Beghin-Say SA 13,739,503 387,500 Euro Disney SCA (Bearer) * 563,185 1,096,728 Eurotunnel SA Units (Bearer) * 1,044,632 1,096,728 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 198,120 304,218 Financiere de Paribas SA 28,926,752 35 Fromageries Bel La Vache 26,020 204,729 GAN (Group Assurances National) * 5,039,845 1,539 Gaz Et Eaux 657,125 83,347 Generale Des Eaux 13,112,686 24,647 Generale Des Eaux Warrants 5/2/2001 * 24,691 70,060 Groupe Danone 14,151,791 238,794 Lafarge Coppee SA 17,619,599 27,055 Lyonnaise Des Eaux 3,567,790 80,620 Michelin SA Class B 4,991,377 36,366 Nord-Est 722,632 40,500 Pernod-Ricard 2,647,124 101,482 Peugeot SA 14,449,217 3,120 Pinault Printemps Redoute 2,045,414 111,810 Renault SA * 3,892,716 595,768 Rhone Poulenc SA Class A 27,453,710 67,636 Saint-Gobain 9,474,649 63,360 Seita 2,767,789 61,920 SGS Thomson Microelectronics * 4,743,717 15,826 Societe Eurafrance 7,368,183 153,800 Societe Generale Paris 23,186,501 43,059 Sommer Allibert 1,678,730 105,241 SPIE Batignolles 6,550,288 6,880 Synthelabo 960,381 8,090 Technip SA (Campagnie Francaise) 914,057 69,883 Thomson CSF 2,410,055 57,130 Total SA 6,267,248 206,720 Usinor Sacilor 3,101,182 15,082 Vallourec 1,039,275 58,635 Worms et Compagnie SA 3,659,121 ------------- 342,267,521 ------------- Germany - 6.2% 52,750 Adidas Salomon AG 8,313,266 154,795 AGIV AG * 3,326,632 16,650 Axa Colonia Konzern AG 2,018,460 See accompanying notes to the financial statements. 5
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Germany - continued 35,300 Bankgesellschaft Berlin AG 749,864 335,300 BASF AG 12,142,673 301,800 Bayer AG 12,830,346 4,400 Bayerische Hypotheken und Wechsel - Bank AG 204,513 850 Bayerische Motorenwerke AG 851,054 310,100 Bayerische Vereinsbank 19,206,635 153,140 Berliner Kraft & Licht AG Class A 6,750,902 1,350 Brau und Brunnen * 121,628 319,966 Continental AG 7,687,294 2,936 Deutsche Babcock & Wilcox * 161,785 155,250 Douglas Holdings AG 5,492,244 5,890 Draegerwerk AG Preferred 121,386 37,828 FAG Kugelfischer 517,992 34,050 Fresenius Medical Care AG Preferred .82% (Non Voting) 6,998,567 11,000 Friedrich Krupp AG 1,982,091 9,350 Gerresheimer Glas AG 132,927 4,187 Hamburgische Electricitaets-Werke AG 1,091,308 71,155 Heidelberg Port-Zement 5,242,278 165,350 Henkel KGAA Preferred 10,724,174 28,250 Hochtief AG 994,724 231,163 Klockner Humboldt Deutz * 1,872,487 2,614 Klockner-Werke AG * 178,324 1,072,500 Lufthansa AG * 20,625,568 13,100 MAN AG 3,933,429 7,172 Metallgesellschaft * 145,831 41,400 Phoenix AG 866,896 7,016 Porsche AG Preferred .12% (Non Voting) 12,255,528 11,050 Preussag AG 3,574,239 6,250 Puma AG Preferred 126,567 134,100 RWE Preferred 6,292,115 4,600 SAP AG Preferred 1,899,314 132,209 Schering AG 14,847,331 18,700 Schwarz Pharma AG 1,525,059 14,300 SGL Carbon AG 1,709,933 220,900 Siemens AG 13,657,518 212,542 SKW Trostberg AG 7,261,388 950 Strabag Bau AG * 65,960 1,950 Suedzucker AG 913,349 10,700 Thyssen AG 2,328,971 213,000 Veba AG 14,366,276 27,650 Viag AG 14,977,242 1,924 Villeroy and Boch AG * 285,194 ------------- 231,371,262 ------------- 6 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Hong Kong - 5.5% 15,484,000 Allied Properties Ltd 1,499,903 7,128,500 Amoy Properties Ltd 6,030,568 328,000 ASM Pacific Technology 258,418 10,243,000 Cathay Pacific Airways Ltd 8,731,521 3,552,500 Century City International 628,599 206,725 Century City International Warrants 12/31/98 * 4,619 206,725 Century City International Warrants 12/31/99 * 2,884 224,000 Champion Technology Holdings 25,749 1,241,600 Champion Technology Holdings Warrants 6/30/98 * 12,829 4,932,000 Cheung Kong Holdings 34,557,443 6,132,000 China Overseas Land & Investment Ltd 1,861,182 1,042,122 Chinese Estates Holdings Ltd 360,049 3,411,000 CLP Holdings Limited 17,578,160 2,982,000 CP Pokphand Co 577,720 52,400 Dah Sing Financial Services 143,478 868,300 Dao Heng Bank 2,489,669 225 Denway Investment Warrants 11/30/99 * 2 529,766 Dickson Concept International Ltd 916,870 3,501,300 Elec & Eltek International Holdings Ltd 1,006,186 293,200 Gold Peak Industries Ltd Warrants 8/6/00 * 20,828 909,000 Gold Peak Industry 363,952 2,402,509 Great Eagle Holdings Ltd 3,537,437 749,901 Great Eagle Holdings Ltd Warrants 11/30/98 * 63,924 1,452,700 Guoco Group 3,696,247 6,803,700 Hang Lung Development Co Ltd 9,973,780 193,200 Hang Seng Bank 1,827,820 75,000 Harbour Centre Development Ltd 61,995 11,846,000 Henderson Investment Ltd 9,944,979 1,804,000 Henderson Land Development Co Ltd 9,413,187 292,000 HKCB Bank Holding Co Ltd 162,170 1,753,608 HKR International Ltd 1,313,649 1,216,000 Hong Kong Aircraft Engineering Co Ltd 2,599,264 5,421,300 Hong Kong Electric Holdings Ltd 19,255,505 723,700 Hong Kong Ferry Co Ltd 747,769 354,000 Hong Kong & Shanghai Hotels 304,049 52,000 Hung Hing Printing Group Ltd 23,339 653,000 Hysan Development Co Ltd 1,244,010 2,600 Innovative International Holding Warrants 8/31/99 * 49 292,000 International Bank of Asia 121,627 166,857 International Bank of Asia Rights 3/20/98 * 29,094 299,000 K Wah International Holdings Ltd 45,183 47,600 Kowloon Motor Bus Co Ltd 94,370 3,277,622 Kumagai Gumi Ltd 2,222,475 642,700 Lai Sun Garment International Ltd 348,639 See accompanying notes to the financial statements. 7
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Hong Kong - continued 585,855 Lai Sun Hotel International Warrants 4/30/99 * 3,254 431,322 Leading Spirit Conrowa Electric * 91,919 716,000 Liu Chong Hing Bank Ltd 1,077,352 1,242,000 Liu Chong Hing Investment Ltd 1,066,748 2,078,462 Mandarin Oriental 1,735,516 451,000 Mingly Corp 80,385 1,348,800 New Asia Realty & Trust A Shares 2,717,634 1,653,467 New World Development Co Ltd 6,086,382 559,000 Oriental Press Group 144,398 729,000 Oriental Press Group Warrants 10/2/98 * 1,695 3,372,000 Paul Y - ITC Construction Holdings Ltd 365,835 107,000 Realty Development Corp Ltd Class A 258,431 33,642,371 Regal Hotels International Ltd 5,257,639 334,000 Semi Tech (Global) Co Ltd 38,825 444,000 Shanghai Petrochemical Co Class H 73,403 274,000 Shangri La Asia 245,954 1,195,000 Shaw Brothers Ltd 744,705 75,000 Shell Co Manufacturing Warrants 11/3/99 * 746 450,000 Shell Electric Co Ltd 65,676 6,409,000 Shun Tak Holdings Ltd 1,597,594 8,031,000 South China Morning Post Ltd 5,808,666 1,245,000 Sun Hung Kai Properties Ltd 9,326,445 1,185,600 Sun Hung Kai Properties Warrants 2/18/00 * 26,644 621,000 Swire Pacific Ltd Class A 3,737,630 3,357,500 Swire Pacific Ltd Class B 3,382,435 628,907 Tai Cheung Holdings Ltd 215,254 392,000 Tem Fat Hing Fung 40,504 48,000 Texwinca Holdings Ltd 5,890 57,000 Union Bank of Hong Kong 79,877 32,000 VTech Holdings Ltd 111,592 2,057,000 Wharf Holdings Ltd 4,330,526 8,770,800 Wheelock & Co Ltd 10,138,671 145,304 Wing Lung Bank 639,957 81,550 Winsor Properties Holdings Ltd 78,996 1,699,000 Yizheng Chemical Fibre Co 318,185 1,136,200 Yue Yuen Industrial Holdings 2,186,552 ------------- 206,183,105 ------------- Italy - 5.7% 210,315 Alitalia Linee Aeree * 1,821,723 197,000 Alleanza Assicurazioni SPA 2,438,487 859,500 Assicurazioni Generali SPA 24,544,106 855,250 Assicurazioni Generali SPA Rights 3/10/98 * 1,758,820 2,029,222 Autostrade Concessioni e Costruzioni SPA Class B Preferred 6.39% 7,597,746 955,000 Banca Commerciale Italiana SPA 4,360,194 8 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Italy - continued 3,803,857 Banca di Roma * 5,250,511 729,263 Banca Fideuram SPA 4,631,632 149,000 Banca Intesa SPA 682,363 80,400 Banca Popolare di Bergamo Credit 1,702,847 448,000 Banca Popolare di Milano 3,842,969 199,200 Banca Toscana 667,358 1,448,650 Banco di Napoli di Risp * 2,112,927 495,000 Bulgari SPA 2,876,862 279,300 Cartiere Burgo SPA 1,897,170 715,500 Cementir SPA 839,671 880,843 COFIDE SPA * 558,695 209,000 Cogefar Impresit Costruzioni Generali SPA * 200,889 154,250 Comau Finanziaria SPA 555,988 1,547,500 Credito Italiano 5,941,113 1,517,000 Credito Italiano (Non Convertible) 4,637,173 2,151,700 Dalmine SPA * 646,911 94,000 Edison SPA 642,443 33,150 Ericsson SPA 1,769,161 313,600 Falck Acciaierie and Ferriere Lombarde 2,218,657 1,540,200 Fiat SPA 5,413,875 1,876,700 Fiat SPA Preferred 3,681,141 2,984,720 Fiat SPA (Non Convertible) 6,246,487 742,500 Finmeccanica SPA * 621,983 588,000 Grassetto SPA (c) * 3 3,564,570 HPI SPA * 2,671,261 285,400 IFI Istituto Finanziario Preferred 5,534,315 386,000 IFIL Finanziaria di Partecipazioni SPA 1,650,172 688,850 IFIL Finanziaria di Partecipazioni SPA (Non Convertible) 1,782,322 1,017,000 Industriali Riunite SPA (Non Convertible) * 726,327 1,156,100 Industriali Riunite SPA * 1,469,797 3,600 Industrie Natuzzi SPA ADR 87,525 813,000 Istituto Bancario San Paolo 9,540,920 550,250 Istituto Mobilaire Italiano 7,672,043 4,474,792 Istituto Nazionale Delle Assicurazioni 12,153,169 450,650 Italcementi Fabbriche Riunite Cemento SPA (Non Convertible) 2,090,248 38,200 Italmobiliare SPA 1,195,451 20,200 Luxottica Group Sponsored ADR 1,550,350 869,940 Magneti Marelli SPA 1,900,844 440,000 Mediobanca SPA 4,499,707 167,500 Mondadori Editore 1,806,561 8,284,798 Montedison SPA 8,551,243 1,901,400 Montedison SPA (Non Convertible) 1,433,395 987,067 Montefibre SPA 808,099 878,593 Parmalat Finanziaria SPA 1,443,496 591,975 Pirelli and Co 1,404,305 See accompanying notes to the financial statements. 9
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Italy - continued 195,500 RAS SPA 2,305,211 156,700 Reno de Medici SPA * 446,601 105,800 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 416,826 96,300 Rinascente per l'Esercizio di Grandi Magazzini SPA (Non Convertible) 478,957 2,000 SAFILO SPA 52,921 2,500 Saipem SPA 15,060 254,000 Sirti SPA 1,477,627 2,483,272 SMI (Societa Metallurgica Italy) * 1,783,232 5,000 Sopaf SPA * 4,429 187,536 Stefanel SPA * 487,324 4,272,500 Telecom Italia Mobile SPA 19,542,548 2,811,269 Telecom Italia Mobile SPA (Non Convertible) 8,247,883 1,348,263 Telecom Italia SPA (Non Convertible) 6,543,722 33,500 Toro Assicurazioni 605,619 ------------- 212,539,415 ------------- Japan - 14.0% 4,000 Aiwa Co 113,354 299,000 Amada Co Ltd 1,401,156 31,000 Anritsu Corp 314,098 960,000 Aoki Corp * 889,100 43,900 Aoki International 316,575 66,600 Aoyama Trading 1,444,502 28,000 Arabian Oil Co Ltd 531,940 202,000 Asahi Breweries Ltd 2,702,288 34,000 Asahi Denka Kogyo 177,361 135,000 Asahi Glass Co Ltd 811,090 9,000 Asatsu Inc 187,366 148,000 Atsugi Nylon Industrial 281,168 77,000 Bandai Co 1,145,888 144,000 Banyu Pharmaceutical Co Ltd 1,880,788 78,000 Best Denki Co Ltd 472,334 68,000 Brother Industries Ltd 185,166 185,000 Canon Sales Co Inc 2,489,512 246,000 Casio Computer Co 2,025,172 217,000 Chubu Electric Power Co Inc 3,469,801 32,000 Chudenko Corp 871,369 334,000 Chugai Pharmaceutical Co Ltd 2,125,671 87,200 Chugoku Electric Power Co Inc 1,263,168 279,000 Citizen Watch Co 2,020,779 801,000 Cosmo Oil Co Ltd 1,838,756 224,200 CSK Corp 5,412,887 813,000 Daicel Chemical Industries Ltd 1,801,947 180,000 Daiichi Seiyaku Co Ltd 2,464,973 56,000 Daimaru Inc 175,097 10 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 245,000 Dainippon Pharmaceutical Co Ltd 1,111,256 293,000 Dainippon Printing Co Ltd 4,986,543 293,000 Dainippon Screen Manufacturing Co Ltd 1,704,702 50,000 Daio Paper Corp 315,839 71,000 Daishowa Paper Manufacturing * 414,771 184,800 Daito Trust Construction Co Ltd 1,638,376 120,000 Daiwa House Industry Co Ltd 938,494 426,000 Daiwa Securities Co Ltd 2,100,831 326,000 Denso Corp 6,657,801 1,070 East Japan Railway Co 5,056,519 181,000 Eisai Co Ltd 3,166,390 231,000 Ezaki Glico Co Ltd 1,444,550 35,300 Familymart 1,377,575 141,100 Fanuc Co 5,137,814 801,000 Fuji Heavy Industries Ltd 3,005,414 312,400 Fuji Photo Film Co Ltd 12,240,798 187,000 Fujisawa Pharmaceutical Co Ltd 1,879,918 177,000 Fukuyama Transporting Co Ltd 868,677 117,000 Furukawa Co Ltd 229,684 243,000 Gakken Co Ltd 605,913 279,000 General Sekiyu (KK) 1,382,522 87,000 Green Cross Corp 249,988 110,000 Gunze Ltd 311,723 512,000 Hankyu Corp 2,387,145 238,000 Haseko Corp * 218,539 107,000 Heiwa Corp 1,177,313 269,000 Hino Motors 849,608 31,000 Hitachi Chemical Co 192,876 1,956,300 Hitachi Ltd 14,680,380 92,000 Hitachi Maxell Ltd 1,704,108 455,000 Hitachi Metals Ltd 2,070,965 147,700 Hokkaido Electric Power 2,127,871 73,000 Hokuetsu Paper Mills 383,116 33,100 Hokuriku Electric Power 482,102 142,000 Honda Motor Co Ltd 4,912,056 220,000 House Foods Corp 3,082,403 33,000 Hoya Corp 875,089 6,000 Hyogo Bank (c) - 222,000 INAX Corp 931,370 149,000 Intec Inc 1,037,917 499,000 Itochu Corp 1,481,240 95,000 Itoham Foods Inc 425,631 180,000 Ito-Yokado 9,831,394 60,000 Japan Airport Terminal Co Ltd 403,230 27,000 Japan Aviation Electronics 125,885 See accompanying notes to the financial statements. 11
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 945,000 Japan Energy Co Ltd 1,309,071 116,000 Japan Radio Co 740,093 608,000 Japan Synthetic Rubber Co Ltd 3,162,004 2,440 Japan Tobacco Inc 17,943,165 242,000 JGC Corp 626,407 149,000 Joshin Denki Co Ltd 459,986 30,000 Kaken Pharmaceutical Co Ltd 109,950 333,000 Kamigumi Co Ltd 1,520,945 186,000 Kandenko Co 1,295,654 120,000 Kanebo Ltd * 136,785 355,000 Kaneka Corp 2,023,272 284,000 Kankaku Securities Co Ltd * 278,762 310,100 Kansai Electric Power 5,326,660 226,000 Kao Corp 3,059,131 67,000 Katokichi Co Ltd 891,000 186,000 Kawasaki Kisen * 298,884 554,000 Keio Teito Electric Railway Co Ltd 2,245,294 20,000 Keisei Electric Railway 78,999 346,000 Kikkoman Corp 2,188,348 126,000 Kinden Corp 1,685,585 552,000 Kirin Brewery Co Ltd 4,806,459 113,000 Kissei Pharmaceutical Co Ltd 1,771,076 27,000 Kokusai Denshin Denwa 1,132,748 173,000 Kokusai Electric 1,602,232 23,000 Kokusai Kogyo Co Ltd 111,605 19,000 Kokuyo Co Ltd 332,383 401,000 Konica Corp 2,098,164 180,000 Koyo Seiko Co Ltd 891,950 345,000 Kubota Corp 994,063 426,000 Kurabo Industries Ltd 738,494 140,000 Kyocera Corp 7,535,819 442,000 Kyowa Hakko Kogyo Co Ltd 2,165,741 262,800 Kyushu Electric Power Co Inc 3,827,689 120,000 Kyushu Matsushita Electric 1,234,861 96,000 Lion Corp 348,041 500 Long Term Credit Bank of Japan 1,354 31,900 Mabuchi Motor Co 1,704,465 278,000 Maeda Corp 981,461 133,000 Maeda Road Construction 787,493 27,000 Makino Milling Machine Co Ltd 190,216 113,000 Makita Corp 1,305,945 121,000 Marudai Food Co Ltd 335,233 26,000 Maruichi Steel Tube 345,761 103,000 Matsushita Communications 3,375,445 47,000 Meidensha Corp 146,956 12 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 71,000 Meiji Milk Products 213,568 322,000 Meiji Seika Kaisha Ltd 1,236,207 50,000 Mercian Corp 200,269 249,000 Minolta Co Ltd 1,497,981 1,178,000 Mitsubishi Electric Corp 3,580,717 408,000 Mitsubishi Gas Chemical Co Inc 1,337,070 900,000 Mitsubishi Oil Co Ltd 1,866,540 155,000 Mitsubishi Paper Mills Ltd 332,502 310,000 Mitsubishi Steel Manufacturing * 478,509 67,000 Mitsubishi Warehouse & Transportation Co Ltd 758,411 145,000 Mitsui Marine & Fire Insurance Co 808,042 1,000 Mitsui Mining Co Ltd * 1,211 545,000 Mitsui Petrochemical Industries Ltd 1,531,505 57,000 Mori Seiki Co Ltd 690,335 27,000 MOS Food Services 374,020 80,000 Murata Manufacturing Co Ltd 2,539,381 71,000 Nagase & Co 275,390 26,000 Nagoya Railroad Co Ltd 91,380 16,400 Namco Ltd 395,947 8,000 Nankai Electric Railway Co Ltd 36,096 126,000 National House Industrial 1,186,891 818,000 NEC Corp 9,129,898 470,000 New Japan Securities Co Ltd * 665,954 539,000 New Oji Paper Co Ltd 2,901,290 160,000 NGK Spark Plug Co 1,156,337 100,000 Nichicon Corp 1,052,798 249,000 Nichii Co Ltd 1,929,637 401,000 Nichirei 1,015,752 114,000 Nihon Cement Co Ltd 275,232 16,000 Nihon Unisys Ltd 85,617 899,000 Nikko Securities 3,551,025 40,000 Nikon Corp 389,456 137,400 Nintendo Co Ltd 12,616,481 74,000 Nippon Chemi-Con Corp 240,165 68,000 Nippon Flour Mills Co Ltd 169,556 60,000 Nippon Hodo Co 286,393 50,000 Nippon Kayaku Co Ltd 235,099 87,000 Nippon Light Metal 139,112 253,000 Nippon Meat Packers Inc 3,324,468 2,489,000 Nippon Oil Co Ltd 8,984,279 72,000 Nippon Paint Co 151,033 313,000 Nippon Paper Industries 1,593,121 53,000 Nippon Shokubai Corp 310,457 150,000 Nippon Suisan Kaisha Ltd * 248,160 See accompanying notes to the financial statements. 13
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 4,830 Nippon Telegraph & Telephone 44,350,511 11,400 Nippon Television Network 3,447,162 56,000 Nippon Zeon Ltd 161,798 259,000 Nishimatsu Construction 1,334,671 193,000 Nisshin Oil Mills Ltd 534,711 427,000 Nisshinbo Industries Inc 2,484,327 1,004,000 Nissho Iwai Corp 2,861,078 53,000 Nissin Food Products Co Ltd 1,103,380 30,000 Nitto Denko Corp 474,947 68,000 NOF Corp 162,020 258,000 Nomura Securities Co Ltd 3,553,550 501,000 Oki Electric Industry 1,292,852 124,000 Okumura Corp 550,653 180,000 Olympus Optical Co Ltd 1,416,291 388,000 Omron Corp 6,265,495 133,000 Ono Pharmaceutical Co Ltd 3,063,643 237,000 Onward Kashiyama Co Ltd 3,376,870 22,000 Orix Corp 1,602,153 213,000 Pioneer Electronics Corp 3,759,915 150,000 Q.P. Corp 986,702 850,000 Renown Inc * 888,150 73,800 Rinnai Corp 1,197,578 27,000 Rohm Co Ltd 2,671,574 140,000 Royal Co Ltd 2,116,679 54,000 Ryosan Co 897,649 247,000 Sagami Railway Co Ltd 703,871 144,000 Sanden Corp 770,553 133,000 Sankyo Co Ltd 3,568,986 113,000 Sanwa Shutter Corp 693,224 200,000 Sapporo Breweries Ltd 902,398 66,500 Secom Co Ltd 4,142,761 264,000 Seino Transportation Co Ltd 1,575,683 222,000 Sekisui House Ltd 1,748,516 212,300 Shikoku Electric Power 3,108,961 233,000 Shin-Etsu Chemical Co Ltd 5,127,365 543,000 Shionogi and Co Ltd 2,811,066 301,000 Shiseido Co Ltd 3,788,411 14,000 Shochiku Co 78,904 1,393,000 Showa Denko 1,874,535 377,000 Showa Shell Sekiyu 2,563,469 112,000 Skylark Co Ltd 1,250,059 386,000 Snow Brand Milk Products Co Ltd 1,341,360 308,000 Stanley Electric Co Ltd 1,065,432 90,000 Sumitomo Bakelite Co Ltd 575,635 1,813,000 Sumitomo Corp 12,600,443 14 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 369,000 Sumitomo Heavy Industries Ltd 1,314,415 148,000 Sumitomo Marine & Fire Insurance Co 931,370 188,000 Sumitomo Osaka Cement Co Ltd 322,932 151,000 Taisho Pharmaceutical Co Ltd 3,549,988 166,000 Taiyo Yuden Co Ltd 1,773,925 161,000 Takara Standard Co 1,033,571 449,000 Takeda Chemical Industries Ltd 12,439,642 172,000 Takuma Corp 1,511,280 340,000 Tanabe Seiyaku Co Ltd 1,937,782 68,000 TDK Corp 5,194,332 798,000 Teikoku Oil Co Ltd 2,646,735 71,000 Toei Co Ltd 316,417 270,100 Tohoku Electric Power Co Inc 3,934,014 348,000 Tokio Marine & Fire Insurance Co 3,939,207 93,000 Tokuyama Corp 293,731 41,000 Tokyo Broadcasting System Inc 529,011 352,000 Tokyo Construction Co Ltd 431,885 336,000 Tokyo Electric Co Ltd 1,103,776 70,000 Tokyo Electron 2,515,634 182,000 Tokyo Ink Manufacturing Co Ltd 466,777 348,000 Tokyo Steel Manufacturing Co 1,597,720 46,000 Tokyo Style Co Ltd 473,363 91,000 Tokyu Department Store Co Ltd 175,042 151,000 Tomen Corp 204,393 1,058,000 Toshiba Corp 4,740,188 166,000 Toyo Suisan Kaisha 1,222,038 930,000 Toyobo Co Ltd 1,560,674 269,000 Toyota Motor Corp 7,431,410 5,000 Trans Cosmos 105,676 120,000 Tsumura and Co 626,929 59,000 Uniden Corp 621,151 48,000 Ushio Inc 379,577 126,000 Victor Co of Japan Ltd 1,117,074 126,000 Wacoal Corp 1,316,552 249,000 Yakult Honsha Co Ltd 1,685,229 120,000 Yamaha Corp 1,329,850 142,000 Yamaha Motor Co 914,969 182,000 Yamanouchi Pharmaceutical Co Ltd 4,422,861 328,000 Yamato Transport Co Ltd 4,128,236 200,000 Yamazaki Baking Co Ltd 2,248,080 64,000 Yasuda Fire & Marine Insurance Co 364,252 88,000 Yodogawa Steel Works 452,782 179,000 Yoshitomi Pharmaceutical Industries Ltd 949,339 ------------- 524,148,383 ------------- See accompanying notes to the financial statements. 15
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Malaysia - 2.2% 287,000 Aluminum Co of Malaysia 93,714 958,000 Amalgamated Steel Mills Berhad 247,646 1,033,000 AMMB Holdings Berhad 1,276,142 11,000 Arab Malaysian Development Berhad 3,263 1,301,000 Arab Malaysian Finance (Foreign Registered) 626,604 8,000 Ayer Hitam Tin Dredging * 2,525 841,000 Berjaya Leisure Berhad 814,683 1,357,300 Berjaya Sports Toto 3,804,133 108,000 Carlsberg Brew Malaysia 423,184 862,000 Cement Industries of Malaysia Berhad 701,328 1,155,800 Edaran Otomobil Berhad 2,516,027 605,000 Ekran Berhad 242,000 312,200 Esso Berhad 378,888 71,400 Faber Group Berhad * 19,429 211,000 Genting Berhad 700,463 515,000 Golden Hope Plantations Berhad 686,667 60,000 Guinness Anchor Berhad 94,694 1,045,000 Highlands and Lowlands Berhad 1,154,476 314,400 Hong Leong Industries Berhad 354,181 2,957,000 Hong Leong Properties Berhad 1,037,967 95,600 IGB Corp Berhad 40,841 1,611,000 IOI Corporation Berhad 1,367,706 49,000 Jaya Tiasa Holdings Berhad 82,000 199,000 Johan Holdings Berhad 67,146 1,010,000 Kedah Cement Berhad 373,769 1,414,058 Kuala Lumpur Kepong Berhad 3,279,986 2,368,000 Kumpulan Guthrie Berhad 1,675,320 367,000 Magnum Corp Berhad 309,578 1,461,750 Malayan Cement Berhad 855,173 1,174,000 Malayan United Industries Berhad 319,456 439,500 Malayawata Steel 191,347 945,000 Malaysia Mining Corp Berhad 594,633 985,000 Malaysian Airline Systems 1,136,435 2,189,600 Malaysian International Ship 4,051,505 187,000 Malaysian Oxygen Berhad 539,374 493,000 Malaysian Pacific Industries 1,475,646 2,079,333 Malaysian Resources Corp 1,408,854 72,710 Matsushita Electric 251,270 5,398,000 MBF Capital Berhad 2,570,476 762,000 MBF Holdings Berhad 175,208 76,000 Nestle Malaysia 409,469 431,000 New Straits Times 668,490 2,099,600 Oriental Holdings Berhad 4,284,898 46,000 OYL Industries Berhad 165,224 16 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Malaysia - continued 1,819,600 Pan Malaysia Cement 663,473 858,500 Perlis Plantations 1,424,993 4,000 Pernas International Hotel & Property 1,371 3,708,000 Perusahaan Otomobil 7,012,408 103,000 Petaling Garden Berhad 75,673 609,600 Petronas Dagangan Berhad 713,273 1,392,000 Petronas Gas Berhad 3,863,510 39 Public Bank Berhad 23 1,051,000 Rashid Hussain Berhad 1,658,721 3,101,000 Renong Berhad 1,468,229 285,000 Resorts World Berhad 620,408 3,438,000 RHB Capital Berhad 3,255,576 493,000 RJ Reynolds Berhad 959,170 303,000 Rothmans of Pall Mall Berhad 2,700,204 1,574,000 Sarawak Enterprises Corp 878,014 629,400 Shell Refinery Co 1,130,351 36,540 Silverstone * 9,943 204,000 Sime Darby 104,075 3,252,000 Sime Darby Berhad 4,247,510 48,000 Sime UEP Properties Berhad 45,714 1,691,000 TA Enterprise Berhad 644,190 4,337,000 Tan Chong Motor Holdings Berhad 3,080,155 566,000 Telekom Malaysia Berhad 1,925,170 1,462,000 UMW Holdings Berhad 1,909,551 104,000 Uniphone Telecommunications 30,563 234,000 Westmont Industries Berhad 56,669 998,500 YTL Corp 1,725,299 ------------- 81,676,054 ------------- New Zealand - 0.0% 8,491 Trans Tasman Properties 3,487 ------------- Norway - 0.7% 3,874 Leif Hoegh and Co AS 60,908 625,490 Norsk Hydro AS 27,353,489 ------------- 27,414,397 ------------- Portugal - 0.7% 109,888 Banco Commercial Portugues (Registered) 3,644,304 62,093 Banco Espirito Santo e Commercial de Lisboa (Registered) 2,522,753 42,173 Banco Totta & Acores (Registered) 1,170,054 55,857 BPI-SGPS SA (Registered) 2,005,146 60,155 Cimpor Cimentos De Portugal SA (Registered) 1,741,793 254,490 Electricidade De Portugal * 5,396,467 19,903 Est Jeronimo Martins Filho Admin 687,374 64,713 Portucel Industrial Empresa 491,081 133,802 Portugal Telecom SA 7,021,175 28,028 Sonae Investimentos 1,261,829 ------------- 25,941,976 ------------- See accompanying notes to the financial statements. 17
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments -- continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Singapore - 3.1% 101,959 Asia Food & Properties Ltd Warrants 7/12/02 * 14,274 924,461 Asia Food & Properties Ltd * 244,982 2,102,000 City Developments 9,530,969 111,000 Comfort Group 53,754 319,950 Creative Technology Ltd * 7,618,797 203,000 Cycle & Carriage Ltd 901,666 1,759,096 DBS Land Ltd 2,723,832 1,787,000 Development Bank of Singapore (Foreign Registered) 14,000,555 1,127,309 First Capital Corp Ltd 1,140,522 3,259,037 Hai Sun Hup Group Ltd 1,326,937 1,065,203 Haw Paw Brothers International Ltd 1,222,256 139,475 Haw Paw Brothers International Ltd Warrants 7/18/2001 * 42,161 781,000 Highlands and Lowlands Berhad 843,152 1,273,104 Hotel Properties Ltd 824,651 2,756,221 Jardine Matheson Holdings Ltd 12,899,114 5,491,911 Jardine Strategic Holdings Ltd 15,651,946 403,324 Jardine Strategic Holdings Ltd Warrants 5/02/98 * 16,133 115,000 Keppel Bank Ltd 162,461 1,405,200 Lum Chang Holdings Ltd 524,458 288,000 Marco Polo Developments Ltd 394,423 477,600 Metro Holdings Ltd 654,085 1,620,000 Natsteel Ltd 2,238,618 2,950,556 Neptune Orient Lines Ltd 1,383,358 211,000 Overseas Chinese Banking (Foreign Registered) 1,256,107 575,000 Overseas Union Bank Ltd (Foreign Registered) 2,163,788 333,000 Parkway Holdings Ltd 714,892 341,508 Prima Ltd 648,886 527,308 Robinson and Co Ltd 1,902,993 247,699 Shangri-La Hotel Ltd 409,521 2,440,000 Singapore Airlines Ltd (Foreign Registered) 18,062,924 492,000 Singapore Press Holdings (Foreign Registered) 7,041,579 996,000 Singapore Telecom 2,039,926 2,199,168 Straits Trading Co Ltd 2,414,879 423,000 Times Publishing Ltd 835,040 226,000 United Engineers 179,852 6,493,960 United Industrial Corp Ltd 2,624,025 546,900 Wearne Brothers Ltd 671,395 ------------- 115,378,911 ------------- Spain - 3.5% 21,430 Acerinox SA 3,218,361 3,100 Azucarera de Espana SA 175,113 658,637 Banco Bilbao Vizcaya SA 30,063,423 216,808 Banco Central Hispano (Registered) 6,735,878 170,000 Banco Popular Espanol 15,088,790 18 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Spain - continued 3,320 Cristaleria Espanola SA 266,221 156,300 Dragados & Construcciones SA 4,262,312 1,508,856 FENOSA SA 18,711,911 62,600 Fomento de Construcciones y Contratas SA 2,682,596 658,660 Repsol SA 29,337,452 587,943 Telefonica de Espana SA 20,194,257 ------------- 130,736,314 ------------- Sweden - 3.8% 177,392 Assi Doman 4,364,786 552,600 Avesta Sheffield AB 3,450,989 58,000 Bilspedition AB Class B * 296,288 107,005 Celsius Industrier AB Class B 1,978,010 257,020 Electrolux AB Class B 19,582,109 92,288 Esselte AB Class A 1,740,544 5,800 Esselte AB Class B 118,443 2,200 Euroc Industri AB Class A 87,930 27,782 Industrivarden AB Class A 1,773,157 11,524 Industrivarden AB Class C (Bearer) 713,917 141,100 Kinnevik Investment Class B 2,669,945 153,170 Marieberg Tidnings AB Class A 3,539,225 652,400 Mo Och Domsjo AB Class B 18,985,961 2,300 Modern Times Group AB * 17,523 542,246 Skanska AB Class B 24,517,018 43,600 SKF AB Class B 901,254 235,500 Ssab Swedish Steel Class A 4,412,095 48,800 Ssab Swedish Steel Class B 914,269 404,542 Stena Line AB Class B * 1,379,396 1,216,500 Stora Kopparberg Bergslags Class A 17,701,120 297,850 Stora Kopparberg Bergslags Class B 4,296,772 751,072 Svenska Cellulosa Class B 17,073,229 12,000 Svenska Kullagerfabriken AB 235,312 336,500 Trelleborg AB Class B 4,749,263 107,750 Volvo AB Class A 2,866,551 210,800 Volvo AB Class B 5,700,215 ------------- 144,065,321 ------------- Switzerland - 5.3% 194,200 CS Holdings (Registered) 35,066,094 320 Jelmoli (Bearer) 313,546 200 Jelmoli (Registered) 39,248 43,515 Nestle AG (Registered) 76,201,656 26,607 Novartis AG (Registered) 48,532,937 1,155 Roche Holdings (Participating Certificate) 13,520,646 1,600 Saurer Group Holdings (Registered) * 1,611,338 2,110 Swiss Reinsurance (Bearer) 4,446,872 33,200 Zurich Reinsurance 18,097,574 ------------- 197,829,911 ------------- See accompanying notes to the financial statements. 19
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- United Kingdom - 24.5% 1,060,100 Abbey National 21,730,910 885,780 AMEC 2,023,581 197,256 Amstrad Plc 123,417 778,600 Anglian Water Plc 10,768,505 240,130 Arcadia Group * 1,950,179 1,239,200 Arjo Wiggins Appleton Plc 3,346,162 1,036,162 ASDA Group 3,433,390 285,246 Associated British Foods 2,977,629 320,000 Bank of Scotland 3,648,644 1,059,880 Barclays Plc 31,551,271 985,030 Barratt Development 4,557,404 938,482 Bass Plc * 15,730,244 1,851,500 BAT Industries 18,473,878 1,077,400 Beazer Holmes Plc 3,734,142 3,546,592 BG Plc * 17,795,766 765,600 Blue Circle Industries 4,478,128 2,267,903 British Airways Plc 21,284,383 350,500 British Energy Plc * 2,585,400 2,281,200 British Steel Plc 5,474,364 1,177,600 British Telecom Plc 11,866,181 988,469 BTR 2,624,367 264,400 Cable & Wireless 2,890,622 3,387,293 Coats Viyella 4,629,058 270,000 Dalgety Plc 1,511,487 1,498,353 Dawson International 1,282,860 480,260 Debenhams Plc * 3,305,327 478,200 Electrocomponents Plc 3,661,207 1,380,294 Elementis Plc 2,886,271 1,547,382 English China Clays Plc 6,216,545 812,300 Enterprise Oil 7,509,793 2,311,000 Eurotunnel SA Units (Registered) * 2,244,986 2,311,000 Eurotunnel SA Warrants 12/31/01 & 10/31/03 * 304,405 83,620 GKN Plc * 2,022,524 354,400 Great Portland Estates Plc 1,709,712 822,035 Greenalls Group Plc 5,610,177 217,900 Hammerson Plc 1,804,625 1,905,423 Hillsdown Holdings 4,988,274 276,485 Hyder Plc 4,270,081 210,670 Imperial Chemical Industries Plc 3,845,034 162,700 Kingfisher 2,806,101 215,273 Kwik Save Group 1,219,298 6,160,950 Ladbroke Group 31,040,653 74,946 Laing (John) 387,472 265,900 Land Securities 4,980,024 4,574,650 Lasmo 20,807,520 20 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- United Kingdom - continued 423,125 Legal & General Group 4,744,359 3,880,448 Lloyds TSB Group 58,396,901 4,533,642 Lonrho 7,016,763 294,260 Meggitt 760,664 541,500 MEPC Ord 5,331,647 433,600 Meyer International 2,705,766 1,834,180 Mirror Group Plc 5,133,962 4,016,490 National Power 41,629,784 366,300 Next 4,996,791 1,768,500 Northern Foods Plc 7,891,074 1,281,100 Orange Plc * 7,271,919 1,607,500 Peninsular & Oriental Steam Navigation Co 20,710,809 4,847,532 Pilkington 9,098,866 1,450,374 Powergen 20,262,526 89,930 Provident Financial Plc * 1,458,487 332,500 Prudential Corp 4,987,372 591,400 Railtrack Group Plc 9,007,096 1,619,900 Rentokil Plc 7,994,828 1,709,500 Reuters Group Plc * 17,211,840 402,810 RMC Group 6,141,479 182,700 Royal Bank of Scotland Group * 2,827,666 652,700 Sainsbury (J) 5,032,134 97,080 Schroders 3,668,379 1,396,200 Scottish Hydro-Electric Plc 12,522,949 2,609,398 Scottish Power Plc 22,255,216 7,203,600 Sears 6,226,882 842,600 Sedgwick Group 2,054,236 849,982 Severn Trent Plc 13,085,282 2,828,224 Signet Group Plc * 1,816,102 41,903,056 Signet Group * 69 963,867 Simon Engineering 785,568 231,800 Slough Estates 1,536,176 4,630,638 Smithkline Beecham Plc 57,945,026 712,200 Smiths Industries Plc 10,659,273 2,089,845 Southern Electric Plc 17,634,765 1,532,847 Storehouse Plc 6,536,726 3,709,375 T & N 15,451,939 7,599,880 Tarmac 12,575,768 2,396,200 Taylor Woodrow Plc 7,969,593 679,500 Thames Water 9,890,163 1,345,800 TI Group Plc 11,633,263 2,964,740 Unilever Plc 26,847,944 2,083,775 United Biscuits 9,194,907 2,473,750 United Utilities 33,235,920 See accompanying notes to the financial statements. 21
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- United Kingdom - continued 449,010 Viglen Technology Plc * 251,360 723,310 Viglen Technology Plc Entitlement Letters* - 2,984,170 Vodafone Group Plc 26,532,554 738,100 Waste Management International * 2,187,507 700,979 Wessex Water Plc 5,597,685 966,510 Whitbread Plc Class A 15,595,315 2,885,100 Wimpey (George) 5,842,890 1,332,432 Yorkshire Water 11,254,447 --------------- 913,492,638 --------------- TOTAL STOCK AND EQUIVALENTS (Cost $3,409,853,876) 3,592,648,619 --------------- INVESTMENT FUNDS - 0.0% Australia - 0.0% 1,078,000 Advance Property Fund 1,255,803 47,400 Franked Income Fund 164,685 --------------- 1,420,488 --------------- Netherlands - 0.0% 30,300 Schroders International Property Fund 55,733 --------------- TOTAL INVESTMENT FUNDS (Cost $1,359,880) 1,476,221 --------------- Shares/ Par Value DEBT OBLIGATIONS - 0.1% United Kingdom - 0.1% GBP 1,178,995 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 1,941,215 GBP 311,023 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 512,099 --------------- 2,453,314 --------------- TOTAL DEBT OBLIGATIONS (Cost $1,334,817) 2,453,314 --------------- SHORT-TERM INVESTMENTS - 8.1% Cash Equivalents - 6.1% $ 89,300,000 Republic Bank of New York Time Deposit, 5.63% due 3/2/98 89,300,000 140,604,073 The Boston Global Investment Trust (b) 140,604,073 --------------- 229,904,073 ------------- U.S. Government - 2.0% $ 76,500,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 73,109,711 --------------- TOTAL SHORT-TERM INVESTMENTS (Cost $303,078,319) 303,013,784 --------------- 22 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- TOTAL INVESTMENTS - 104.2% (Cost $3,715,626,892) 3,899,591,938 Other Assets and Liabilities (net) - (4.2%) (157,629,676) --------------- TOTAL NET ASSETS - 100.0% $ 3,741,962,262 =============== Notes to the Schedule of Investments: ADR American Depositary Receipt (a) All or a portion of this security is held as collateral for open futures contracts. (b) Represents investment of security lending collateral (Note 1). (c) Bankrupt issuer. * Non-income producing security. A dividend has not been declared for the twelve months ended February 28, 1998. See accompanying notes to the financial statements. 23
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GMO International Core Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- At February 28, 1998, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Banking 13.0% Utilities 7.9 Consumer Goods 7.7 Services 6.4 Conglomerates 5.1 Construction 4.9 Telecommunications 4.8 Oil and Gas 4.6 Health Care 4.5 Chemicals 4.4 Transportation 3.8 Real Estate 3.6 Electronic Equipment 3.4 Insurance 3.0 Paper and Allied Products 2.7 Food and Beverage 2.6 Retail Trade 2.6 Machinery 2.5 Automotive 2.5 Metals and Mining 2.1 Communications 1.9 Financial Services 0.9 Textiles 0.5 Aerospace 0.4 Computers 0.1 Miscellaneous 4.1 ------- 100.0% ======= 24 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Assets and Liabilities - February 28, 1998 ----------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $3,715,626,892) (Note 1) $ 3,899,591,938 Foreign currency, at value (cost $10,709,447) (Note 1) 10,742,505 Cash 94,724 Receivable for Fund shares sold 264,666 Receivable for investments sold 49,802 Dividends and interest receivable 4,307,818 Foreign withholding taxes receivable 4,397,359 Receivable for open swap contracts (Notes 1 and 5) 38,660,933 Receivable for open forward foreign currency contracts (Notes 1 and 5) 45,150,762 Receivable for expenses waived or borne by Manager (Note 2) 435,216 -------------- Total assets 4,003,695,723 -------------- Liabilities: Payable upon return of securities loaned (Note 1) 140,604,073 Payable for investments purchased 151,889 Payable for variation margin on open futures contracts (Notes 1 and 5) 1,519,527 Payable for open forward foreign currency contracts (Notes 1 and 5) 95,692,374 Payable for Fund shares repurchased 20,071,223 Payable to affiliate for (Note 2): Management fee 2,133,200 Shareholder service fee 395,181 Accrued expenses 1,165,994 -------------- Total liabilities 261,733,461 -------------- Net assets $ 3,741,962,262 ============== Net assets consist of: Paid-in capital $ 3,503,831,089 Distributions in excess of net investment income (13,664,487) Accumulated undistributed net realized gain 64,940,672 Net unrealized appreciation 186,854,988 -------------- $ 3,741,962,262 ============== Net assets attributable to: Class II Shares $ 12,500,387 ============== Class III Shares $ 3,046,509,668 ============== Class IV Shares $ 682,952,207 ============== Shares outstanding: Class II 539,724 ============== Class III 131,331,157 ============== Class IV 29,449,788 ============== Net asset value per share: Class II $ 23.16 ============== Class III $ 23.20 ============== Class IV $ 23.19 ============== See accompanying notes to the financial statements. 25
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GMO International Core Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Operations - Year Ended February 28, 1998 -------------------------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $11,084,792) $ 104,434,383 Interest (including securities lending income of $1,904,825) 11,578,563 -------------------- Total income 116,012,946 -------------------- Expenses: Management fee (Note 2) 30,572,502 Custodian fees 3,224,655 Legal fees 81,307 Audit fees 74,159 Transfer agent fees 63,554 Trustees fee (Note 2) 37,252 Registration fees 17,000 Stamp duties and transfer taxes 5,523 Miscellaneous 34,983 Fees waived or borne by Manager (Note 2) (12,093,211) -------------------- 22,017,724 Shareholder service fee (Note 2) Class I 7,600 Class II 74,548 Class III 5,925,551 Class IV 80,453 -------------------- Net expenses 28,105,876 -------------------- Net investment income 87,907,070 -------------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 369,594,289 Closed futures contracts 64,189,567 Closed swap contracts 55,168,217 Foreign currency, forward contracts and foreign currency related transactions (46,206,918) -------------------- Net realized gain 442,745,155 -------------------- Change in net unrealized appreciation (depreciation) on: Investments (110,021,917) Open futures contracts 18,232,787 Open swap contracts 16,068,733 Foreign currency, forward contracts and foreign currency related transactions (22,245,129) -------------------- Net unrealized loss (97,965,526) -------------------- Net realized and unrealized gain 344,779,629 -------------------- Net increase in net assets resulting from operations $ 432,686,699 ==================== 26 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 87,907,070 $ 103,049,778 Net realized gain 442,745,155 231,885,655 Change in net unrealized appreciation (depreciation) (97,965,526) (42,361,514) --------------- --------------- Net increase in net assets resulting from operations 432,686,699 292,573,919 --------------- --------------- Distributions to shareholders from: Net investment income Class I (104,457) (2,078) Class II (1,185,156) (231,954) Class III (115,540,157) (56,618,907) --------------- --------------- Total distributions from net investment income (116,829,770) (56,852,939) --------------- --------------- Net realized gains Class I (411,274) (8,575) Class II (4,695,006) (932,158) Class III (446,289,351) (264,270,135) --------------- --------------- Total distributions from net realized gains (451,395,631) (265,210,868) --------------- --------------- Net share transactions: (Note 4) Class I 261,289 206,837 Class II (8,131,121) 25,522,151 Class III (974,400,627) (275,828,032) Class IV 601,324,132 - --------------- --------------- Decrease in net assets from net fund share transactions (380,946,327) (250,099,044) --------------- --------------- Total decrease in net assets (516,485,029) (279,588,932) Net assets: Beginning of period 4,258,447,291 4,538,036,223 --------------- --------------- End of period (including distributions in excess of net investment income of $13,664,487 and accumulated undistributed net investment income of $9,222,649, respectively) $ 3,741,962,262 $ 4,258,447,291 =============== =============== See accompanying notes to the financial statements. 27
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GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from September 10, 1996 Period from March 1, 1997 (commencement of operations) to January 9, 1998 to February 28, 1997 -------------------- -------------------- Net asset value, beginning of period $ 24.36 $ 24.17 -------------------- -------------------- Income (loss) from investment operations: Net investment income 0.47(d) 0.14 Net realized and unrealized gain (loss) (0.58) 1.38 -------------------- -------------------- Total from investment operations (0.11) 1.52 -------------------- -------------------- Less distributions to shareholders: From net investment income (0.74) (0.26) From net realized gains (2.92) (1.07) -------------------- -------------------- Total distributions (3.66) (1.33) -------------------- -------------------- Net asset value, end of period $ 20.59(e) $ 24.36 ==================== ==================== Total Return (a) (0.83%) 6.38% Ratios/Supplemental Data: Net assets, end of period (000's) $ -- $ 208 Net expenses to average daily net assets 0.82% * 0.85 *(b) Net investment income to average daily net assets 2.22% * 1.12% * Portfolio turnover rate 68% 97% Average broker commission rate (c) $ 0.0077 $ 0.0062 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.06 $ 0.04 * Annualized (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .03% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. (d) Computed using average shares outstanding throughout the period. (e) All Class I shares of the fund were exchanged for Class II shares on January 9, 1998. Amount represents ending net asset value per share on January 9, 1998. 28 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from September 26, 1996 Year Ended (commencement of operations) February 28, 1998 to February 28, 1997 ----------------- -------------------- Net asset value, beginning of period $ 24.36 $ 24.60 ---------------- ---------------- Income (loss) from investment operations: Net investment income 0.52 (d) 0.14 Net realized and unrealized gain 1.94 0.96 ---------------- ---------------- Total from investment operations 2.46 1.10 ---------------- ---------------- Less distributions to shareholders: From net investment income (0.74) (0.27) From net realized gains (2.92) (1.07) ---------------- ---------------- Total distributions (3.66) (1.34) ---------------- ---------------- Net asset value, end of period $ 23.16 $ 24.36 ================ ================ Total Return (a) 11.60% 4.51% Ratios/Supplemental Data: Net assets, end of period (000's) $ 12,500 $ 25,302 Net expenses to average daily net assets 0.76% 0.80% *(b) Net investment income to average daily net assets 2.14% 0.98% * Portfolio turnover rate 68% 97% Average broker commission rate (c) $ 0.0077 $ 0.0062 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.07 $ 0.05 * Annualized (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .04% of average daily net assets. (c) The average broker commission rate will vary depending on the markets in which trades are executed. (d) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 29
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GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28/29, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ----------- ------------ ------------ ----------- Net asset value, beginning of period $ 24.37 $ 24.62 $ 22.32 $ 25.56 $ 18.51 ------------ ----------- ------------ ------------ ----------- Income (loss) from investment operations: Net investment income 0.54 (d) 0.59 0.36 0.27 0.29 Net realized and unrealized gain (loss) 1.96 1.02 3.09 (1.57) 7.44 ------------ ----------- ------------ ------------ ----------- Total from investment operations 2.50 1.61 3.45 (1.30) 7.73 ------------ ----------- ------------ ------------ ----------- Less distributions to shareholders: From net investment income (0.75) (0.33) (0.39) (0.35) (0.27) From net realized gains (2.92) (1.53) (0.76) (1.59) (0.41) ------------ ----------- ------------ ------------ ----------- Total distributions (3.67) (1.86) (1.15) (1.94) (0.68) ------------ ----------- ------------ ------------ ----------- Net asset value, end of period $ 23.20 $ 24.37 $ 24.62 $ 22.32 $ 25.56 ============ =========== ============ ============ =========== Total Return (a) 11.71% 6.72% 15.72% (5.31%) 42.10% Ratios/Supplemental Data: Net assets, end of period (000's) $ 3,046,510 $ 4,232,937 $ 4,538,036 $ 2,591,646 $ 2,286,431 Net expenses to average daily net assets 0.69% 0.71% (b) 0.71% (b) 0.70% 0.71% (b) Net investment income to average daily net assets 2.19% 2.34% 1.93% 1.48% 1.48% Portfolio turnover rate 68% 97% 14% 53% 23% Average broker commission rate (c) $ 0.0077 $ 0.0062 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.07 $ 0.06 $ 0.03 $ 0.03 $ 0.03 (a) Calculation excludes purchase premiums. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .02% of average daily net assets. (c) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (d) Computed using average shares outstanding throughout the period. 30 See accompanying notes to the financial statements.
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GMO International Core Fund (A Series of GMO Trust) Financial Highlights (For a Class IV share outstanding throughout the period) -------------------------------------------------------------------------------- Period from January 9, 1998 (commencement of operations) to February 28, 1998 ---------------------- Net asset value, beginning of period $ 20.61 ------------ Income from investment operations: Net investment income 0.02 (c) Net realized and unrealized gain 2.56 ------------ Total from investment operations 2.58 ------------ Net asset value, end of period $ 23.19 ============ Total Return (a) 12.52% Ratios/Supplemental Data: Net assets, end of period (000's) $ 682,952 Net expenses to average daily net assets 0.63% * Net investment income to average daily net assets 0.68% * Portfolio turnover rate 68% Average broker commission rate (b) $ 0.0077 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.01 * Annualized (a) Calculation excludes purchase premiums. The total return would have been lower had certain expenses not been waived during the period shown. (b) The average broker commission rate will vary depending on the markets in which trades are executed. (c) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 31
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies GMO International Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks maximum total return through investment in a portfolio of common stocks of non-U.S. issuers. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. Effective January 9, 1998, Class I shares ceased operations and all shares were exchanged for Class II shares. Additionally, Class IV shares commenced operations on January 9, 1998. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. 32
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Futures contracts The Fund may purchase and sell stock index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 5 for all open futures contracts as of February 28, 1998. 33
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 5 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1998. Swap agreements The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there is no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 5 for a summary of the open swap agreement as of February 28, 1998. 34
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Security lending The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 1998, the Fund loaned securities having a market value of $131,279,631 collateralized by cash in the amount of $140,604,073, which was invested in a short-term instrument. Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency and passive foreign investment company transactions and redemptions in-kind. Gains resulting from such in-kind transactions amounted to $1,754,151. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. 35
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Distributions in Accumulated Excess of Net Undistributed Net Investment Income Realized Gain Paid-in Capital ------------------------ ----------------------- ------------------- $6,035,564 ($7,751,716) $1,716,152 Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is .60% of the amount invested. Prior to June 1, 1996, the premium on cash purchases was .75% of the amount invested. All purchase premiums are paid to and are recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" as summarized in Note 4. For the year ended February 28, 1998, the Fund received $1,253,729 in purchase premiums. There is no premium for cash redemptions or reinvested distributions. Normally, no purchase premium is charged with respect to in-kind purchases of Fund shares. A purchase premium of up to 0.10% may be charged on certain in-kind transactions. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and 36
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. GMO has agreed to waive a portion of its fee until further notice to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed .54% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for fees exceeding .69%; thus the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $37,252. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchase and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 1998 aggregated $2,648,648,497 and $3,425,987,739, respectively. At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows: Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ------------------ ----------------- ---------------- --------------- $3,747,223,350 $576,726,579 $424,357,991 $152,368,588 37
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 4. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including a class' portion of the purchase premiums received by the Fund, were as follows: [Enlarge/Download Table] Period from September 10, 1996 Period from March 1, 1997 (commencement of operations) to January 9, 1998 to February 28, 1997 -------------------------------------------- ----------------------------------------- Class I: Shares Amount Shares Amount ------------------- ---------------------- ----------------- -------------------- Shares sold 129,549 $ 3,082,734 8,196 $ 198,184 Shares issued to shareholders in reinvestment of distributions 23,945 515,731 440 10,653 Shares repurchased (162,048) (3,337,176) (82) (2,000) ------------------- ---------------------- ----------------- -------------------- Net increase (decrease) (8,554) $ 261,289 8,554 $ 206,837 =================== ====================== ================= ==================== Period from September 26,1996 Year Ended (commencement of operations) February 28, 1998 to February 28, 1997 -------------------------------------------- ----------------------------------------- Class II: Shares Amount Shares Amount ------------------- ---------------------- ----------------- -------------------- Shares sold 763,855 $ 18,068,147 990,710 $ 24,358,040 Shares issued to shareholders in reinvestment of distributions 274,162 5,880,162 48,104 1,164,111 Shares repurchased (1,537,107) (32,079,430) - - ------------------- ---------------------- ----------------- -------------------- Net increase (decrease) (499,090) $ (8,131,121) 1,038,814 $ 25,522,151 =================== ====================== ================= ==================== 38
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Share transactions - continued [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 -------------------------------------------- ----------------------------------------- Class III: Shares Amount Shares Amount ------------------- ---------------------- ----------------- -------------------- Shares sold 19,930,602 $ 489,010,908 26,694,331 $ 662,148,445 Shares issued to shareholders in reinvestment of distributions 23,749,073 513,606,936 12,151,121 296,116,351 Shares repurchased (86,021,674) (1,977,018,471) (49,513,521) (1,234,092,828) ------------------- ---------------------- ----------------- -------------------- Net decrease (42,341,999) $ (974,400,627) (10,668,069) $ (275,828,032) =================== ====================== ================= ==================== Period from January 9, 1998 (commencement of operations) to February 28, 1998 ---------------------------------- Class IV: Shares Amount --------------- ---------------- Shares sold 32,918,242 $ 678,472,578 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased (3,468,454) (77,148,446) --------------- ---------------- Net increase 29,449,788 $ 601,324,132 =============== ================ 39
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Financial instruments A summary of outstanding financial instruments at February 28, 1998 is as follows: Forward currency contracts [Enlarge/Download Table] Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) --------------- -------------------------- --------------------- -------------------- ------------------- Buys 3/6/98 ATS 1,109,395,622 $ 86,903,000 $ (3,257,106) 7/16/98 ATS 814,379,622 64,261,251 (48,284) 4/17/98 AUD 70,914,834 48,353,280 (1,093,895) 3/6/98 BEF 8,198,259,690 218,889,639 (7,768,501) 7/16/98 BEF 5,473,244,600 147,217,295 (188,024) 4/17/98 CAD 104,838,494 73,744,046 (893,275) 3/6/98 CHF 336,557,083 229,416,319 (1,816,875) 7/16/98 CHF 62,138,265 43,080,520 (179,202) 3/6/98 DEM 74,570,800 41,098,974 132,084 3/6/98 ESP 43,474,433,004 282,293,657 (10,732,995) 7/16/98 ESP 28,237,964,122 184,203,683 (583,792) 3/6/98 FIM 447,945,328 81,307,860 (3,824,649) 7/16/98 FIM 276,365,486 50,564,528 (166,291) 3/6/98 FRF 1,905,304,317 312,952,552 (3,059,920) 7/16/98 FRF 1,274,568,068 210,958,335 (966,088) 3/6/98 GBP 297,445,095 489,671,961 (990,794) 3/6/98 HKD 830,535,241 107,273,506 31,562 4/17/98 HKD 2,162,664,330 279,021,960 6,363,811 3/6/98 IEP 100,108,983 136,495,323 (10,773,255) 7/16/98 IEP 90,083,920 122,748,350 (394,337) 3/6/98 ITL 85,754,523,590 47,920,329 (1,384,908) 7/16/98 ITL 17,265,523,590 9,646,069 11,398 3/6/98 NLG 138,589,117 67,720,753 (2,917,191) 7/16/98 NLG 118,562,117 58,397,432 47,998 40
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued Buys - continued [Enlarge/Download Table] Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) --------------- -------------------------- --------------------- ------------------- ------------------- 3/6/98 NOK 3,383,031,427 $ 447,028,865 $ (22,113,509) 7/16/98 NOK 1,637,773,351 217,718,800 227,398 3/6/98 SEK 2,110,650,263 263,645,084 (7,929,343) 7/16/98 SEK 279,372,222 35,034,294 58,783 ------------------- $ (74,209,200) =================== Sales 3/6/98 ATS 1,109,395,622 86,903,000 495,487 4/17/98 AUD 357,462,351 243,735,704 5,452,754 3/6/98 BEF 8,198,259,690 218,889,639 2,645,206 7/16/98 BEF 2,424,591,090 65,215,748 206,866 4/17/98 CAD 25,179,800 17,711,627 (211,627) 3/6/98 CHF 336,557,083 229,416,319 5,631,178 7/16/98 CHF 182,522,091 126,542,744 (316,384) 3/6/98 DEM 74,570,800 41,098,974 1,211,608 7/16/98 DEM 101,647,300 56,457,784 (171,769) 3/6/98 ESP 43,474,433,004 282,293,657 3,731,513 7/16/98 ESP 5,924,089,600 38,644,398 356,314 3/6/98 FIM 447,945,328 81,307,860 968,014 3/6/98 FRF 1,905,304,317 312,952,552 3,447,546 7/16/98 FRF 26,761,500 4,429,392 42,037 3/6/98 GBP 297,445,095 489,671,961 (664,569) 7/16/98 GBP 146,066,073 238,876,091 (145,096) 3/6/98 HKD 830,535,241 107,273,506 (4,516,285) 4/17/98 HKD 3,486,389,077 449,805,871 (8,354,795) 3/6/98 IEP 100,108,983 136,495,323 1,708,074 7/16/98 IEP 10,025,063 13,660,150 174,436 3/6/98 ITL 85,754,523,590 47,920,329 (161,773) 4/17/98 JPY 4,883,874,760 38,918,438 1,613,562 3/6/98 NLG 138,589,117 67,720,753 61,942 41
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued Sales - continued [Enlarge/Download Table] Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) --------------- -------------------------- --------------------- ------------------- ------------------- 3/6/98 NOK 3,383,031,427 $ 447,028,865 $ 8,228,088 7/16/98 NOK 535,097,917 71,133,699 292,381 3/6/98 SEK 2,110,650,263 263,645,084 2,010,722 7/16/98 SEK 285,445,484 35,795,904 (67,842) ------------------- $ 23,667,588 =================== Currency Abbreviations: ATS Austrian Schilling GBP British Pound AUD Australian Dollar HKD Hong Kong Dollar BEF Belgian Franc IEP Irish Pound CAD Canadian Dollar ITL Italian Lira CHF Swiss Franc JPY Japanese Yen DEM German Mark NLG Netherlands Guilder ESP Spanish Peseta NOK Norwegian Kroner FIM Finnish Markka SEK Swedish Krona FRF French Franc 42
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Futures contracts [Enlarge/Download Table] Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ----------------- --------------------- ---------------------- -------------------- --------------------- Buys 691 DAX March 1998 $ 179,208,789 $ 19,458,500 1,449 MIB 30 March 1998 235,198,826 38,537,032 249 TSE 35 March 1998 33,496,856 2,229,389 --------------------- $ 60,224,921 ===================== Sales 2,934 ALL ORDS March 1998 $ 134,918,240 $ (7,046,524) 1,193 FTSE 100 ID March 1998 283,887,203 (25,208,008) 994 HANG SENG March 1998 74,140,781 (6,577,712) 174 IBEX March 1998 10,111,353 (831,876) 358 MATIF CAC 40 March 1998 40,354,921 (5,243,825) 143 TOPIX March 1998 14,443,758 (272,818) 79 OMX STOCK March 1998 2,711,481 (67,742) --------------------- $ (45,248,505) ===================== At February 28, 1998 the Fund has cash and/or securities to cover any margin requirements on open futures contracts. 43
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GMO International Core Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreement [Enlarge/Download Table] Notional Expiration Unrealized Amount Date Description Appreciation ------------------------ --------------- ----------------------------------------------------- -------------------- CHF 241,069,567 8/6/98 Agreement with Swiss Bank Corporation dated 8/6/97 to receive (pay) the notional amount multiplied by the return on the Swiss Market Index (including dividends) and to pay the notional amount multiplied by 6 month CHF LIBOR adjusted by a specified spread. $ 38,660,933 ==================== 44
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GMO International Core Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 60.25% as net capital gain dividends. 45
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GMO International Core Fund (A Series of GMO Trust) Portfolio Managers ------------------ Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Management Discussion and Analysis of Fund Performance ------------------------------------------------------ The Class III shares of the GMO International Core Fund returned 11.7% for the fiscal year ended February 28, 1998 as compared to 15.5% for EAFE and 18.9% for the GMO EAFE-Lite Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. Effect of country weights (local currency terms) Overseas markets were mixed during the fiscal year. Although a strong bull market prevailed in Europe, the investment climate was difficult for investors in the Far East. Poor economic conditions in Japan combined with the fallout from the Asian currency crisis caused most stock markets in the Pacific Rim to fall significantly. Hedging currency exposure back to the strong-performing U.S. dollar added to the absolute performance of the Fund. Within Europe, ten of the fourteen EAFE markets returned in excess of 30% for the year, led by strong performance of the largest international blue chip companies. On the other hand, small European stocks performed poorly throughout the region. Weakness in the Pacific Rim countries offset the strong performance of the European markets. Many of the Pacific Rim countries represented in the index (Japan, Malaysia, Hong Kong and Singapore) were significantly affected by the debt crisis in the Asian markets. Weakening currencies further depressed returns for dollar-based investors. In the crisis environment pervading these markets, both large and small stocks performed poorly in absolute terms, however, smaller stocks were more drastically affected by the turn of events. Country selection contributed negatively to the Fund's performance for the year, primarily in some of the Asian countries where the Fund had slight overweights in the latter part of the year. In Europe, where the Fund was underweight in many of the expensive markets, including the Netherlands, Switzerland, and the United Kingdom, performance was also negatively affected. These decisions were somewhat offset by the Fund's overweighting of the Italian market, which was one of the best performing EAFE markets for the year, as well as by underweighting Japan. Relative to EAFE, country selection added value, primarily due to the Fund's underweight in Japan.
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Effect of currency weights The dollar strengthened versus every currency in the EAFE-Lite benchmark during the year with the exception of the Swiss franc and the pound sterling. Currency allocation contributed negatively to performance through the Fund's underweighting of the strong-performing Swiss and British currencies and through its modest overweights in some of the Asian currencies (Malaysia and Singapore). The Fund benefited from underweighting the Dutch guilder and Australian dollar. The Fund was modestly hedged back to the U.S. dollar during the year, which added value as well. Effect of stock selection Stock selection was negative for the year as the Fund's value orientation was not rewarded in a market environment that favored the largest, growth-oriented international stocks. This trend was perhaps best exemplified by the remarkable spread between large and small stocks in the U.K., where the largest 20% of the market outperformed the smallest 20% by a margin of twenty-seven percentage points (27%). As a group, the largest multinational stocks are very expensive relative to their historical levels, and the Fund maintained a significant underweight in these stocks during the year. Our bias in favor of smaller, less expensive companies, was not rewarded. Portfolio structure and outlook Country selection. The International Core Fund remains underweight in Japan. The Fund holds no weight in the Netherlands and we have increased our underweight in the U.K. as the market (and the British pound) appear expensive on all of our valuation measures. The Fund's largest overweight positions are in Italy and Canada. Currency Selection. Among currencies, the Fund is slightly underweight in the European currencies and holds a larger underweight in the Asian/Pacific Rim currencies. The Fund's largest underweights are the Dutch guilder, Swiss Franc, Deutsche mark and pound sterling. The Fund continues to emphasize the Canadian dollar, Norwegian krone, Spanish peseta and French franc. Stock selection. Small stocks in EAFE are now cheaper than they have been in more than twenty years. Value stocks are also very attractive in many European markets, following the strong run over the last several years in multinational companies. While small stocks also appear attractive in a number of the Pacific Rim countries, we are somewhat more cautious about their outlook given their higher risk of bankruptcy in what will likely be a difficult economic environment. Overall, the Fund remains about 20% overweight in smaller stocks and 20% underweight in large, multinational stocks. The Fund is very well positioned to outperform the benchmark over the next three years. Although the restructuring craze in Europe may well provide support for large companies in the short term, we believe large cap companies (whose valuations are historically high) are susceptible to earnings disappointments, and eventually, shrinking profit margins. We expect value and small stocks to do well in many countries over the next several years. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice.
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International Core Fund Comparison of Change in Value of a $10,000 Investment in GMO International Core Fund Class III Shares and the MSCI EAFE Index As of February 28, 1998 ------------------------------------------ Average Annual Total Return ------------------------------------------ Since 1 Year 5 Year 10 Year Inception ------------------------------------------ Class 9/26/96 II 10.9% n/a n/a 11.0% ------------------------------------------ Class III 11.0% 13.0% 11.7% n/a ------------------------------------------ Class 1/9/98 IV n/a n/a n/a 11.8% ------------------------------------------ [LINE GRAPH APPEARS HERE] Date GMO International Core Fund MSCI EAFE Index 2/29/88 $9,940 $10,000 2/28/89 $12,720 $12,083 2/28/90 $14,459 $11,695 2/28/91 $15,992 $11,426 2/29/92 $15,992 $10,578 2/28/93 $16,224 $10,141 2/28/94 $23,042 $14,114 2/28/95 $21,819 $13,488 2/29/96 $25,249 $15,760 2/28/97 $26,945 $16,271 2/28/98 $30,101 $18,788 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 60 bp on the purchase. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class IV and Class II shares may vary due to different shareholder service fees. Past performance is not indicative of future performance. Information is unaudited.
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GMO Japan Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Japan Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Japan Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 20, 1998
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 97.6% Automotive - 4.6% 2,000 Autobacs Seven 75,200 48,000 Denso Corp 980,290 142,000 Fuji Heavy Industries Ltd 532,795 20,000 Honda Motor Co Ltd 691,839 95,000 Isuzu Motors Ltd 205,296 14,600 Mabuchi Motor Co 780,100 200,000 Mazda Motor Corp * 638,012 46,000 NGK Spark Plug Co 332,447 87,000 Toyota Motor Corp 2,403,467 28,000 Yamaha Motor Co 180,416 --------------- 6,819,862 --------------- Banking - 0.1% 14,000 Bandai Co 208,343 --------------- Chemicals - 3.5% 365,000 Daicel Chemical Industries Ltd 808,992 9,000 Hitachi Chemical Co 55,996 204,000 Japan Synthetic Rubber Co Ltd 1,060,936 39,000 Kureha Chemical Industry Co Ltd 105,272 208,000 Mitsubishi Gas Chemical Co Inc 681,639 72,000 Mitsui Petrochemical Industries Ltd 202,327 20,000 Nagase & Co 77,575 20,000 Nippon Paint Co 41,954 56,000 Nippon Soda Chemical Co Ltd 500,910 38,000 Shin-Etsu Chemical Co Ltd 836,223 411,000 Showa Denko 553,075 17,000 Sumitomo Bakelite Co Ltd 108,731 27,000 Tokuyama Corp 85,277 48,000 Tokyo Ink Manufacturing Co Ltd 123,106 --------------- 5,242,013 --------------- Computers and Office Equipment - 0.5% 44,000 NCR Japan Ltd 171,012 8,000 Nihon Unisys Ltd 42,809 46,000 Ricoh Co Ltd 491,570 --------------- 705,391 --------------- Conglomerates - 0.4% 77,000 Mitsubishi Corp 585,744 --------------- Construction - 3.5% 468,000 Aoki Corp * 433,436 15,000 Chudenko Corp 408,454 See accompanying notes to the financial statements. 1
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Construction - continued 29,000 Daiwa House Industry Co Ltd 226,803 212,000 Haseko Corp * 194,665 68,000 INAX Corp 285,285 106,000 Maeda Corp 374,226 501,000 Mitsui Engineering & Shipbuilding * 511,589 52,000 National House Industrial 489,828 57,000 Okumura Corp 253,123 91,000 Penta Ocean Construction 200,974 248,000 Sato Kogyo Co Ltd 296,430 40,000 Sekisui House Ltd 315,048 154,000 Shokusan Jutaku Sogo Co Ltd * 132,874 67,000 Takara Standard Co 430,120 25,000 Takuma Corp 219,663 152,000 Tokyo Construction Co Ltd 186,496 21,000 Toyo Exterior Co Ltd 192,828 --------------- 5,151,842 --------------- Consumer Goods - 8.0% 50,000 Citizen Watch Co 362,147 8,000 Daikin Industries Ltd 40,212 55,000 Ezaki Glico Co Ltd 343,940 99,800 Fuji Photo Film Co Ltd 3,910,473 22,000 Hitachi Maxell Ltd 407,504 70,000 Kao Corp 947,518 53,000 Minolta Co Ltd 318,847 61,000 Nikon Corp 593,921 37,300 Nintendo Co Ltd 3,424,998 44,000 Olympus Optical Co Ltd 346,204 6,000 Ushio Inc 47,447 46,000 Victor Co of Japan Ltd 407,821 44,000 Yakult Honsha Co Ltd 297,792 49,000 Yamaha Corp 543,022 --------------- 11,991,846 --------------- Electric - 2.2% 30,000 Kinden Corp 401,330 28,000 Kokusai Electric 259,321 63,000 Matsushita Electric Industrial Co Ltd 917,597 245,000 Mitsubishi Electric Corp 744,716 232,000 Oki Electric Industry 598,686 65,000 Showa Electric Wire & Cable 158,474 58,000 Stanley Electric Co Ltd 200,633 --------------- 3,280,757 --------------- 2 See accompanying notes to the financial statements.
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Electronics - 5.4% 6,000 Aiwa Co 170,031 12,000 Brother Industries Ltd 32,676 20,000 Fanuc Co 728,251 71,000 Hosiden Corp * 668,804 57,000 Japan Aviation Electronics 265,756 36,000 Kyocera Corp 1,937,782 26,000 Nichicon Corp 273,728 5,000 Pioneer Electronics Corp 88,261 18,000 Ryosan Co 299,216 72,000 Sharp Corp 563,097 46,000 Tokyo Electron 1,653,131 311,000 Toshiba Corp 1,393,382 --------------- 8,074,115 --------------- Financial Services - 1.1% 173,000 Nikko Securities 683,345 52,000 Nomura Securities Co Ltd 716,219 3,900 Orix Corp 284,018 --------------- 1,683,582 --------------- Food and Beverage - 5.7% 67,000 Asahi Breweries Ltd 896,303 4,000 Denny's Japan Co Ltd 101,005 91,000 House Foods Corp 1,274,994 39,000 Itoham Foods Inc 174,733 7,000 Ito-Yokado 382,332 20,000 Katokichi Co Ltd 265,970 82,000 Kikkoman Corp 518,626 155,000 Kirin Brewery Co Ltd 1,349,640 10,000 Marudai Food Co Ltd 27,705 34,000 Meiji Seika Kaisha Ltd 130,531 42,000 Mercian Corp 168,226 35,000 Nichirei 88,657 84,000 Nippon Meat Packers Inc 1,103,776 116,000 Nippon Suisan Kaisha Ltd * 191,910 37,000 Nisshin Oil Mills Ltd 102,509 16,000 Nissin Food Products Co Ltd 333,096 69,700 Q.P. Corp 458,487 94,000 Snow Brand Milk Products Co Ltd 326,652 39,000 Takara Shuzo Co Ltd 182,142 24,000 Toyo Suisan Kaisha 176,680 23,000 Yamazaki Baking Co Ltd 258,529 --------------- 8,512,503 --------------- See accompanying notes to the financial statements. 3
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Health Care - 4.2% 48,000 Eisai Co Ltd 839,706 46,000 Hoya Corp 1,219,821 84,000 Kyowa Hakko Kogyo Co Ltd 411,589 81,000 Lion Corp 293,659 58,000 Sankyo Co Ltd 1,556,400 59,000 Shionogi and Co Ltd 305,438 126,000 Shiseido Co Ltd 1,585,847 --------------- 6,212,460 --------------- Leisure - 0.2% 19,000 Heiwa Corp 209,056 24,000 Tokyotokeiba Co Ltd 43,315 --------------- 252,371 --------------- Machinery - 1.3% 3,000 Aida Engineering Ltd 12,420 113,000 Amada Co Ltd 529,534 18,000 Furukawa Co Ltd 35,336 24,000 Kubota Corp 69,152 13,000 Mori Seiki Co Ltd 157,445 32,000 Okuma Corp 133,745 15,000 Rinnai Corp 243,410 51,000 Sanden Corp 272,904 94,000 Toshiba Tungaloy Co Ltd 290,936 65,000 Tsubakimoto Chain 227,935 --------------- 1,972,817 --------------- Metals and Mining - 2.1% 114,000 Fujikara Ltd 802,232 35,000 Hitachi Metals Ltd 159,305 150,000 Japan Metals & Chemicals * 249,347 7,000 Maruichi Steel Tube 93,090 108,000 Nachi Fujikoshi Co 241,083 82,000 Nippon Sheet Glass Co Ltd 179,150 65,000 Nitto Denko Corp 1,029,051 67,000 NTN Corp 212,673 25,000 Yodogawa Steel Works 128,631 --------------- 3,094,562 --------------- Oil and Gas - 5.0% 256,000 Cosmo Oil Co Ltd 587,667 20,000 General Sekiyu (KK) 99,106 238,000 Mitsubishi Oil Co Ltd 493,596 1,423,000 Nippon Oil Co Ltd 5,136,452 108,600 Showa Shell Sekiyu 738,442 126,000 Teikoku Oil Co Ltd 417,905 --------------- 7,473,168 --------------- 4 See accompanying notes to the financial statements.
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Paper and Allied Products - 0.9% 19,000 Daio Paper Corp 120,019 69,000 Hokuetsu Paper Mills 362,123 108,000 Nippon Paper Industries 549,703 46,000 Sumitomo Forestry Co Ltd 268,725 --------------- 1,300,570 --------------- Pharmaceuticals - 7.0% 226,000 Chugai Pharmaceutical Co Ltd 1,438,328 44,000 Dainippon Pharmaceutical Co Ltd 199,573 170,000 Fujisawa Pharmaceutical Co Ltd 1,709,016 105,000 Kaken Pharmaceutical Co Ltd 384,825 28,000 Kissei Pharmaceutical Co Ltd 438,851 13,000 Nippon Kayaku Co Ltd 61,126 115,000 Takeda Chemical Industries Ltd 3,186,100 66,000 Tanabe Seiyaku Co Ltd 376,158 93,000 Yamanouchi Pharmaceutical Co Ltd 2,260,033 78,000 Yoshitomi Pharmaceutical Industries Ltd 413,678 --------------- 10,467,688 --------------- Retail Trade - 2.0% 7,000 Aoki International 50,479 21,000 Aoyama Trading 455,474 24,000 Best Denki Co Ltd 145,334 6,200 Familymart 241,954 34,000 Hankyu Department Stores Inc 228,766 58,000 Joshin Denki Co Ltd 179,055 59,000 Nichii Co Ltd 457,223 68,000 Sanrio Co Ltd * 516,204 9,000 Seven-Eleven Japan 628,354 4,000 UNY Co Ltd 61,110 --------------- 2,963,953 --------------- Services - 6.5% 27,000 Canon Sales Co Inc 363,334 74,000 CSK Corp 1,786,591 96,000 Dainippon Printing Co Ltd 1,633,816 108,000 Kamigumi Co Ltd 493,280 12,000 Kyodo Printing Co Ltd 64,118 353,000 Nissho Iwai Corp 1,005,937 28,000 Secom Co Ltd 1,744,320 24,600 Sega Enterprises 471,242 276,000 Sumitomo Corp 1,918,214 42,000 Sumitomo Warehouse Co Ltd 184,184 --------------- 9,665,036 --------------- See accompanying notes to the financial statements. 5
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Technology - 9.3% 42,000 Dainippon Screen Manufacturing Co Ltd 244,360 152,000 Fujitsu Ltd 1,708,541 720,000 Hitachi Ltd 5,402,992 17,300 Murata Manufacturing Co Ltd 549,141 218,000 NEC Corp 2,433,151 39,000 Omron Corp 629,779 2,000 Rohm Co Ltd 197,894 61,000 Taiyo Yuden Co Ltd 651,864 27,700 TDK Corp 2,115,927 --------------- 13,933,649 --------------- Telecommunications - 2.8% 102,000 Gakken Co Ltd 254,334 40,000 Japan Radio Co 255,205 59,000 Matsushita Communications 1,933,507 3,600 Nippon Television Network 1,088,578 64,000 Nitsuko Corp 243,173 26,000 Tokyo Broadcasting System Inc 335,471 --------------- 4,110,268 --------------- Textiles - 2.2% 18,000 Gunze Ltd 51,009 124,000 Kurabo Industries Ltd 214,961 186,000 Nisshinbo Industries Inc 1,082,166 52,000 Onward Kashiyama Co Ltd 740,917 329,000 Renown Inc * 343,766 13,000 Tokyo Style Co Ltd 133,777 73,000 Toyobo Co Ltd 122,505 59,000 Wacoal Corp 616,481 --------------- 3,305,582 --------------- Tobacco - 2.4% 491 Japan Tobacco Inc 3,610,694 --------------- Transportation - 4.6% 257 East Japan Railway Co 1,214,510 25,000 Fujita Kanko Inc 261,221 55,000 Fukuyama Transporting Co Ltd 269,928 111,000 Hankyu Corp 517,526 19,000 Japan Airport Terminal Co Ltd 127,689 197,000 Kawasaki Kisen * 316,560 69,000 Keio Teito Electric Railway Co Ltd 279,649 104,000 Keisei Electric Railway 410,797 84,000 Nagoya Railroad Co Ltd 295,227 33,000 Nankai Electric Railway Co Ltd 148,896 6 See accompanying notes to the financial statements.
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GMO Japan Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Transportation - continued 48,000 Royal Co Ltd 725,718 92,000 Sagami Railway Co Ltd 262,171 53,000 Seino Transportation Co Ltd 316,330 40,000 Skylark Co Ltd 446,450 50,000 Toei Co Ltd 222,829 79,000 Yamato Transport Co Ltd 994,301 --------------- 6,809,802 --------------- Utilities - 12.1% 35,200 Chubu Electric Power Co Inc 562,843 32,900 Chugoku Electric Power Co Inc 476,585 45,500 Hokkaido Electric Power 655,505 16,200 Hokuriku Electric Power 235,953 72,500 Kansai Electric Power 1,245,349 7,000 Kokusai Denshin Denwa 293,675 89,400 Kyushu Electric Power Co Inc 1,302,114 1,184 Nippon Telegraph & Telephone 10,871,844 72,600 Shikoku Electric Power 1,063,168 51,400 Tohoku Electric Power Co Inc 748,642 37,800 Tokyo Electric Power 712,135 --------------- 18,167,813 --------------- TOTAL STOCK AND EQUIVALENTS (Cost $171,705,786) 145,596,431 --------------- TOTAL INVESTMENTS - 97.6% (Cost $171,705,786) 145,596,431 Other Assets and Liabilities (net) - 2.4% 3,556,062 --------------- TOTAL NET ASSETS - 100.0% $ 149,152,493 =============== Notes to the Schedule of Investments: * Non-income producing security. A dividend has not been declared for the twelve months ended February 28, 1998. See accompanying notes to the financial statements. 7
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GMO Japan Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1998 -------------------------------------------------------------------------------- [Enlarge/Download Table] Assets: Investments, at value (cost $171,705,786) (Note 1) $ 145,596,431 Foreign currency, at value (cost $3,922,370) (Note 1) 3,807,377 Cash 85,565 Cash held on demand deposit (Notes 1 and 6) 55,000 Dividends and interest receivable 72,441 Receivable for expenses waived or borne by Manager (Note 2) 56,955 --------------- Total assets 149,673,769 --------------- Liabilities: Payable for Fund shares repurchased 100,000 Payable for variation margin on open futures contracts (Notes 1 and 6) 191,802 Payable to affiliate for (Note 2): Management fee 87,219 Shareholder service fee 17,518 Accrued expenses 124,737 --------------- Total liabilities 521,276 --------------- Net assets $ 149,152,493 =============== Net assets consist of: Paid-in capital $ 212,406,170 Distributions in excess of net investment income (444,014) Accumulated net realized loss (36,569,557) Net unrealized depreciation (26,240,106) --------------- $ 149,152,493 =============== Net assets attributable to Class III Shares $ 149,152,493 =============== Shares outstanding - Class III 23,446,166 =============== Net asset value per share - Class III $ 6.36 =============== 8 See accompanying notes to the financial statements.
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GMO Japan Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1998 -------------------------------------------------------------------------------- [Enlarge/Download Table] Investment income: Dividends (net of foreign tax expense of $224,903) $ 1,471,540 Interest (including securities lending income of $143,301) 388,818 ----------------- Total income 1,860,358 ----------------- Expenses: Management fee (Note 2) 1,540,113 Custodian fees 279,470 Audit fees 52,114 Transfer agent fees 32,924 Legal fees 3,922 Registration fees 3,844 Trustees fee (Note 2) 1,918 Stamp duties and transfer taxes 921 Miscellaneous 1,830 Fees waived or borne by Manager (Note 2) (803,953) ----------------- 1,113,103 Shareholder service fee - Class III (Note 2) 308,029 ----------------- Net expenses 1,421,132 ----------------- Net investment income 439,226 ----------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments (36,251,088) Closed futures contracts 21,391 Foreign currency and foreign currency related transactions (1,125,615) ----------------- Net realized loss (37,355,312) ----------------- Change in net unrealized appreciation (depreciation) on: Investments 21,074,281 Open futures contracts 426,337 Foreign currency and foreign currency related transactions 520,303 ----------------- Net unrealized gain 22,020,921 ----------------- Net realized and unrealized loss (15,334,391) ----------------- Net decrease in net assets resulting from operations $ (14,895,165) ================= See accompanying notes to the financial statements. 9
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GMO Japan Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28, 1998 February 28, 1997 -------------------- -------------------- Increase (decrease) in net assets: Operations: Net investment income $ 439,226 $ 23,994 Net realized loss (37,355,312) (1,918,375) Change in net unrealized appreciation (depreciation) 22,020,921 (46,708,941) -------------------- -------------------- Net decrease in net assets resulting from operations (14,895,165) (48,603,322) -------------------- -------------------- Distributions to shareholders: In excess of net investment income - Class III - (36,409) -------------------- -------------------- Net share transactions - Class III (Note 5) (54,749,266) 141,329,696 -------------------- -------------------- Total increase (decrease) in net assets (69,644,431) 92,689,965 Net assets: Beginning of period 218,796,924 126,106,959 -------------------- -------------------- End of period (including distributions in excess of net investment income of $444,014 and $564,380, respectively) $ 149,152,493 $ 218,796,924 ==================== ==================== 10 See accompanying notes to the financial statements.
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GMO Japan Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) ------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28/29 --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- ---------- ---------- ---------- --------- Net asset value, beginning of period $ 7.02 $ 8.52 $ 9.12 $ 11.13 $ 7.37 --------- ---------- ---------- ---------- --------- Income (loss) from investment operations: Net investment income (loss) 0.01 -(d) (0.01)(d) -(d) -- Net realized and unrealized gain (loss) (0.67) (1.50) 0.79 (1.08) 3.94 --------- ---------- ---------- ---------- --------- Total from investment operations (0.66) (1.50) 0.78 (1.08) 3.94 --------- ---------- ---------- ---------- --------- Less distributions to shareholders: From net investment income -- -- -- -- -- In excess of net investment income -- (0.00) -- -- (0.01) From net realized gains -- -- (1.38) (0.93) (0.17) --------- ---------- ---------- ---------- --------- Total distributions -- (0.00) (1.38) (0.93) (0.18) --------- ---------- ---------- ---------- --------- Net asset value, end of period $ 6.36 $ 7.02 $ 8.52 $ 9.12 $ 11.13 ========= ========== ========== ========== ========= Total Return (a) (9.40%) (17.69%) 8.29% (10.62%) 53.95% Ratios/Supplemental Data: Net assets, end of period (000's) $ 149,152 $ 218,797 $ 126,107 $ 60,123 $ 450,351 Net expenses to average daily net assets 0.69% 0.70%(e) 0.92% 0.83% 0.87% Net investment income (loss) to average daily net assets 0.21% 0.01% (0.13%) (0.02%) (0.01%) Portfolio turnover rate 128% 4% 23% 60% 8% Average broker commission rate per equity share (b) $ 0.0072 $ 0.0066 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.02 $ 0.03 $ 0.01 (c) $ 0.01 (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Fees and expenses waived or borne by the Manager were less than $.01 per share. (d) Based on average month end shares outstanding. (e) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .01% of average daily net assets. See accompanying notes to the financial statements. 11
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies GMO Japan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks maximum total return through investment in Japanese securities, primarily in common stocks of Japanese companies. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. Effective January 9, 1998, Class I and Class II shares ceased to be offered. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges. Those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. 12
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Futures contracts The Fund may purchase and sell Japanese futures contracts. Japanese futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instruments or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the accumulation in commitment value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 1998. Security lending The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 1998, the Fund had no securities out on loan. 13
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Distributions to shareholders The Fund's present policy is to declare and pay distributions from net investment income, if any, semi-annually, and from net realized short-term and long-term capital gains, if any, at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency and passive foreign investment company transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Distributions in Excess of Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital --------------------- ---------------------------- ------------------- $(318,860) $889,641 $(570,781) 14
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is .40% of the amount invested. In the case of cash redemptions, the fee is .61% of the amount redeemed. Prior to June 1, 1996, the redemption fee was .70% of the amount redeemed. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" and redemption fees are included as part of each class' "shares repurchased", respectively, as summarized in Note 5. For the year ended February 28, 1998 the Fund received $83,349 in purchase premiums and $180,864, in redemption fees. There is no premium for reinvested distributions. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 15
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .75% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed .54% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .69%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. Additionally, effective March 14, 1996, the waiver was adjusted to include custodian fees. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $1,918. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchases and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 1998, aggregated $234,309,079 and $267,149,166, respectively. At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held was as follows: Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $172,219,003 $3,788,637 $30,411,209 $26,622,572 4. Principal shareholders At February 28, 1998, 33% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 16
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GMO Japan Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including purchase premiums and redemption fees received by the Fund, were as follows: [Enlarge/Download Table] Class III: Year Ended Year Ended February 28, 1998 February 28, 1997 ---------------------------------------------- --------------------------------------------- Shares Amount Shares Amount ---------------------- --------------------- -------------------- ---------------------- Shares sold 4,316,975 $ 32,950,333 22,172,884 $ 188,630,734 Shares issued to shareholders in reinvestment of distributions - - 3,661 28,076 Shares repurchased (12,050,534) (87,699,599) (5,789,470) (47,329,114) ---------------------- --------------------- -------------------- ---------------------- Net increase / (decrease) (7,733,559) $ (54,749,266) 16,387,075 $ 141,329,696 ====================== ===================== ==================== ====================== 6. Financial instruments A summary of outstanding futures contracts purchased at February 28, 1998 is as follows: [Enlarge/Download Table] Number of Net Unrealized Contracts Type Expiration Date Contract Value Depreciation -------------- -------------------------------- ---------------------- ------------------ ------------------- 9 TOPIX March 1998 $ 909,048 $ (20,206) =================== At February 28, 1998, the Fund had cash and/or securities to cover any margin requirements on open futures contracts. 17
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GMO Japan Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- At February 28, 1998, the Fund had a capital loss carryforward available to offset future capital gains, if any, of the following amounts: Year of Expiration Amount ------------------- ------ 2005 $ 43,013 2006 $ 22,345,866 The Fund has also elected to defer to March 1, 1998 post-October losses of $14,111,475. 18
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GMO Japan Fund (A Series of GMO Trust) Portfolio Managers ------------------ Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham and Mr. Darnell have been portfolio managers at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Mr. Berkley has been with GMO and involved in portfolio management for more than ten years. Management Discussion and Analysis of Fund Performance ------------------------------------------------------ The Class III shares of the GMO Japan Fund underperformed the MSCI Japan index for the fiscal year ended February 28, 1998, with a total return of -9.4% versus -8.4% for the MSCI Japan Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks throughout the period. The Japanese market returned -4.1% during the fiscal year in local currency. However, because of the strengthening U.S. dollar relative to the yen, the return for dollar-denominated investors was reduced significantly. During the year, the two-tiered market structure continued with the multinational exporters ("the Japanese nifties") faring well. On the other hand, the stocks of smaller companies, which are more dependent on the local economy, performed poorly. As fears of a collapse of the financial system spread in the fourth quarter of 1997, small stock performance declined sharply. The Fund's overweight in small stocks, which are at record levels of attractiveness, had a negative impact on performance. With respect to sector weights, the Fund's underweight in banks contributed positively to performance while the overweight in value stocks detracted from performance. The portfolio is currently positioned in favor of both value and small stocks, which are the most attractive sectors of the Japanese market. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice.
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Comparison of Change in Value of a $10,000 Investment in GMO Japan Fund Class III Shares and the MSCI Japan Index As of February 28, 1998 ---------------------------- Average Annual Total Return ---------------------------- Since Inception 1 Year 5 Year 6/8/90 Class ---------------------------- III -10.3% 1.9% -2.5% ---------------------------- [LINE GRAPH APPEARS HERE] Date GMO Japan MSCI Japan Fund Index 6/8/90 $9,960 $10,000 2/28/91 $9,582 $9,615 2/29/92 $7,816 $7,904 2/28/93 $7,465 $7,387 2/28/94 $11,492 $10,826 2/28/95 $10,271 $9,701 2/29/96 $11,136 $10,565 2/28/97 $9,166 $8,401 2/28/98 $8,253 $7,697 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 40 bp on the purchase and 61 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Past performance is not indicative of future performance. Information is unaudited.
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GMO International Small Companies Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO International Small Companies Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Small Companies Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 23, 1998
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 94.6% Austria - 2.0% 777 Allgemeine Baugesellschaft AG 63,349 20,272 Austrian Airlines* 509,650 1,600 Bank Austria AG Preferred* 105,011 6,305 Bank Austria AG (Participating Certificate) 371,835 1,781 Bau Holdings AG 104,894 63 Bau Holdings AG Preferred 2.42% (Non Voting) 3,000 17,355 Boehler Uddeholm (Bearer) 1,110,360 7,468 Brau Union AG 438,668 2,293 BWT AG 412,152 9 EA-Generali AG 2,948 8 EA-Generali AG Preferred 6.00% 1,516 3,199 Interunfall Versicherung AG 489,814 1,834 Jenbacher Werke AG 54,582 507 Mayr-Melnhof Karton AG (Bearer) 29,384 1,243 Oesterreichische Brau Beteiligungs AG 72,819 1,636 Oesterreichische Laenderbank AG Preferred 2.34% (Non Voting) 111,602 13,419 Radex-Heraklith AG 539,148 3,285 Universale Bau AG 114,490 226 Wiener Allianz Versicherungs AG 26,639 2,756 Wolford AG 197,286 ------------------ 4,759,147 ------------------ Canada - 6.6% 36,600 Air Canada Inc* 335,615 14,200 Alberta Energy Ltd 347,230 28,700 Anderson Exploration Ltd* 338,798 24,700 BCE Mobile Communications* 659,523 24,400 CAE Industries Inc 188,596 16,700 Cameco Corp 492,264 8,900 Canadian Hotel Inc 552,830 16,800 Canadian Natural Resources* 336,437 18,800 Canadian Tire Corp Ltd Class A 449,805 12,100 Cominco Ltd 204,054 21,700 Dofasco Inc 380,434 41,000 Domtar Inc 312,581 23,900 Donohue Inc Class A 480,301 84,600 Echo Bay Mines Ltd* 172,392 3,500 Edperbrascan Corp Class A Ltd (Voting Shares) 66,156 47,800 Gulf Canada Resources Ltd* 362,425 11,300 International Comfort Products Corp* 96,870 5,700 IPL Energy Inc 256,934 27,750 Ipsco Inc 789,709 12,700 Loewen Group Inc 312,335 32,000 Macmillan Bloedel Ltd 403,612 35,900 Methanex Corp* 292,618 25,200 Mitel Corp* 324,042 15,700 Molson Co Ltd Class A 281,864 2,500 Molson Co Ltd Class B 45,146 20,300 Moore Corporation Ltd 316,664 39,800 National Bank of Canada Montreal 662,797 See accompanying notes to the financial statements. 1
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Canada - continued 39,700 Noranda Forest Inc 244,089 13,800 Norcen Energy Resource 191,512 20,200 Nova Scotia Power Inc 269,683 120,800 Numac Energy Inc * 479,584 13,500 Oshawa Group Ltd Class A 237,624 12,600 Power Corp of Canada Ltd 467,470 7,100 Quebecor Inc Class B 137,695 23,356 Ranger Oil Ltd 150,165 13,700 Rio Algom Ltd 254,622 9,000 Rogers Communications Inc Class B * 39,209 15,500 Sears Canada Inc 239,065 31,100 Stelco Inc Class A 262,235 10,700 Suncor Energy Inc 392,843 8,500 Teck Corp Class B 122,141 23,900 Telus Corp 601,216 6,300 Torstar Corp Class B 233,735 26,800 Transalta Corp 451,014 100 TVA Group Inc Class B * 2,319 61,600 TVX Gold Inc * 177,465 7,800 United Dominion Industries Ltd 223,617 22,400 Westcoast Energy Inc 566,630 3,000 Weston (George) Ltd 252,960 ------------ 15,458,925 ------------ Denmark - 0.0% 800 Hafnia Holdings (Registered) Class A (c) * 1 ------------ France - 11.0% 1,750 Accor SA 404,073 8,390 BIC SA 664,945 10,470 Bouygues 1,468,388 15,000 Cap Gemini SA 1,724,350 5,990 Castorama Dubois Investment 811,553 7,390 Club Mediterranee SA Rights 3/11/98 * 10,740 7,390 Club Mediterranee SA * 548,554 1,730 Compagnie Generale d'Industrie et de Participations 744,077 3,610 Compagnie Parisienne de Reescompte 281,010 1,400 Comptoirs Modernes 761,013 13,300 Credit Commercial de France 983,098 9,040 Credit Local de France SA 1,153,521 15,830 Credit Lyonnais * 1,156,850 5,630 Credit National 342,095 2,220 Eridania Beghin-Say SA 395,931 2,460 Essilor International 755,059 9,255 Financiere de Paribas SA 880,017 420 Gaz Et Eaux 179,332 760 Groupe Andre * 83,623 2,790 Hermes International 218,554 4,780 Imetal 595,022 37,850 Lagardere Groupe 1,373,708 12,200 Moulinex * 305,538 2 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------- France - continued 1,260 Pathe SA 242,099 10,600 Pechiney SA Class A 470,009 6,190 Pernod-Ricard 404,585 3,090 Primagaz 264,890 299 Sagem Applic Gen D Electric 183,154 2,440 Seb SA 355,026 3,300 SEFIMEG 203,010 20,010 Seita 874,108 3,920 Simco Union Habit (Registered) 311,579 850 Societe Eurafrance 395,738 1,430 Sodexho Alliance 921,513 15,790 SPIE Batignolles 982,783 5,170 Synthelabo 721,682 5,620 Technip SA (Compagnie Francaise) 634,981 13,500 Thomson CSF 465,575 6,170 TV Francaise 668,752 1,909 Unibail (Bearer) 208,166 1,197 Union Immobiliere de France SA 86,297 28,400 Usinor Sacilor 426,052 4,320 Valeo 369,622 10,610 Worms et Compagnie SA 662,118 ---------------- 25,692,790 ---------------- Germany - 10.9% 5,182 Aachener & Munchener Beteiligungs AG (Bearer) 577,380 8,950 Aachener & Munchener Beteiligungs AG (Registered) 1,001,157 6,700 Adidas Salomon AG 1,055,903 4,700 Altana AG 372,685 1,350 Ava Allgemeine Handelsgesellschaft der Verbraucher AG * 444,855 7,600 Axa Colonia Konzern AG 921,339 300 Axel Springer Verlag AG 247,968 25,050 Bankgesellschaft Berlin AG 532,127 8,450 Beiresdorf AG (Bearer) 396,716 17,750 Berliner Kraft & Licht AG Class A 782,477 25,800 BHF Bank AG 753,492 6,000 Bilfinger & Berger 157,708 1,050 Buderus AG 473,288 24,900 Continental AG 598,231 937 DBV-Winterthur Holding AG * 413,060 13,800 Degussa AG 709,486 4,800 Douglas Holdings AG 169,809 7,500 ERGO Versicherungs Gruppe AG * 1,388,621 10,150 FAG Kugelfischer 138,987 4,700 Fresenius Medical Care AG Preferred .82% (Non Voting) 966,028 2,750 Fresenius Medical Care AG * 193,208 650 Friedrich Grohe AG Preferred (Non Voting) 181,953 4,600 Friedrich Krupp AG 828,875 450 GEA AG Preferred 3.13% 143,140 8,700 Gehe AG 460,708 700 Hamburgische Electricitaets-Werke AG 182,449 7,755 Heidelberg Port-Zement 571,342 See accompanying notes to the financial statements. 3
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) ------------------------------------------------------------------------------- Germany - continued 4,250 Henkel KGAA Preferred 275,644 7,750 Henkel KGAA (Bearer) 477,449 5,200 Hochtief AG 183,100 700 Holzmann (Philipp) * 165,863 300 ISAR Amperwerke AG 98,691 1,600 IWKA AG 362,364 950 Karstadt AG 329,797 10,800 Lahmeyer AG 443,367 650 Linde AG 431,602 15,600 Lufthansa AG * 300,008 1,900 MAN AG 570,497 800 MAN AG Preferred 186,692 4,700 Merck KGAA 174,558 14,100 Metallgesellschaft * 286,701 300 Porsche AG Preferred .12% (Non Voting) 524,039 1,950 Preussag AG 630,748 3,200 SAP AG Preferred 1,321,262 7,100 Schering AG 797,344 850 Schmalbach-Lubeca 167,213 3,900 Schwarz Pharma AG 318,060 2,450 SGL Carbon AG 292,960 15,100 SKW Trostberg AG 515,884 800 Suedzucker AG 374,707 800 Thyssen AG 174,129 850 Vereins Und Westbank 208,431 1,900 Volkswagen AG Preferred .79% 925,527 400 Wella AG 277,945 ------------- 25,477,574 ------------- Hong Kong - 0.9% 1,000 Asia Financial Holdings 254 136,000 Associated International Hotels 56,209 68,000 Cross Harbour Tunnel Co Ltd 113,297 666 Dickson Concept International Ltd 1,153 6,000 Grand Hotel Holdings Ltd Class A 1,333 79,900 Hong Kong Aircraft Engineering Co Ltd 170,790 13,000 IMC Holdings 3,022 154,000 Lai Sun Garment International Ltd 83,539 212,000 Liu Chong Hing Investment Ltd 182,086 620 Mandarin Oriental 518 200 Mingly Corp 36 500 New Asia Realty & Trust A Shares 1,007 30,100 Realty Development Corp Ltd Class A 72,699 6,200 Semi Tech (Global) Co Ltd Warrants 7/31/98 * 8 776,000 South China Morning Post Ltd 561,266 309,101 Tsim Sha Tsui Properties Ltd 503,025 152,000 Wing On Co 106,994 18,000 Wing On International Holdings Ltd 21,388 130,500 Winsor Properties Holdings Ltd 126,413 ------------- 2,005,037 ------------- 4 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ------------------------------------------------------------------------------------------------------------------ Italy - 1.5% 777,200 Banca Nazionale dell'Agricoltura SPA (Non Convertible) 560,277 334,500 Finmeccanica SPA (Non Convertible) * 301,890 102,000 Fornara SPA * 4,104 213,400 Grassetto SPA (c) * 1 3,500 Recordati Industria Chimica e Farmaceutica SPA 31,295 56,000 Recordati Industria Chimica e Farmaceutica SPA (Non Convertible) 272,888 47,000 Rinascente per l'Esercizio di Grandi Magazzini SPA Preferred 5.59% 185,169 335,000 Snia BPD SPA (Non Convertible) 328,551 371,274 Unione Cementi Marchino Emiliane e di Augusta-Casale (Non Convertible) 1,883,913 ------------------ 3,568,088 ------------------ Japan - 21.1% 22,000 Alps Electric Co Ltd 193,303 108,000 Amada Co Ltd 506,103 29,000 Amano Corp 293,834 3,000 Anritsu Corp 30,397 253,000 Aoki Corp * 234,315 10,000 Aoki International 72,113 25,800 Aoyama Trading 559,582 95,000 Atsugi Nylon Industrial 180,480 15,000 Bandai Co 223,225 6,000 Brother Industries Ltd 16,338 56,000 Canon Sales Co Inc 753,582 13,000 Casio Computer Co 107,021 2,000 Chudenko Corp 54,461 25,000 Chugai Pharmaceutical Co Ltd 159,107 117,000 Citizen Watch Co 847,423 243,000 Cosmo Oil Co Ltd 557,825 29,300 CSK Corp 707,393 50,000 Daicel Chemical Industries Ltd 110,821 110,000 Daido Steel Co Ltd 245,547 36,000 Dainippon Ink & Chemicals Inc 108,288 20,000 Dainippon Pharmaceutical Co Ltd 90,715 4,000 Dainippon Screen Manufacturing Co Ltd 23,272 25,000 Daio Paper Corp 157,920 57,400 Daito Trust Construction Co Ltd 508,889 114,000 Denki Kagaku Kogyo 218,380 3,000 Denny's Japan Co Ltd 75,754 47,000 Ezaki Glico Co Ltd 293,913 212,000 Fuji Heavy Industries Ltd 795,441 108,000 Fujisawa Pharmaceutical Co Ltd 1,085,728 28,000 Fujitec Co 170,664 49,000 Fujiya Co Ltd * 91,150 75,000 Fukuyama Transporting Co Ltd 368,084 52,000 Furukawa Co Ltd 102,082 44,000 Furukawa Electric Co Ltd 194,348 127,000 Gakken Co Ltd 316,671 107,000 General Sekiyu (KK) 530,215 32,000 Godo Shusei Co Ltd 65,859 30,000 Green Cross Corp 86,203 7,000 Gunze Ltd 19,837 See accompanying notes to the financial statements. 5
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 54,000 Hankyu Department Stores Inc 363,334 211,000 Hanwa Co Ltd * 342,397 189,000 Haseko Corp * 173,545 1,000 Heiwa Corp 11,003 600 Hitachi Ltd 4,502 36,000 Hitachi Maxell Ltd 666,825 116,000 Hitachi Metals Ltd 527,982 31,000 Hokuetsu Paper Mills 162,693 19,000 House Foods Corp 266,208 25,000 Hyogo Bank Ltd (c) * 2 79,000 INAX Corp 331,434 43,000 Intec Inc 299,533 11,000 Ishihara Sangyo Kaisha * 19,504 13,000 Itoham Foods Inc 58,244 34,000 Izumiya Co Ltd 210,465 25,000 Japan Airport Terminal Co Ltd 168,012 3,000 Japan Radio Co 19,140 73,000 Japan Steel Works Ltd * 97,657 122,000 Japan Synthetic Rubber Co Ltd 634,481 53,000 JGC Corp 137,188 38,000 Joshin Denki Co Ltd 117,312 29,000 Kamigumi Co Ltd 132,455 42,000 Kandenko Co 292,567 111,000 Kaneka Corp 632,629 12,000 Katokichi Co Ltd 159,582 189,000 Keihin Electric Express Railway Co Ltd 673,237 245,000 Keio Teito Electric Railway Co Ltd 992,955 23,000 Kikkoman Corp 145,468 9,000 Kinden Corp 120,399 18,000 Kissei Pharmaceutical Co Ltd 282,118 6,000 Koito Manufacturing Co Ltd 26,692 48,000 Kokusai Kogyo Co Ltd 232,914 5,000 Kokuyo Co Ltd 87,469 27,000 Komori Corp 476,609 25,000 Konica Corp 130,808 59,000 Koyo Seiko Co Ltd 292,361 44,000 Kumagai Gumi Co Ltd 48,761 133,000 Kurabo Industries Ltd 230,563 116,000 Kuraray Co 1,019,235 253,000 Kureha Chemical Industry Co Ltd 682,918 11,000 Kyowa Exeo Corp 85,855 15,000 Kyowa Hakko Kogyo Co Ltd 73,498 7,000 Kyudenko Corp 44,938 84,000 Lion Corp 304,536 2,100 Mabuchi Motor Co 112,206 67,000 Maeda Corp 236,539 40,000 Maeda Road Construction 236,840 62,000 Makino Milling Machine Co Ltd 436,793 56,000 Makita Corp 647,194 2,000 Maruichi Steel Tube 26,597 6 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 29,000 Matsushita Refrigeration Co 117,304 58,000 Mitsubishi Belting Ltd 174,923 200 Mitsubishi Chemical Corp 374 186,000 Mitsubishi Gas Chemical Co Inc 609,546 87,000 Mitsubishi Oil Co Ltd 180,432 10,000 Mitsubishi Paper Mills Ltd 21,452 8,000 Mitsubishi Warehouse & Transportation Co Ltd 90,556 30,000 Mitsui Petrochemical Industries Ltd 84,303 3,000 Mizuno Corp 11,422 33,000 Mori Seiki Co Ltd 399,668 13,000 Nagase & Co 50,423 61,000 Nagoya Railroad Co Ltd 214,391 2,000 Namco Ltd 48,286 39,000 Nankai Electric Railway Co Ltd 175,968 25,000 NGK Spark Plug Co 180,678 11,000 NHK Spring Co Ltd 35,874 28,000 Nichicon Corp 294,784 118,000 Nichiei Co Ltd 150,384 7,000 Nichirei 17,731 83,000 Nihon Cement Co Ltd 200,388 3,000 Nihon Unisys Ltd 16,053 124,000 Nippon Chemi-Con Corp 402,438 7,000 Nippon Comsys 85,332 40,000 Nippon Hodo Co 190,929 13,000 Nippon Kayaku Co Ltd 61,126 76,000 Nippon Meat Packers Inc 998,654 25,000 Nippon Paint Co 52,442 141,000 Nippon Sheet Glass Co Ltd 308,050 27,000 Nippon Shokubai Corp 158,157 62,000 Nippon Suisan Kaisha Ltd * 102,573 22,000 Nippon Zeon Ltd 63,564 29,000 Nishimatsu Construction 149,442 56,000 Nissan Fire & Marine Insurance Co Ltd 202,137 35,000 Nisshin Oil Mills Ltd 96,968 316,000 Nisshin Steel Co Ltd 480,266 49,000 Nisshinbo Industries Inc 285,087 67,000 Nissho Iwai Corp 190,929 4,000 Nissin Food Products Co Ltd 83,274 63,000 Nitto Boseki Co Ltd 182,023 60,000 Nitto Denko Corp 949,893 38,000 NSK Ltd 148,896 40,000 Okamoto Industries Inc 115,570 8,000 Okumura Corp 35,526 93,000 Olympus Optical Co Ltd 731,750 192,000 Onoda Cement Co Ltd 416,433 62,000 Onward Kashiyama Co Ltd 883,401 2,000 Oyo Corp 31,030 6,000 Pioneer Electronics Corp 105,913 27,000 Q.P. Corp 177,606 333,000 Renown Inc * 347,946 See accompanying notes to the financial statements. 7
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) ---------------------------------------------------------------------------- Japan - continued 5,000 Rinnai Corp 81,137 55,000 Royal Co Ltd 831,552 5,000 Ryosan Co 83,116 25,000 Sanden Corp 133,777 79,000 Sankyo Aluminum Industry Co Ltd 109,436 36,000 Sanrio Co Ltd * 273,284 11,000 Sanwa Shutter Corp 67,482 145,000 Sanyo Securities Co Ltd * 1,148 13,000 Sapporo Breweries Ltd 58,656 58,000 Seino Transportation Co Ltd 346,173 7,000 Shimachu Co 135,201 10,000 Shimadzu Corp 35,067 4,000 Shimano Inc 82,324 144,000 Shionogi and Co Ltd 745,476 394,000 Showa Denko 530,199 37,000 Showa Electric Wire & Cable 90,208 151,000 Showa Shell Sekiyu 1,026,747 5,000 Skylark Co Ltd 55,806 10,000 Snow Brand Milk Products Co Ltd 34,750 75,000 Stanley Electric Co Ltd 259,440 71,000 Sumitomo Bakelite Co Ltd 454,112 39,000 Sumitomo Osaka Cement Co Ltd 66,991 42,000 Taiyo Yuden Co Ltd 448,825 13,000 Takara Shuzo Co Ltd 60,714 33,895 Takara Standard Co 217,596 76,000 Tanabe Seiyaku Co Ltd 433,151 84,000 Teikoku Oil Co Ltd 278,604 65,000 Tobu Railway Co Ltd 229,478 115,000 Toda Corp 558,933 800 Toho Co Ltd 100,055 60,000 Tokai Carbon Co Ltd 146,758 49,000 Tokuyama Corp 154,761 18,000 Tokyo Broadcasting System Inc 232,249 122,000 Tokyo Construction Co Ltd 149,687 92,000 Tokyo Electric Co Ltd 302,224 106,000 Tokyo Ink Manufacturing Co Ltd 271,859 43,000 Tokyo Rope Manufacturing Co Ltd 74,202 8,000 Tokyo Steel Manufacturing Co 36,729 36,000 Tokyo Style Co Ltd 370,458 16,000 Tokyu Department Store Co Ltd 30,777 13,000 Toshiba Ceramics Co Ltd 58,244 28,000 Toshiba Tungaloy Co Ltd 86,662 19,000 Toyo Engineering Corp 31,434 11,000 Toyo Suisan Kaisha 80,978 41,000 Tsubakimoto Chain 143,774 4,000 Uniden Corp 42,112 197,000 Victor Co of Japan Ltd 1,746,537 59,000 Wacoal Corp 616,481 4,000 Yakult Honsha Co Ltd 27,072 9,000 Yamaha Corp 99,739 8 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Download Table] Shares Description Value ($) -------------------------------------------------------------------------------- Japan - continued 11,000 Yamatake Honeywell 147,154 6,000 Yamazaki Baking Co Ltd 67,442 75,000 Yodogawa Steel Works 385,894 21,000 Yokogawa Electric Corp 132,154 109,000 Yokohama Rubber Co 333,911 ----------- 49,343,505 ----------- Malaysia - 0.0% 1,000 Aluminum Co of Malaysia 327 3,000 Berjaya Leisure Berhad 2,906 2,000 Boustead Holdings Berhad 1,912 11,000 Esso Berhad 13,350 8,000 Sime Darby 4,081 ----------- 22,576 ----------- New Zealand - 0.0% 43,500 DB Group Ltd 74,006 ----------- Norway - 0.0% 1 SAS Norge ASA Class B 15 ----------- Singapore - 0.6% 2,103,000 Chuan Hup Holdings Ltd 642,187 1,650 Haw Paw Brothers International Ltd Warrants 7/18/2001 * 499 64,000 Inchcape Berhad 96,730 64,000 Inchcape Marketing Services * 16,188 89,000 Prima Ltd 169,105 191,000 Times Publishing Ltd 377,051 16,000 Wearne Brothers Ltd 19,642 ----------- 1,321,402 ----------- Spain - 0.3% 565 Koipe SA 39,766 135,578 Sarrio SA 585,393 5,608 Tableros Defibras Class B 91,394 ----------- 716,553 ----------- Sweden - 5.5% 15,300 AGA AB Class A 210,207 16,050 AGA AB Class B 202,469 11,300 Atlas Copco AB 314,736 6,600 Atlas Copco AB Class B 183,416 32,800 Avesta Sheffield AB 204,836 19,813 Celsius Industrier AB Class B 366,248 20,900 Enator AB * 430,718 200 Esselte AB Class A 3,772 15,000 Euroc Industri AB Class A 599,520 3,994 Incentive AB Class A 383,118 2,312 Incentive AB Class B 221,775 9,366 Industrivarden AB Class A 597,775 17,700 Kinnevik Investment Class B 334,926 19,860 Marieberg Tidnings AB Class A 458,895 28,200 Mo Och Domsjo AB Class B 820,668 2,100 Modern Times Group AB * 16,000 See accompanying notes to the financial statements. 9
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Download Table] Shares Description Value ($) -------------------------------------------------------------------------------- Sweden - continued 6,600 Sandivik AB Class B 184,652 10,200 Scania AB Class A 220,399 8,800 Scania AB Class B 191,797 10,400 Securitas AB 314,998 8,500 Skandia Forsakrings AB 479,866 12,800 SKF AB Class B 264,588 18,800 Ssab Swedish Steel Class A 352,218 256,706 Stena Line AB Class B * 875,309 10,891 Svedala Industries 193,161 32,000 Svenska Handelsbanken Class B 1,282,974 14,825 Svenska Kullagerfabriken AB 290,708 56,976 Sydkraft AB Class A 1,494,424 44,413 Sydkraft AB Class C 1,065,060 8,398 Trygg Hansa Holdings AB Class B 255,934 --------------- 12,815,167 --------------- Switzerland - 0.3% 440 Ascom Holding AG (Registered) * 155,901 45 Kuoni Reisen Holdings AG (Registered) 183,667 1,930 Swissair AG (Participating Certificate) * 460,275 --------------- 799,843 --------------- United Kingdom - 33.9% 305,700 Allied Colloids 1,011,703 156,300 AMEC 357,070 38,366 Amstrad Plc 24,004 132,300 Anglian Water Plc 1,829,788 68,565 Arcadia Group * 556,840 119,680 Argos Plc 1,202,024 124,300 Arjo Wiggins Appleton Plc 335,642 1,120,000 ASDA Group 3,711,193 179,700 Associated British Ports 905,381 152,900 Astec (BSR) 318,464 122,390 Barratt Development 566,258 136,000 Beazer Holmes Plc 471,360 96,412 Berisford International 306,373 238,200 BICC Group 511,816 152,100 Blue Circle Industries 889,659 75,700 Bowthorpe Holdings * 498,560 144,200 BPB Industries Plc 781,129 141,800 British Land Co 1,716,032 200,700 British Steel Plc 481,635 219,535 Bunzl Co 880,166 224,200 Caradon Plc 732,753 24,885 Carlton Communications 174,955 313,800 Centrica Plc * 558,005 26,140 Charter Plc (Registered) 266,845 45,300 Christian Salvesen Plc 93,979 89,100 Coats Viyella 121,764 52,648 Cobham Group Plc 758,493 82,900 Cordiant Communications Group * 139,225 89,502 Costain Group Plc * 44,210 10 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 Shares Description Value ($) ------------------------------------------------------------------------------- United Kingdom - continued 118,300 Courtaulds 681,733 41,081 Dawson International 35,173 137,131 Debenhams Plc * 943,786 71,200 Delta Plc 332,935 198,600 Electrocomponents Plc 1,520,526 231,480 Elementis Plc 484,037 203,159 English China Clays Plc 816,183 89,400 First Leisure Plc 465,143 97,100 Glynwed International 406,083 87,800 Great Portland Estates Plc 423,569 122,920 Greenalls Group Plc 838,897 39,509 Greycoat Plc 147,017 140,436 Hammerson Plc 1,163,076 113,820 Hazlewood Foods 348,573 100,700 Hepworth Plc 374,714 413,976 Hillsdown Holdings 1,083,762 49,183 Hyder Plc 759,591 12,618 Hyder Plc Cumulative Redemption Preferred 24,827 191,444 Inchcape Plc 589,447 120,300 Johnson Matthey 1,047,316 48,700 Kwik Save Group 275,835 1,030,167 Ladbroke Group 5,190,280 32,734 Laing (John) 169,235 9,009 Laing (John) Class A (Non Voting) 46,280 50,400 Laird Group 360,979 6,200 Laporte Plc 67,553 891,817 Lasmo Plc 4,056,376 81,160 Lex Service 636,079 774,181 Lonrho Plc 1,198,208 154,634 Marley Plc 278,792 56,048 Meyer International 349,753 284,900 MFI Furniture Group 605,123 123,800 Mirror Group Plc 346,522 131,400 Morgan Crucible 956,267 395,800 NFC Plc 1,088,313 178,097 Norcros Plc 190,604 107,685 Northern Foods Plc 480,492 68,680 Ocean Group 774,609 21,900 Oxford Instruments 109,978 270,800 Pilkington 508,294 122,500 Premeir Farnell Plc 800,734 101,870 Provident Financial Plc * 1,652,130 158,800 Racal Electronics 755,971 63,200 Railtrack Group Plc 962,544 24,400 Rank Group Plc 133,781 209,300 Rexam Plc 956,300 240,700 Rugby Group 505,299 93,500 Saatchi & Saatchi Plc * 177,040 187,400 Scottish Hydro-Electric Plc 1,680,848 334,500 Sears Plc 289,146 See accompanying notes to the financial statements. 11
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares/ Par Value Description Value ($) --------------------------------------------------------------------------------------------------- United Kingdom - continued 286,297 Securicor Plc 1,718,209 210,600 Sedgwick Group 513,437 30,840 Severn Trent Plc 474,775 388,740 Signet Group Plc * 249,637 7,828,760 Signet Group * - 83,125 Simon Engineering 67,748 64,800 Slough Estates 429,440 145,100 Smith (WH) Group 1,170,645 88,300 Southern Electric Plc 745,103 42,116 Southwest Water 624,616 202,300 St James's Place Capital * 676,167 229,842 Storehouse Plc 980,146 295,606 T & N 1,231,390 945,164 Tarmac 1,563,994 92,100 Tate & Lyle 796,124 718,280 Taylor Woodrow Plc 2,388,949 318,000 Telewest Communications Plc * 408,398 60,200 Thames Water 876,215 111,000 Transport Development Group 425,834 58,100 Unigate 624,671 240,863 United Biscuits 1,062,837 900 Vendome Luxury Group Plc Units 7,128 87,226 Viglen Technology Plc * 48,830 96,926 Viglen Technology Plc Entitlement Letters * - 80,000 Waste Management International * 237,096 100,700 Wessex Water Plc 804,142 213,900 Willis Corroon Group Plc 494,822 120,980 Wilson (Connolly) Holdings 323,690 442,935 Wimpey (George) 897,030 5,368 Wolseley 44,192 149,700 Yorkshire Water 1,264,448 --------------- 79,484,792 --------------- United States - 0.0% 2,125 Ultramar Diamond Shamrock Corp 75,836 --------------- TOTAL STOCK AND EQUIVALENTS (Cost $223,702,677) 221,615,257 --------------- DEBT OBLIGATIONS - 0.1% United Kingdom - 0.1% GBP 157,989 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 260,129 GBP 41,678 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 68,623 --------------- 328,752 --------------- TOTAL DEBT OBLIGATIONS (Cost $178,828) 328,752 --------------- 12 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares/ Par Value Description Value ($) ------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS - 6.2% Cash Equivalents - 4.1% 3,500,760 The Boston Global Investment Trust (b) 3,500,760 $ 6,000,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 6,000,000 ---------------- 9,500,760 ---------------- U.S. Government - 2.1% $ 5,150,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 4,921,765 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $14,427,126) 14,422,525 ---------------- TOTAL INVESTMENTS - 100.9% (Cost $238,308,631) 236,366,534 Other Assets and Liabilities (net) - (0.9%) (2,211,977) ---------------- TOTAL NET ASSETS - 100.0% $ 234,154,557 ================ Notes to the Schedule of Investments: ADR American Depositary Receipt (a) This security is held as collateral for open futures contracts (Note 5). (b) Represents investment of security lending collateral (Note 1). (c) Bankrupt issuer. * Non-income producing security. A dividend has not been declared for the twelve months ended February 28, 1998. See accompanying notes to the financial statements. 13
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GMO International Small Companies Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- At February 28, 1998, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Services 11.7% Construction 9.6 Consumer Goods 7.5 Machinery 6.9 Retail Trade 6.4 Chemicals 4.2 Conglomerates 4.1 Oil and Gas 4.1 Banking 4.0 Health Care 4.0 Metals and Mining 3.8 Transportation 3.8 Utilities 3.8 Electronic Equipment 3.3 Insurance 3.0 Paper and Allied Products 2.4 Real Estate 2.2 Communications 2.1 Textiles 1.6 Financial Services 1.6 Food and Beverage 1.3 Automotive 1.2 Aerospace 0.9 Telecommunications 0.7 Computers 0.3 Miscellaneous 5.5 ========== 100.0% ========== 14 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Assets and Liabilities - February 28, 1998 ---------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $238,308,631) (Note 1) $ 236,366,534 Foreign currency, at value (cost $2,260,202) (Note 1) 2,259,164 Cash 64,359 Receivable for investments sold 43,689 Dividends and interest receivable 266,977 Receivable for open forward foreign currency contracts (Notes 1 and 6) 2,345,748 Receivable for open swap contracts (Notes 1 and 6) 1,437,500 Foreign withholding taxes receivable 115,409 Receivable for expenses waived or borne by Manager (Note 2) 168,551 ------------- Total assets 243,067,931 ------------- Liabilities: Payable for open forward foreign currency contracts (Notes 1 and 6) 4,769,487 Payable upon return of securities loaned (Note 1) 3,500,760 Payable for variation margin on open futures contracts (Notes 1 and 6) 85,682 Payable for fund shares repurchased 172,084 Payable to affiliate for (Note 2): Management fee 216,922 Shareholder service fee 26,029 Accrued expenses 142,410 ------------- Total liabilities 8,913,374 ------------- Net assets $ 234,154,557 ============= Net assets consist of: Paid-in capital $ 236,274,501 Distributions in excess of net investment income (665,119) Accumulated net realized loss (51,411) Net unrealized depreciation (1,403,414) ------------- $ 234,154,557 ============= Net assets attributable to Class III Shares $ 234,154,557 ============= Shares outstanding - Class III 19,163,810 ============= Net asset value per share - Class III $ 12.22 ============= See accompanying notes to the financial statements. 15
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GMO International Small Companies Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1998 -------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $614,487) $ 5,052,924 Interest (including securities lending income of $95,132) 1,203,813 ------------ Total income 6,256,737 ------------ Expenses: Management fee (Note 2) 2,912,080 Custodian fees 395,883 Audit fees 52,473 Transfer agent fees 30,930 Registration fees 5,298 Legal fees 4,647 Trustees fee (Note 2) 2,190 Stamp duties and transfer taxes 200 Miscellaneous 3,015 Fees waived or borne by Manager (Note 2) (2,004,718) ------------ 1,401,998 Shareholder service fee - Class III (Note 2) 349,448 ------------ Net expenses 1,751,446 ------------ Net investment income 4,505,291 ------------ Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 27,585,697 Closed futures contracts 4,716,568 Foreign currency, forward contracts and foreign currency related transactions (2,314,343) ------------ Net realized gain 29,987,922 ------------ Change in net unrealized appreciation (depreciation) on: Investments (19,556,569) Open futures contracts (514,303) Open swap contracts 1,437,500 Foreign currency, forward contracts and foreign currency related transactions (2,197,239) ------------ Net unrealized loss (20,830,611) ------------ Net realized and unrealized gain 9,157,311 ------------ Net increase in net assets resulting from operations $ 13,662,602 ============ 16 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Changes in Net Assets ----------------------------------------------------------------------------------------------------------- Year Ended Year Ended February 28, 1998 February 28, 1997 ------------------- ------------------- Increase (decrease) in net assets: Operations: Net investment income $ 4,505,291 $ 4,054,564 Net realized gain (loss) 29,987,922 (6,729,282) Change in net unrealized appreciation (depreciation) (20,830,611) 15,655,726 ----------------- ---------------- Net increase in net assets resulting from operations 13,662,602 12,981,008 ----------------- ---------------- Distributions to shareholders from: Net investment income - Class III (4,394,112) (1,160,606) Net realized gains - Class III (28,025,043) (3,372,778) In excess of net realized gains - Class III - (30,591) ----------------- ---------------- (32,419,155) (4,563,975) ----------------- ---------------- Net share transactions - Class III (Note 5) 17,258,306 8,272,041 ----------------- ---------------- Total increase (decrease) in net assets (1,498,247) 16,689,074 Net assets: Beginning of period 235,652,804 218,963,730 ----------------- ---------------- End of period (including distributions in excess of net investment income of $665,119 and $655,418, respectively) $ 234,154,557 $ 235,652,804 ================= ================ See accompanying notes to the financial statements. 17
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GMO International Small Companies Fund (A Series of GMO Trust) [Enlarge/Download Table] Financial Highlights (For a Class III share outstanding throughout each period) ----------------------------------------------------------------------------------------------------------------------------------- Year ended February 28/29, ----------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Net asset value, beginning of period $ 13.46 $ 12.95 $ 11.95 $ 14.45 $ 8.91 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income 0.27 0.23 0.18 0.18 0.15 Net realized and unrealized gain (loss) 0.42 0.55 1.16 (1.52) 5.59 ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.69 0.78 1.34 (1.34) 5.74 ----------- ----------- ----------- ----------- ----------- Less distributions to shareholders from: Net investment income (0.26) (0.07) (0.17) (0.20) (0.12) In excess of net investment income - - (0.02) - - Net realized gains (1.67) (0.20) (0.15) (0.96) (0.08) In excess of net realized gains - (0.00) - - - ----------- ----------- ----------- ----------- ----------- Total distributions (1.93) (0.27) (0.34) (1.16) (0.20) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 12.22 $ 13.46 $ 12.95 $ 11.95 $ 14.45 =========== =========== =========== =========== =========== Total Return (a) 6.92% 5.99% 11.43% 9.66% 64.67% Ratios/Supplemental Data: Net assets, end of period (000's) $ 234,155 $ 235,653 $ 218,964 $ 186,185 $ 132,645 Net expenses to average daily net assets 0.75% 0.76%(c) 0.76%(c) 0.76%(c) 0.75% Net investment income to average daily net assets 1.93% 1.75% 1.84% 1.45% 1.50% Portfolio turnover rate 79% 13% 13% 58% 38% Average broker commission rate per equity share (b) $ 0.0063 0.0015 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.12 $ 0.10 $ 0.07 $ 0.08 $ 0.09 (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Includes stamp duties and taxes not waived or borne by the Manager, which approximate .01% of average daily net assets. 18 See accompanying notes to the financial statements.
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks maximum total return through investment primarily in equity securities of small capitalization foreign companies traded on a major stock exchange of a foreign country. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. Effective January 9, 1998, the Fund ceased offering Class I and Class II shares. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. 19
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Forward currency contracts The Fund may enter into forward currency contracts in connection with planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy and sell is shown under Note 6, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1998. 20
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Futures contracts The Fund may purchase or sell index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 1998. Swap agreements The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there is no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for the summary of all open swap agreements as of February 28, 1998. 21
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Security lending The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 1998, the Fund loaned securities having a market value of $3,329,671 collateralized by cash in the amount of $3,500,760, which was invested in a short-term instrument. Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency and passive foreign investment company transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Distributions in Excess of Accumulated Net Realized Net Investment Income Gain/Loss Paid-in Capital --------------------- --------- --------------- ($120,880) $121,263 ($383) 22
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis, and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is 1.00% of the amount invested. In the case of cash redemptions, the fee is .60% of the amount redeemed. Prior to June 1, 1996, the premium on cash purchases and fee on cash redemptions was 1.25% and .75% of the amount invested or redeemed, respectively. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" and redemption fees are included as part of each class' "shares repurchased", respectively, as summarized in Note 5. For the year ended February 28, 1998, the Fund received $328,967 in purchase premiums and $298,370 in redemption fees. There is no premium for reinvested distributions. Normally, no purchase premium is charged with respect to in-kind purchases of Fund shares. A purchase premium of up to .10% may be charged on certain in-kind transactions. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 23
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of 1.25% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees, and extraordinary expenses) exceed .60% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding .75%; thus, the net annual expense ratio after the waiver for a Class III shareholder is unchanged. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $2,190. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchases and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 1998, aggregated $169,063,402 and $173,116,323, respectively. At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held was as follows: Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation --------------- ---------------- ----------------- -------------- $238,806,998 $29,040,678 $31,481,142 $2,440,464 4. Principal Shareholders At February 28, 1998, 13.68% of the outstanding shares of the Fund were held by one shareholder. 24
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares including purchase premiums and redemption fees received by the Fund were as follows: [Enlarge/Download Table] Year Ended Year Ended Class III: February 28, 1998 February 28, 1997 ---------------------------------------------- ---------------------------------------------- Shares Amount Shares Amount ---------------------- --------------------- -------------------- --------------------- Shares sold 2,671,927 $ 37,883,371 1,509,544 $ 20,156,083 Shares issued to shareholders in reinvestment of distributions 2,808,143 30,552,594 302,311 4,040,065 Shares repurchased (3,825,152) (51,177,659) (1,205,784) (15,924,107) ---------------------- --------------------- -------------------- --------------------- Net increase 1,654,918 $ 17,258,306 606,071 $ 8,272,041 ====================== ===================== ==================== ===================== 6. Financial instruments A summary of outstanding financial instruments at February 28, 1998 is as follows: Forward currency contracts [Enlarge/Download Table] Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ----------------------- -------------------- ---------------------- -------------------- Buys 3/6/98 ATS 47,732,484 $ 3,739,059 $ (146,606) 7/16/98 ATS 47,732,484 3,766,486 (4,258) 3/6/98 BEF 393,029,095 10,493,690 (257,053) 7/16/98 BEF 301,061,320 8,097,835 (49,678) 3/6/98 CAD 7,763,351 5,455,606 (12,698) 4/17/98 CAD 7,632,260 5,368,579 (67,735) 3/6/98 CHF 4,455,836 3,037,350 (76,442) 25
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued Buys - continued [Enlarge/Download Table] Net Unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ----------------------- -------------------- ---------------------- -------------------- 3/6/98 DEM 9,429,811 $ 5,197,148 $ (94,370) 7/16/98 DEM 4,729,813 2,627,072 (6,601) 3/6/98 ESP 1,974,956,718 12,824,037 (573,811) 7/16/98 ESP 1,665,756,718 10,866,170 (18,482) 3/6/98 FIM 11,593,387 2,104,349 (141,125) 7/16/98 FIM 11,593,387 2,121,156 (699) 3/6/98 FRF 131,038,379 21,523,488 (677,296) 7/16/98 FRF 67,257,717 11,132,066 (28,946) 3/6/98 GBP 30,500,618 50,211,948 102,778 4/17/98 HKD 3,317,718 428,044 13,044 3/6/98 IEP 3,621,912 4,938,358 (451,612) 7/16/98 IEP 3,621,912 4,935,217 (13,005) 3/6/98 ITL 3,204,093,500 1,790,474 (47,526) 7/16/98 ITL 3,204,093,500 1,790,094 (13,759) 4/17/98 JPY 200,864,000 1,600,638 638 3/6/98 NLG 2,842,678 1,389,058 (74,957) 7/16/98 NLG 2,842,678 1,400,153 2,298 3/6/98 NOK 131,449,676 17,369,569 (1,087,110) 7/16/98 NOK 116,608,503 15,501,451 (11,953) 3/6/98 SEK 173,966,681 21,730,488 (846,591) 7/16/98 SEK 105,016,001 13,169,389 48,160 -------------------- $ (4,535,395) ==================== 26
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued [Enlarge/Download Table] Net unrealized Settlement Units of Appreciation Date Deliver/Receive Currency Value (Depreciation) ---------------- ----------------------- -------------------- ---------------------- ------------------ Sales 3/6/98 ATS 47,732,484 $ 3,739,059 $ 3,773 3/6/98 BEF 393,029,095 10,493,690 178,770 7/16/98 BEF 91,967,774 2,473,715 (1,064) 3/6/98 CAD 7,763,351 5,455,606 117,910 8/20/98 CAD 7,763,351 5,471,811 11,943 3/6/98 CHF 4,455,836 3,037,350 42,650 3/6/98 DEM 9,429,811 5,197,148 144,525 7/16/98 DEM 4,699,998 2,610,512 (8,365) 3/6/98 ESP 1,974,956,718 12,824,037 14,794 3/6/98 FIM 11,593,387 2,104,349 96 3/6/98 FRF 131,038,379 21,523,488 331,507 7/16/98 FRF 31,621,093 5,233,721 68,718 3/6/98 GBP 30,500,618 50,211,948 297,168 7/16/98 GBP 22,776,371 37,248,420 (55,157) 3/6/98 IEP 3,621,912 4,938,358 12,463 3/6/98 ITL 3,204,093,500 1,790,474 14,650 4/17/98 JPY 1,288,543,335 10,268,096 307,666 3/6/98 NLG 2,842,678 1,389,058 (2,588) 3/6/98 NOK 131,449,676 17,369,569 136,697 7/16/98 NOK 14,841,173 1,972,924 17,657 3/6/98 SEK 173,966,681 21,730,488 469,974 7/16/98 SEK 68,950,680 8,646,666 7,869 ------------------ $ 2,111,656 ================== 27
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GMO International Small Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Currency Abbreviations: ATS Austrian Schilling GBP British Pound BEF Belgian Franc HKD Hong Kong Dollar CAD Canadian Dollar IEP Irish Punt CHF Swiss Franc ITL Italian Lira DEM German Mark JPY Japanese Yen ESP Spanish Peseta NLG Netherlands Guilder FIM Finnish Markka NOK Norwegian Kroner FRF French Franc SEK Swedish Krona Futures Contracts [Enlarge/Download Table] Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) ----------------- --------------------- ---------------------- --------------------- --------------------- Buys 164 AOH8 March 1998 $ 7,541,442 $ 427,668 3 IBEX March 1998 174,334 15,258 68 Hang Seng March 1998 5,072,005 391,064 116 MIB 30 March 1998 18,828,892 3,096,185 6 OMX INDEX March 1998 205,935 5,336 1 TSE 35 March 1998 134,526 8,461 -------------------- $ 3,943,972 ==================== Sells 1 CAC - 40 March 1998 $ 112,723 $ (12,851) 92 FTSE 100 March 1998 21,892,391 (2,011,366) 1 GXZ7 March 1998 259,347 18,241 103 TOPIX March 1998 10,403,546 374,829 -------------------- $ 2,417,287 ==================== 28
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GMO International Smalll Companies Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreement [Enlarge/Download Table] Notional Expiration Unrealized Amount Date Description Appreciation ------------------------ --------------- ------------------------------------------------ -------------------- CHF 8,700,000 10/9/98 Agreement with Swiss Bank Corporation dated 10/10/97 to receive (pay) the notional amount multiplied by the return on the Swiss Market Index (including dividends) and to pay the notional amount multiplied by 6 month CHF LIBOR adjusted by a specified spread. $ 1,437,500 ==================== 29
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GMO International Small Companies Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 83.64% of distributions as net capital gain dividends. The Fund has also elected to defer to March 1, 1998 post-October losses of $744,063. 30
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GMO International Small Companies Fund (A Series of GMO Trust) Portfolio Managers ------------------ Mr. R. Jeremy Grantham and Mr. Christopher Darnell are primarily responsible for the day-to-day management of the Fund's portfolio. Each of these individuals has been a portfolio manager at Grantham, Mayo, Van Otterloo & Co. LLC for more than fifteen years. Management Discussion and Analysis of Fund Performance ------------------------------------------------------ The Class III shares of the GMO International Small Companies Fund returned 6.9% for the fiscal year ended February 28, 1998 as compared to 15.5% for EAFE and 18.9% for the GMO EAFE-Lite Index. Consistent with the Fund's investment objective and policies, the Fund was invested substantially in common stocks that ranked within the smallest 50% by market capitalization within each country. Overseas markets were mixed during the fiscal year. Although a strong bull market prevailed in Europe, the investment climate was difficult for investors in the Far East. Poor economic conditions in Japan combined with the fallout from the Asian currency crisis caused most stock markets in the Pacific Rim to fall significantly. Hedging currency exposure back to the strong-performing U.S. dollar added to the absolute performance of the fund. Within Europe, ten of the fourteen EAFE markets returned in excess of 30% for the year, led by strong performance of the largest international blue chip companies. On the other hand, small European stocks performed poorly throughout the region. Weakness in the Pacific Rim countries offset the strong performance of the European markets. Many of the Pacific Rim countries represented in the index (Japan, Malaysia, Hong Kong and Singapore) were significantly affected by the debt crisis in the Asian markets. Weakening currencies further depressed returns for dollar-based investors. In the crisis environment pervading these markets, both large and small stocks performed poorly in absolute terms, however, smaller stocks were more drastically affected by the turn of events. Impact of country selection Country selection detracted slightly from the Fund's performance for the year, primarily in Europe where the Fund was underweight in many of the expensive strong-performing European markets, including the Netherlands, Switzerland, and the United Kingdom. The funds small (less than 2%) allocation to cash also detracted from performance given the strong markets. These decisions were partially offset by the Fund's underweighting of a number of Asian markets affected by the turmoil. The Fund also added value through overweighting of the Italian market, which was one the best performing EAFE market for the year, as well as by underweighting Japan. Relative to EAFE, country selection added value, primarily due to the Fund's underweight in Japan. Impact of currency selection The Fund's currency weights detracted from performance, primarily from overweighting the Norwegian krone and underweighting the strong performing pound sterling and the Swiss franc, the only two currencies to outperform the U.S. dollar. The underperformance was partially offset
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through the underweighting the Malaysian ringgit, Australian dollar and Dutch guilder. The Fund was modestly hedged back to the U.S. dollar during the year, which added value as well. Impact of stock selection Stock selection negatively impacted the Fund's performance for the year. Small European stocks performed poorly throughout the region, as a few, very large stocks were responsible for the strong performance of the overall market in a number of countries, including the United Kingdom. In EAFE, the smallest 20% of stocks as measured by market capitalization underperformed the index by over 13%. Current portfolio structure and outlook Country selection. The International Small Companies Fund remains underweight in some of the expensive European countries, in particular the Netherlands and Switzerland. The Fund remains slightly underweight in the Asia/Pacific Rim countries. The Fund's largest overweight positions are in Italy and Canada. Currency Selection. Among currencies, the Fund is slightly underweight in the European currencies and holds a larger underweight in the Asian/Pacific Rim currencies. The Fund's largest underweights are the Dutch guilder, Swiss Franc and pound sterling. The Fund continues to emphasize the Canadian dollar, Norwegian krone, Swedish krona and French franc. Stock Selection. Small stocks in EAFE are now cheaper than they have been in more than twenty years. Value stocks are also very attractive in many European markets, following the strong run over the last several years in multinational companies. While small stocks also appear attractive in a number of the Pacific Rim countries, we are somewhat more cautious about their outlook given their higher risk of bankruptcy in what will likely be a difficult economic environment. The Fund is very well positioned to outperform the benchmark over the next three years. Although the restructuring craze in Europe may well provide support for large companies in the short term, we believe large cap companies (whose valuations are historically high) are susceptible to earnings disappointments, and eventually, shrinking profit margins. We expect value and small stocks to do well in many countries over the next several years. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co LLC Management. They are not meant as investment advice.
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International Small Companies Fund Comparison of Change in Value of a $10,000 Investment in GMO International Small Companies Fund Class III Shares and the MSCI EAFE Index As of February 28, 1998 -------------------------------------- Average Annual Total Return -------------------------------------- Since Inception 1 Year 5 Year 10/14/91 -------------------------------------- Class III 5.2% 13.1% 8.9% -------------------------------------- [LINE GRAPH APPEARS HERE] GMO International Small Companies MSCI EAFE Date Fund Class III Shares Index ----------- --------------------- --------- 10/14/91 $9,900 $10,000 2/29/92 $9,541 $9,591 2/28/93 $9,205 $9,195 2/28/94 $15,175 $12,798 2/28/95 $13,711 $12,230 2/29/96 $15,278 $14,291 2/28/97 $16,193 $14,754 2/28/98 $17,210 $17,036 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 100 bp on the purchase and 60 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Past performance is not indicative of future performance. Information is unaudited.
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GMO Emerging Markets Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Emerging Markets Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Markets Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 20, 1998
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 85.7% Argentina - 2.4% 749,616 Atanor SA D Shares 809,990 485,440 Capex SA Class A (Voting) 2,816,960 2,082,454 Central Costanera Class B (Voting) 6,500,507 1,646,584 Central Puerto B Shares 4,942,223 2,819,415 Ciadea SA (Bearer) 4,597,945 1,559,939 Garovaglio Y Zorraquin 3,979,834 563,998 Nobelza Piccardo 2,539,261 45,970 Quimica Estrella Preferred 10% 45,993 1,069,000 Sociedad Comercial del Plata SA 1,550,825 3,543,000 Transportadora De Gas Del Sur Class B 8,383,387 53,653 YPF SA ADR 1,696,776 ------------------ 37,863,701 ------------------ Brazil - 10.7% 6,531,000 Acos Villares SA Preferred 577,310 2,300,000 Alpargatas de Sao Paolo 109,897 35,870,000 Alpargatas de Sao Paolo Preferred 1,364,783 148,940,000 Banco Nacional Preferred (b) 1,318 25,040,000 Belgo Mineira Preferred (Registered) 1,154,346 4,400,000 Belgo Mineira (Registered) 221,917 20,525,003 Bombril SA Preferred 89,717 6,800,000 Brasmotor Preferred (Registered) 716,011 21,500,000 Caemi Mineracao e Metalurgica SA Preferred 932,177 385,100,000 Cemig Preferred 16,526,435 246,500,000 Ceval Participacoes * 1,505,632 34,000,000 Cia Energetica Perna Class A Preferred 231,651 162,100,000 Cia Energetica de Sao Paolo SA Preferred (Registered) 7,888,776 246,500,000 Cia Hering Preferred (Registered) 119,962 12,689,000 Copene-Petroquimica do Nordeste SA Class A Preferred 3,441,294 1,637,000 Cosipa PN Class B * 420,059 179,000,000 Electrobras 8,046,012 855,067,710 Electrobras Class B Preferred (Registered) 40,099,623 2,000,000 Ericsson Telecom 41,605 43,950,000 Ericsson Telecom Preferred 1,481,657 660,000,000 Fertilizantes Fosfatados Preferred 2,423,572 126,196,118 Gerdau SA Preferred 2,009,937 1,050,000 Industrias Klabin de Papel e Celulose SA Preferred 445,959 1,336,261 Iochpe Maxion Preferred 68,578 262,400,000 Iparanga Brasil De Petroleo Preferred 3,436,287 42,420,000 Mesbla Preferred (Registered) * 375 12,598,589 Metalurgica Gerdau SA 300,988 52,947,674 Metalurgica Gerdau SA Preferred 1,641,160 335,746,000 Olvebra Preferred * 23,766 134,600,000 Petrobras Distrib Preferred 2,358,165 85,880,000 Petroleo Brasileiro SA (Petrobras) Preferred 19,453,418 583,800,000 Siderurgica de Tubarao Preferred * 7,593,558 60,000 Telebras ADR 7,346,250 283,810,000 Telebras SA 28,123,596 See accompanying notes to the financial statements. 1
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Brazil - continued 17,522,000 Telebras SA Preferred (Registered) 2,139,571 5,830,152 Unipar Preferred 1,341,273 600,740 Usiminas Preferred 4,066,417 673,000 Varig Preferred (Registered) * 1,625,705 ------------------ 169,368,757 ------------------ Chile - 3.3% 1,000 Administradora de Fondos de Pensiones Provida ADR 16,500 173,600 Banco Santiago Sponsored ADR 3,613,050 112,600 Chilectra SA ADR 2,773,338 661,763 Chilgener ADR 15,882,312 46,500 Chilquinta Sponsored ADR 441,750 200 Chilquinta Sponsored ADR 144A 1,900 191,800 Compania de Telefonos de Chile ADR 5,250,525 23,700 Cristalerias de Chile SA ADR 355,500 11,900 Embotelladora Andina ADR Class A 249,900 566,200 Empresa Natl de Electricidad ADR 10,439,313 211,000 Enersis SA ADR 6,145,375 1,330,000 Five Arrows Chile Investment Trust Ltd 3,059,000 165,100 Maderas Y Sinteticos Soc ADR 1,423,988 101,390 Quimenco SA ADR * 1,089,943 33,500 Soc Quimica Y Minera de Chile Sponsored ADR 1,440,500 50,500 Telex Chile Sponsored ADR 119,938 6,800 Vina Concha Y Toro SA Sponsored ADR 197,200 ------------------ 52,500,032 ------------------ Colombia - 0.1% 26,200 Banco Ganadero SA ADR 917,000 ------------------ Czech Republic - 0.4% 21,000 Alpha Effect 497,867 34,360 Cez Z 781,254 21,397 IF Zivnobanka 247,346 84,249 IPS Praha 449,781 1,670 Leciva AS * 112,981 46,000 PF IKS KB Plus 257,731 31,300 Restitucni IF 820,317 32,362 Skoda Koncern Plzen * 467,387 367,188 SP Vseobecny * 704,307 27,366 Spif Cesky 285,758 212,476 Spif Vynosovy 1,237,469 8,470 SPT Telecom AS * 1,001,790 ------------------ 6,863,988 ------------------ Egypt - 1.4% 67,000 Al Ahram Beverages Co GDR 2,167,450 23,000 Alexandria Cement 391,921 98,000 Ameriyah Cement Co 2,041,337 131,000 Commercial International Bank GDR 2,168,050 121,291 Eastern Tobacco Co 2,743,858 See accompanying notes to the financial statements. 2
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Egypt - continued 14,800 Egyptian International Pharm Investment 1,034,859 117,800 Helwan Portland Cement Co 2,290,416 41,750 Middle Egypt Flour Mills 269,972 350 Miraco /Misr Aircond/ * 257,891 145,500 Misr International Bank Sae GDR * 1,800,563 200,000 Paints & Chemical Industries Co GDR 2,250,000 18,000 Suez Cement Co 362,512 65,000 Suez Cement Co GDR 1,280,500 37,881 Suez Cement Co GDR 144A 746,256 60,250 Torrah Portland Cement 1,168,093 65,935 Upper Egypt Flour Mills 1,152,591 ------------------ 22,126,269 ------------------ Greece - 0.1% 47,000 Alpha Leasing (Registered) 800,542 13,900 Aluminum of Greece Preferred 10.41% 603,728 30 Aluminum of Greece (Registered) 1,314 8,940 Econ Viomihanies * 7,085 1,409 National Mortgage Bank of Greece 63,427 ------------------ 1,476,096 ------------------ Hungary - 0.0% 28,151 Fotex (Registered) * 28,327 ------------------ India - 7.7% 101,200 Aptech Ltd * 1,458,849 434 Arvind Mills Ltd 614 394,600 Ashok Leyland Ltd GDR 887,850 25,000 Ashok Leyland Ltd GDR 144A 56,250 35,000 Bajaj Auto 504,543 75,000 Bajaj Auto GDR 144A 1,443,750 544,800 Bank of India * 535,109 200 Bank of India * 198 183,900 Bharat Heavy Electricals Ltd 1,495,502 125,500 Bharat Petrol Corp 1,211,147 460,300 Bombay Dyeing & Manufacturing Co Ltd GDR 1,104,720 903,760 BSES Ltd 4,610,669 22,400 Ciba Speciality Chemicals 44,088 591,804 Core Healthcare Ltd GDR 59,180 1,002,000 Escorts 1,869,042 255,520 Garden Silk Mills Ltd GDR 191,640 572,814 Glaxo India Ltd 5,239,756 76,500 Grasim Industries 555,524 3,227,678 Great Eastern Shipping Co 3,412,234 56,000 Great Eastern Shipping Co GDR 376,600 45,000 Great Eastern Shipping Co GDR 302,625 114,300 Hindalco Industry GDR 2,257,425 494,000 Hindustan Development Corp GDR 144A 4,940 See accompanying notes to the financial statements. 3
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- India - continued 721,500 Hindustan Petroleum 8,452,643 6,000 Housing Development Finance 460,521 469,770 India Cements GDR 563,724 17,900 Indian Hotels 254,740 270,100 Indian Petrochemical Co Ltd GDR 1,181,688 102,500 Indian Rayon & Industries GDR 376,688 250,000 Indo Gulf Fertilizers 214,422 1,265,000 Indo Gulf Fertilizers GDR 1,265,000 90,000 Indo Gulf Fertilizers GDR 144A 90,000 1,976,505 Industrial Credit & Investment Corp of India Ltd 4,470,367 95 Industrial Credit & Investment Corp of India Ltd 217 1,130 Industrial Credit & Investment GDR 144A 17,798 600 Industrial Development Bank of India 1,290 803,000 Industrial Development Bank of India * 1,726,399 593,000 Industrial Finance Corp of India 506,348 439,099 ITC Ltd 7,407,215 909 Jaiprakash Industries Ltd 231 350,000 Kirloskar Cummins Ltd 3,482,656 75,867 Larsen & Toubro 426,089 120 Larsen & Toubro 695 678,200 Larsen & Toubro GDR 8,901,375 1,870 Madras Cement Ltd 184,149 1,094,500 Mahanagar Telephone 7,259,581 95,000 Mahanagar Telephone GDR 144A * 1,615,000 226,993 Mahindra & Mahindra 1,424,835 2,162,000 National Aluminum 1,546,640 287,500 NIIT 5,443,504 44,800 Novartis India 378,551 117,600 Oil & Natural Gas Commission Ltd 800,935 1,634,000 Oriental Bank of Commerce 2,688,729 14,000 Parke Davis & Co Ltd 88,216 121,900 Pentafour Software 823,716 620,227 Reliance Industries 2,507,703 1,769,171 Reliance Industries 7,207,068 547,800 Reliance Industries GDR (Registered) 4,738,470 83,000 Sanghi Polyesters GDR (Registered) * 4,150 589,000 Satyam Computer Service 3,068,488 119,973 Siemens India 551,540 88,000 Smithkline Beecham Plc 892,300 225,000 Southern Petrochem GDR 866,250 346,000 Southern Petrochem Industry Corp 230,813 100 State Bank of India 651 762,350 State Bank of India 4,940,260 75,000 Steel Authority of India GDR 189,375 54,000 Steel Authority of India GDR 144A 136,350 312,828 Sterlite Industries Ltd 1,566,922 4 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- India - continued 46,000 Sterlite Industries Ltd GDR 115,000 894,586 Tata Iron & Steel 2,944,063 4,281 Tata Iron & Steel 14,426 5,115,000 Uti Masterplus 1991 Unit * 2,255,280 3,600 Videocon International 2,653 95,150 Zuari Argochemicals Ltd 240,595 ------------------ 122,148,574 ------------------ Indonesia - 1.5% 7,635,000 Aneka Tambang * 1,358,771 851,000 Astra Agro Lestari * 331,746 4,080,500 Astra International 772,298 5,286,500 Barito Pacific Timber 1,194,689 171,000 Ciputra Development 6,280 18,766,500 Citra Marga Nusaphale Persada 1,219,292 1,875,000 Dynaplast 121,822 1,663,000 Gudang Garam 2,076,401 5,000 Gulf Resources Ltd ADR * 93,750 2,116,500 HM Sampoerna 1,219,678 226,076 Indah Kiat Pulp & Paper Warrants 4/13/01 * 25,545 140,000 Indosat ADR 2,100,000 3,072,000 International Nickel 3,471,186 3,097,500 Kalbe Farma 367,500 1,834,000 Pakuwon Jati 108,797 4,134,500 Semen Gresik 2,557,784 5,692,000 Tambang Timah Persero (Foreign Registered) 4,855,887 128,000 Telekomunikasi Indonesia ADR 1,088,000 810,000 Telekomunikasi Indonesia 320,339 100 Unggul Indah Corp 19 2,478,500 United Tractors 406,082 ------------------ 23,695,866 ------------------ Israel - 2.8% 1,683,161 Bank Hapoalim 3,940,597 6,105,650 Bank Leumi Le Israel 10,358,811 86,500 Blue Square Chain Stores * 823,085 41,700 Blue Square Sponsored ADR 583,800 61,500 ECI Telecommunications Ltd 1,787,344 70,932 Elbit Medical Imaging Ltd 508,686 33,200 Elbit Medical Imaging Ltd * 240,700 137,101 Formula Systems Ltd * 4,173,878 1,780,000 Israel Chemical Ltd 2,284,821 27,610 Koor Industries 2,873,754 11,300 Koor Industries ADR 240,125 131,100 Makhteshim Chemicals Works Ltd * 1,009,686 317,739 Supersol Ltd 1,024,950 130,460 Supersol Ltd ADR 2,054,745 16,134 Tadiran Ltd 638,850 64,800 Tadiran Ltd ADR 2,592,000 28,260 Teva Pharmaceutical Industries Ltd 1,169,466 191,500 Teva Pharmaceutical Industries Ltd ADR 8,043,000 ------------------ 44,348,298 ------------------ See accompanying notes to the financial statements. 5
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Korea - 6.9% 286,730 Cheil Industries 890,215 47,431 Cheil Jedang Corp 882,978 84,300 Choongnam Spinning 142,479 70,280 Chosun Brewery Co Ltd 568,093 971,170 Daewoo Corp 3,734,812 55,900 Dongbu Construction Co Preferred 32,520 20,700 Dongbu Steel Co 82,268 102,340 Dongbu Steel Co Preferred 112,806 1,709 Hana Bank 9,733 840 Hanwha Chemical Corp * 2,227 174,406 Hanwha Corp 372,735 10,080 Hanwha Corp Preferred 8,642 226,113 Housing & Commercial Bank Korea 1,536,959 251,017 Housing & Commercial Bank Korea GDR 1,882,628 328,745 Hyundai Engineering & Construction GDR 144A 295,871 53,123 Hyundai Motor Service Co 289,525 63,700 Hyundai Motor Service Co Preferred 103,371 50 Jinro Ltd Preferred 27 19,000 Kang Won Industrial 38,977 71,930 Kang Won Industrial Preferred (Non Voting) 40,964 12,080 Kookmin Bank 76,933 188,280 Kookmin Bank GDR 1,204,992 9,670 Korea Container Terminal 197,190 213,840 Korean Air Lines * 1,220,446 177,500 Kumho Petrochemical Preferred 106,522 225,420 LG Electronics Co 3,395,794 63,150 LG Information & Communication 2,057,306 12,130 Lotte Chilsung Beverage 563,789 28,611 Oriental Brewing Co Ltd 387,203 37,400 Oriental Brewing Co Ltd Preferred 71,227 67,728 Oriental Chemical Preferred 141,014 26,840 Pang Rim Spinning 414,187 729,784 Pohang Iron & Steel 43,759,214 3,850 Pohang Iron & Steel ADR 89,031 573 Sam Yang 3,039 194,100 Samho International * 92,712 72,060 Samsung Display Devices 4,192,100 49,310 Samsung Display Devices Preferred 803,212 157,364 Samsung Electronics 9,106,490 184,544 Samsung Electronics GDS 144A (Non Voting) 2,560,548 534,763 Samsung Electronics Preferred (Non Voting) 9,180,699 41,922 Shin Sung Corp 34,914 5,212 Shinsegae Department Store 76,600 42,414 SK Telecom 19,272,007 11,944 SK Telecom ADR 103,017 1,170 Sunkyong Industries 6,018 ------------------ 110,144,034 ------------------ 6 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Lebanon - 0.5% 121,508 Banque Libanaise GDR Class B * 2,266,124 217,164 Banque Libanaise * 4,397,571 139,000 Solidere GDR (Registered) 1,740,975 ------------------ 8,404,670 ------------------ Malaysia - 0.2% 243,666 Amsteel Corp Warrants 5/19/00 * 33,815 376,000 Esso Berhad 456,316 3,801,000 IGB Corp Berhad 1,623,829 727,000 Malaysian Tobacco Co Berhad 443,124 109,620 Silverstone * 29,829 375,000 Tractors Holdings Berhad 188,776 133,600 UMW Holding Berhad Warrants 1/26/00 * 38,171 4,009,000 Westmont Industries Berhad 970,887 ------------------ 3,784,747 ------------------ Mexico - 12.7% 5,997,015 Altos Hornos De Mexico * 9,793,917 783,000 Cemex SA Class B 3,748,038 3,642,000 Cemex SA CPO 14,335,555 430,273 Cintra SA CPO Class A (Registered) * 412,933 2,137,915 Controladora Coml Mexicana Class B 2,458,094 4,191,480 Cydsa SA Class A 8,940,119 302,000 Dina (Consorcio Grupo Dina) 389,746 396,000 Empresas ICA Sociedad Controladora 787,958 324,100 Empresas ICA Sociedad Controladora ADR 3,868,944 75,000 Grupo Celanese Mexicana Class B 167,185 4,647,005 Grupo Financiero Banamex Class B 11,694,522 103,529 Grupo Financiero Banamex Class L 230,780 68,713,595 Grupo Financiero Bancomer SA Class B 39,824,621 328,963 Grupo Financiero Bancomer SA Class L 114,241 1,541,640 Grupo Financiero Probursa SA de CV * 343,652 95,181 Grupo Financiero Santander Class B * 87,995 225,755 Grupo Financiero Serfin SA de CV Class B * 35,756 31,106,320 Grupo Gigante SA Class B * 12,882,655 600 Grupo Iusacell Sponsored ADR * 11,550 4,503,818 Grupo Mexico Class B 15,534,962 38,886 Grupo Mexico Class B Warrants 8/9/01 * 123,180 80,200 Grupo Mexico Desarollo Class B ADR * 17,544 780,000 Grupo Mexico SA Class L 2,242,037 117,000 Grupo Posadas SA Class L * 79,615 9,500 Grupo Posadas SA GDR 144A * 127,506 660,000 Grupo Simec SA Class B * 99,889 6,310,000 Grupo Situr SA de CV Class B 74,031 32,000 Grupo Televisa SA PTG Certs (1A,L & D) 561,272 3,205,200 Grupo Tribasa SA ADR * 16,626,975 See accompanying notes to the financial statements. 7
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Mexico - continued 506,000 Grupo Tribasa SA * 1,329,782 4,814,000 Herdez Class B 3,490,411 53,000 Hylsamex SA 253,699 973,340 International de Ceramic * 1,144,233 10,000 Ispat International NV Class A (Registered) * 246,250 353,000 Telefonos de Mexico ADR Class L 17,892,688 39,000 Tolmex SA Class B 150,994 448,000 Transportation Maritima Mexicana SA Class A 2,628,028 25,000 Transportation Maritima Mexicana SA Class L 168,651 94,100 Tubos de Acero de Mexico SA * 1,640,554 8,000 TV Azteca SA ADR * 164,500 2,637,370 Vitro SA 9,963,432 1,512,400 Vitro SA ADR 17,109,025 ------------------ 201,797,519 ------------------ Pakistan - 3.2% 1,002,000 Fauji Fertilizer 1,865,971 804,710 Hub Power Co Ltd GDR 24,342,478 8,877,000 Hub Power Co Ltd * 11,104,823 910,000 Japan Power Generation Ltd * 159,228 961,000 Karachi Electric Supply * 540,489 864,000 Pakistan State Oil 5,791,937 2,314,000 Pakistan Telecom Corp Ltd Class A 1,722,117 6,600 Pakistan Telecom Corp Ltd GDR 481,800 1,395,000 Southern Electric Power Co * 496,108 5,910,425 Sui Northern Gas Pipelines * 3,095,835 2,619,010 Sui Southern Gas Pipelines Ltd * 1,172,442 ------------------ 50,773,228 ------------------ Peru - 0.0% 100,218 Cervecerias 70,516 58 Milpo Minera T Shares 253 ------------------ 70,769 ------------------ Phillippines - 0.1% 3,438,270 Metro Pacific Corp 143,046 5,170,000 Petron Corp 764,486 ------------------ 907,532 ------------------ Poland - 0.0% 460,418 International UNP Holdings * 48,528 49,695 Polifarb Cieszyn SA Class D (Bearer) * 252,941 2,952 Polifarb Cieszyn SA (Bearer) 15,365 ------------------ 316,834 ------------------ Portugal - 1.7% 18,999 Allantis Cristais de Alcobaca 427,415 12,853 Banco Commercial Portugues (Registered) 426,254 101,540 Banco Espirito Santo e Commercial de Lisboa (Registered) 4,125,430 214,800 Banco Totta & Acores (Registered) 5,959,441 128,400 BPI-SGPS SA (Registered) 4,609,284 8 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Portugal - continued 15,400 Cabos de Energia e Telecomunicacoes SA Rights 3/12/98 * 67,964 15,400 Cel-Cat Fabrica Nacional de Condutores Electricos SA 144,299 285,000 Empresa Fabril de Maquinas Electricas 2,510,939 44,500 Fisipe Fibra Sint 275,423 116,250 Inparsa Industrias Participacoes * 2,857,996 17,700 Lisnave Navais De Lisboa * 176,233 4,500 Portugal Telecom Sponsored ADR 236,813 124,000 Semapa Society Investment 3,270,095 148,750 Soares Da Costa 1,102,386 7,500 Telecel-Comunicacaoes Pessoais SA * 999,031 3,000 Unicer Uniao Cervjeira SA (Registered) 49,487 ------------------ 27,238,490 ------------------ Russia - 5.9% 2,649,789 Chelabinsky Tube Work * 476,962 17,100 Dalmoreproduct * 51,300 88,800 Electrocila * 466,200 29,221 Elisb * 175,326 672,700 Irkutskelectrosviaz * 437,255 797,100 Irkutskenergo ADR 5,579,700 566 Irkutskenergo RDC * 17,319,600 4,931,400 Irkutskenergo (Registered) 754,504 2,000 Izhorskie Zavody Preferred * 24,000 53,506 Izhorskie Zavody * 2,728,806 89,030 Kirovsky Plant * 409,538 646,500 Komineft * 1,551,600 100,800 Krasny Red October Preferred 144A * 705,600 57,525 Lukoil Holding ADR 4,033,941 430,800 Lukoil Holding Preferred 4,824,960 144,500 Lukoil Holding Sponsored ADR Preferred (Foreign Registered) 3,106,750 600 Moscow City Telephone Network 480,000 2,339 Moscow City Telephone Network Preferred 893,498 2,710,587 Norilsk Nickel (Registered) * 14,366,111 220,000 Norlisk Nickel Preferred 974,600 25,000 Rostelecom ADR * 526,563 30 Rostelecom Preferred 60 135,000 Russia Petroleum * 1,080,000 19,700 Seversky Tube Works ADR * 542,774 3,411,000 St Petersburg Telephone 3,581,550 1,834,100 St Petersburg Telephone Preferred 1,008,755 67,000 Trade House Gum Sp ADR 301,500 98,500 Unified Energy Systems GDR * 2,696,438 17,200,000 Unified Energy Systems Preferred 2,958,400 35,394,250 Unified Energy Systems * 9,786,510 1,519,500 Uralmash Zavody * 11,396,250 6,000 Uralmash Zavody Preferred* 59,310 ------------------ 93,298,361 ------------------ See accompanying notes to the financial statements. 9
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- South Africa - 14.3% 2,386,581 AECI Ltd 7,968,954 106,383 Alpha Ltd 1,054,896 1,358,637 Amalgamated Bank of South Africa 10,447,881 96,890 Anglo American Coal Corp 4,352,844 631,080 Anglo American Corp of South Africa 26,436,013 357,417 Anglo American Industrial Ltd 8,404,706 430,100 Anglo American Platinum Corp 6,127,500 7,563,314 Consolidated African Mines * 2,081,576 1,891,800 De Beers Centenary Link Units 37,518,243 413,400 De Beers Consolidated Mines Ltd ADR 8,242,163 35,000 Driefontein Ltd Sponsored ADR 231,875 2,501,192 Engen Ltd 8,908,424 727,300 First National Bank Holdings 8,242,194 605,800 Free State Cons Gold Mines 2,880,967 177,218 Goldfields Ltd * 896,580 13,789,165 ISCOR 4,604,295 1,973,100 Joel (HJ) Mining Co Ltd 978,265 683,900 Liberty Life Association of Africa Ltd 20,759,891 3,314,800 Malbak Ltd 2,783,855 495,840 Murray & Roberts Holdings Ltd 767,616 328,100 Nedcor Ltd 9,561,145 78,637 Polifin Ltd 132,083 2,461 Randfontein Estates Warrants 7/01/02 * 946 600,500 Randfontein Estates * 1,142,305 164,000 Randgold Resources Ltd GDR 144A * 984,000 309,500 Randgold & Exploration Co * 375,797 650,600 Rembrandt Group Ltd 4,450,122 2,362,028 Sappi Ltd 10,492,060 2,245,000 Sasol Ltd 19,172,114 93,800 Standard Bank Investment Corp 5,201,093 10,908,400 Sun International Ltd 7,505,527 18,935 Western Areas Gold Mining Co Ltd 107,291 121,500 Western Deep Levels 2,360,417 ------------------ 225,173,638 ------------------ Sri Lanka - 0.2% 131,500 Aitken Spence & Co 345,941 4,590,170 Blue Diamonds Jewelry Ltd 278,665 46,500 Development Finance Corp 159,592 115,599 Hayleys Ltd 411,717 285,305 John Keells Holdings Ltd 1,288,653 333,600 Lanka Walltile Ltd 83,711 404,200 Lion Brewery Ceylon Ltd * 327,181 304,000 National Development Bank 1,058,119 ------------------ 3,953,579 ------------------ Thailand - 8.1% 2,703,900 Advanced Info Service Public Co Ltd (Foreign Registered) 20,577,244 315,000 Ban Pu Coal Public Co Ltd (Foreign Registered) 2,558,005 10 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Thailand - continued 2,851,500 Bangchak Petro (Foreign Registered) 678,141 8,899,200 Bangkok Expressway Plc (Foreign Registered) * 8,672,074 74,800 Bangkok Insurance (Foreign Registered) 610,896 5,633,400 Bangkok Rubber Public Co Ltd (Foreign Registered) * 1,176,348 77,000 BEC World Public Co Ltd (Foreign Registered) 450,209 11,918,500 Cogeneration Public Co (Foreign Registered) 12,443,910 393,700 CP Feedmill Public Co Ltd (Foreign Registered) 648,555 101,400 Delta Electronics Public Co Ltd (Foreign Registered) 1,675,100 4,150,760 Electricity Generating Public Co Ltd (Foreign Registered) 10,882,503 227,600 GFPT Public Co Ltd (Foreign Registered) 54,128 122,200 Grammy Entertainment Plc (Foreign Registered) 737,169 745,000 Hana Microelectronic Plc (Foreign Registered) 2,938,515 1,909,000 Industrial Finance (Foreign Registered) 1,284,478 1,324,850 International Broadcasting Plc (Foreign Registered) * 1,105,681 1,852,700 International Broadcasting Plc * 1,546,209 23,000 International Cosmetics Public Co Ltd (Foreign Registered) 31,218 1,100 Karat Sanitaryware Plc (Foreign Registered) * 281 129,700 KCE Electronics Plc (Foreign Registered) 962,970 573,000 KR Precision Plc (Foreign Registered) 1,994,200 1,559,100 Krisda Mahanakorn Public Co Ltd (Foreign Registered) * 94,052 5,548,236 Land & House Public Co Ltd (Foreign Registered) 3,443,511 203,000 Lanna Lignite Plc Ltd (Foreign Registered) 998,515 4,010,600 National Petrochemical (Foreign Registered) 3,582,555 512,700 NTS Steel Group Plc (Foreign Registered) * 35,687 5,985,750 Padaeng Industry Plc (Foreign Registered) * 1,249,925 1,111,000 Phatra Thanakit (Foreign Registered) * 1,417,749 75,000 Pranda Jewelry (Foreign Registered) * 25,232 87,200 Prasit Development Public Co Ltd (Foreign Registered) 12,827 1,752,600 Regional Container Lines Plc (Foreign Registered) 2,439,814 1,859,000 Ruang Khao Fund (Foreign Registered) * 301,926 32,400 Saha Pathana International Holdings Plc (Foreign Registered) 23,304 70,000 Saha Pathanapibul (Foreign Registered) 94,200 2,511,300 Saha Union Public Co Ltd (Foreign Registered) 2,214,139 1,292,596 Shinawatra Computer Public Co Ltd (Foreign Registered) 8,337,394 532,000 Siam City Cement (Foreign Registered) 1,542,923 513,000 Siam Pulp & Paper (Foreign Registered) 357,077 201,512 Singer Plc (Foreign Registered) 168,316 3,108,050 Star Block Co Ltd (Foreign Registered) * 36,056 24,000 Swedish Motor (Foreign Registered) 3,230 3,117,500 Thai Airways International (Foreign Registered) 3,833,585 6,143,100 Thai Farmers Bank Plc (Foreign Registered) 18,386,541 1,581,150 Thai German Ceramics Industry (Foreign Registered) * 359,519 10,757,880 Thai Petrochemical (Foreign Registered) 2,870,432 352,300 Thai Plastic & Chemical (Foreign Registered) 940,012 378,600 Thai Telephone & Telecommunications (Foreign Registered) * 109,803 70 Thailand International (Foreign Registered) 717,500 1,028,100 Tipco Asphalt Public Co (Foreign Registered) 2,230,333 1,343,000 Total Access Communication 1,947,350 ------------------ 128,801,341 ------------------ See accompanying notes to the financial statements. 11
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------------- Turkey - 0.1% 870 Mardin Cimento 24 75,300 Sabanci Holding GDR (Registered) * 1,016,550 ---------------- 1,016,574 ---------------- Venezuela - 1.4% 2,534,473 Banco Provincial 4,421,847 218,606 Ceramica Carabobo Class B ADR 1,230,752 162,800 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 5,769,225 6,654,350 Electricidad De Caracas 6,100,893 778 International Briquettes Holdings * 7,391 35,181 Mantex SA Class A Sponsored ADR 765,187 832,000 Siderurgica Venezolana (Sivensa) ADR 1,980,160 349,950 Siderurgica Venezolana (Sivensa) Class A 94,459 3,182 Siderurgica Venezolana (Sivensa) Registered ADR Class B 144A 7,160 689,454 Venepal SA Class A GDR 144A 620,509 75,490 Venezolana de Cementes 103,087 489,122 Venezolana de Cementes Tipo II 671,762 ---------------- 21,772,432 ---------------- TOTAL STOCK AND EQUIVALENTS (Cost $0) 1,358,790,656 ---------------- Par Value/ CONVERTIBLE SECURITIES - 2.0% Shares India - 0.3% $ 800,000 Mahindra & Mahindra CV, 5.00% due 7/9/01 736,000 $ 2,292,000 Mahindra & Mahindra CV, 5.00% due 7/9/01 144A 2,108,640 $ 1,500,000 Reliance Industries Convertible, 3.50% due 11/03/99 1,672,500 ---------------- 4,517,140 ---------------- Indonesia - 0.4% $ 28,000,000 APP Finance (VI) Convertible, 0.00% due 11/18/12 6,160,000 $ 2,470,000 Astra International Convertible, 6.75% due 5/30/2006 938,600 ---------------- 7,098,600 ---------------- Korea - 0.1% $ 2,000,000 Daewoo Corp Convertible, Zero Coupon, due 12/31/07 1,773,333 $ 108,350 Hanbo Steel & General Construction Convertible, 3.375% due 01/31/99 51,753 ---------------- 1,825,086 ---------------- Portugal - 0.1% 20,100 Banco Commercial Portugues Preferred Class A 2,211,000 ---------------- Russia - 0.8% $ 7,050,000 Lukinter Fin Convertible, 3.50% due 5/6/02 144A 8,883,000 $ 2,000,000 Lukinter Fin Convertible, 3.50% due 5/6/02 2,520,000 ---------------- 11,403,000 ---------------- South Africa - 0.0% $ 1,100,000 Randgold Finance Convertible, 7.00% due 10/03/01 144A 517,000 ---------------- Thailand - 0.2% $ 5,730,000 Bangkok Bank Public Co Convertible, 3.25% due 3/3/04 2,578,500 $ 358,000 Bangkok Land Ltd Convertible, 4.50% due 10/13/03 17,900 $ 1,814,000 MDX Public Co Ltd Convertible, 4.75% due 9/17/03 181,400 12 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares/ Par Value Description Value ($) ------------------------------------------------------------------------------------------------------------- Thailand - continued CHF 2,800,000 NTS Steel Group Convertible, 1.00% due 12/17/03 228,945 $ 534,000 NTS Steel Group Convertible, 4.00% due 12/16/08 48,060 $ 2,724,000 Sahaviriya Steel Convertible, 3.50% due 7/26/05 272,400 $ 630,000 Somprasong Land Co Convertible, 3.88% due 1/21/04 31,500 ---------------- 3,358,705 ---------------- Venezuela - 0.1% $ 1,460,000 Global Investment Financial Corp, 11.00% due 3/19/01 1,460,000 ---------------- TOTAL CONVERTIBLE SECURITIES (Cost $0) 32,390,531 ---------------- EQUITY LINKED SECURITIES - 1.6% Chile - 1.2% $ 2,630,074 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/15/98 (d) (f) 2,227,936 $ 2,168,200 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/16/98 (d) (f) 1,764,915 $ 4,043,627 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/17/98 (d) (f) 3,137,451 $ 1,158,098 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 4/17/98 (d) (f) 918,256 $ 5,000,000 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 5/8/98 (d) (f) 3,985,500 $ 10,000,000 Citibank-Nassau Chilean Equity Time Deposit, 4.00% due 6/19/98 (d) (f) 7,235,000 ---------------- 19,269,058 ---------------- Russia - 0.4% 32,787 Renaissance Sberbank Note (e) * 5,725,800 ---------------- TOTAL EQUITY LINKED SECURITIES (Cost $0) 24,994,858 ---------------- INVESTMENT FUNDS - 1.8% Chile - 0.0% 22,000 Chile Fund Inc 365,750 ---------------- Czech Republic - 0.0% 10,000 Sporitelni Privatizacni * 230,314 ---------------- India - 0.0% 58,300 India Fund Inc * 426,319 ---------------- Kazakhstan - 0.2% 450,000 Kazakhstan Investment Fund (f) * 1,710,000 ---------------- Poland - 0.1% 2,060,116 Templeton Emerging European Fund L.P. (f) * 2,060,116 ---------------- Romania - 0.3% 4,500 Romanian Investment Fund (f) 3,960,000 ---------------- Russia - 1.0% 27,500 Morgan Stanley Russia & New Europe Fund 646,250 10,000,000 New Century Holdings LP (c) (f) 15,549,000 ---------------- 16,195,250 ---------------- See accompanying notes to the financial statements. 13
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares/ Par Value Description Value ($) --------------------------------------------------------------------------------------------------- Thailand - 0.0% 1,500,000 Ruam Pattana Fund (Registered) * 250,580 ----------------- Ukraine - 0.1% 25,000 Societe Generale Thalmann Ukraine Fund (f) * 2,050,000 ----------------- United States - 0.1% 71,400 Morgan Stanley Emerging Markets Fund 905,888 ----------------- TOTAL INVESTMENT FUNDS (Cost $0) 28,154,217 ----------------- SHORT-TERM INVESTMENTS - 16.0% Cash Equivalents - 10.5% $ 8,400,000 Republic Bank of New York Time Deposit, 5.63% due 3/2/98 8,400,000 82,662,900 The Boston Global Investment Trust (a) 82,662,900 $ 75,000,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 75,000,000 ----------------- 166,062,900 ----------------- U.S. Government - 5.5% $ 89,400,000 U.S. Treasury Bill, 5.35% due 7/23/98 87,567,598 ----------------- TOTAL SHORT-TERM INVESTMENTS (Cost $253,689,535) 253,630,498 ----------------- TOTAL INVESTMENTS - 107.1% (Cost $1,883,863,795) 1,697,960,760 Other Assets and Liabilities (net) - (7.1%) (112,325,136) ----------------- TOTAL NET ASSETS - 100.0% $ 1,585,635,624 ================= 14 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- Notes to the Schedule of Investments: ADR American Depositary Receipt GDR Global Depository Receipt GDS Global Depository Shares RDC Russian Depositary Certificate CHF Swiss Franc IDR Indonesian Rupiah INR Indian Rupee KRW Korean Won (a) Represents investment of security lending collateral (Note 1). (b) Bankrupt issuer. (c) Valued by management (Note 1). (d) A derivative security whose price is linked to the return on a basket of Chilean equities. (e) A derivative security whose price is linked to the return on a Russian basket of securities. (f) Security is restricted as to public resale. The aggregate market value of restricted securities is $44,598,174 or 2.81% of net assets. * Non-income producing security. A dividend has not been declared for the year ended February 28, 1998. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. See accompanying notes to the financial statements. 15
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GMO Emerging Markets Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 -------------------------------------------------------------------------------- At February 28, 1998, industry sector diversification of the Fund's equity investments was as follows: Industry Sector (Unaudited) Utilities 14.6% Banking 11.0 Metals and Mining 9.1 Telecommunications 9.0 Conglomerates 8.9 Oil and Gas 7.6 Construction 6.4 Electronic Equipment 3.8 Chemicals 2.2 Machinery 2.0 Textiles 1.8 Transportation 1.7 Consumer Goods 1.5 Financial Services 1.5 Insurance 1.4 Food and Beverage 1.4 Paper and Allied Products 1.3 Automotive 0.9 Computers 0.7 Communications 0.6 Services 0.6 Health Care 0.6 Real Estate 0.3 Retail Trade 0.2 Miscellaneous 10.9 ------------ 100.0 % ============ 16 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1998 -------------------------------------------------------------------------------- [Enlarge/Download Table] Assets: Investments, at value (cost $1,883,863,795) (Note 1) $ 1,697,960,760 Foreign currency, at value (cost $7,736,141) (Note 1) 7,657,249 Receivable for investments sold 11,839,197 Receivable for Fund shares sold 216,855 Receivable for open forward foreign currency contracts (Notes 1 and 5) 596,670 Foreign withholding taxes receivable 936,140 Dividends and interest receivable 4,229,344 Receivable for expenses waived or borne by Manager (Note 2) 323,465 ---------------- Total assets 1,723,759,680 ---------------- Liabilities: Payable for investments purchased 31,719,960 Payable for Fund shares repurchased 10,408,149 Payable for open forward foreign currency contracts (Notes 1 and 5) 6,702,848 Payable for open swap agreements (Notes 1 and 5) 3,173,148 Due to custodian 909,064 Payable upon return of securities loaned (Note 1) 82,662,900 Payable to affiliate for (Note 2): Management fee 1,179,899 Shareholder service fee 154,258 Accrued expenses 1,213,830 ---------------- Total liabilities 138,124,056 ---------------- Net assets $ 1,585,635,624 ================ Net assets consist of: Paid-in capital $ 1,844,862,815 Accumulated undistributed net investment income 22,378,753 Accumulated net realized loss (86,438,597) Net unrealized depreciation (195,167,347) ---------------- $ 1,585,635,624 ================ Net assets attributable to: Class III Shares $ 913,615,199 ================ Class IV Shares $ 672,020,425 ================ Shares outstanding: Class III 95,539,011 ================ Class IV 70,302,469 ================ Net asset value per share: Class III $ 9.56 ================ Class IV $ 9.56 ================ See accompanying notes to the financial statements. 17
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GMO Emerging Markets Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Operations - Year Ended February 28, 1998 --------------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $2,797,206) $ 34,225,753 Interest (including security lending income of $1,199,507) 9,380,304 --------------- Total income 43,606,057 --------------- Expenses: Management fee (Note 2) 17,396,168 Custodian fees 4,074,035 Stamp duties and transfer taxes 611,342 Brazil CPMF taxes (Note 1) 220,165 Legal fees 117,588 Audit fees 70,565 Transfer agent fees 53,060 Registration fee 47,657 Trustees fee (Note 2) 16,877 Miscellaneous 14,013 Fees waived or borne by Manager (Note 2) (3,619,369) --------------- 19,002,101 Shareholder service fee (Note 2) Class I 10,272 Class II 6,557 Class III 2,477,394 Class IV 85,169 --------------- Net expenses 21,581,493 --------------- Net investment income 22,024,564 --------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 61,048,120 Written options 1,461,013 Closed swap contracts (5,475,068) Foreign currency, forward contracts and foreign currency related transactions 24,368,436 --------------- Net realized gain 81,402,501 --------------- Change in net unrealized appreciation (depreciation) on: Investments (324,191,813) Open swap contracts (5,559,088) Foreign currency, forward contracts and foreign currency related transactions (11,883,130) --------------- Net unrealized loss (341,634,031) --------------- Net realized and unrealized loss (260,231,530) --------------- Net decrease in net assets resulting from operations $ (238,206,966) =============== 18 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 ------------------ ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 22,024,564 $ 17,549,883 Net realized gain 81,402,501 47,250,695 Change in net unrealized appreciation (depreciation) (341,634,031) 173,776,577 ------------------ ----------------- Net increase (decrease) in net assets resulting from operations (238,206,966) 238,577,155 ------------------ ----------------- Distributions to shareholders from: Net investment income Class I (129,011) - Class II (254,928) (178,659) Class III (35,349,550) (15,814,130) ------------------ ----------------- Total distributions from net investment income (35,733,489) (15,992,789) ------------------ ----------------- Net realized gains Class I (503,907) - Class II (1,133,793) - Class III (100,204,482) - ------------------ ----------------- Total distributions from net realized gains (101,842,182) - ------------------ ----------------- In excess of net realized gains Class I (266,871) - Class II (600,460) - Class III (53,068,677) - ------------------ ----------------- Total distributions in excess of net realized gains (53,936,008) - ------------------ ----------------- (191,511,679) (15,992,789) ------------------ ----------------- Net share transactions: (Note 4) Class I 1,328,062 1,542,386 Class II 4,693,314 (2,994,394) Class III (324,321,493) 599,087,113 Class IV 606,255,395 - ------------------ ----------------- Increase in net assets resulting from net share transactions 287,955,278 597,635,105 ------------------ ----------------- Total increase (decrease) in net assets (141,763,367) 820,219,471 Net assets: Beginning of period 1,727,398,991 907,179,520 ------------------ ----------------- End of period (including accumulated undistributed net investment income of $22,378,753 and $11,553,963, respectively.) $ 1,585,635,624 $ 1,727,398,991 ================== ================= See accompanying notes to the financial statements. 19
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GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class I share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from March 1, 1997 Period Ended to January 9, 1998 February 28, 1997 * ---------------------- ----------------------- Net asset value, beginning of period $ 12.48 $ 10.86 ---------------------- ----------------------- Income (loss) from investment operations: Net investment income 0.14+ 0.01 Net realized and unrealized gain (loss) (2.69) 1.61 ---------------------- ----------------------- Total from investment operations (2.55) 1.62 ---------------------- ----------------------- Less distributions to shareholders from: Net investment income (0.26) -- Net realized gains (0.71) -- In excess of net realized gains (0.37) -- ---------------------- ----------------------- Total distributions (1.34) -- ---------------------- ----------------------- Net asset value, end of period $ 8.59(e) $ 12.48 ====================== ======================= Total Return (a) (21.66%) 14.92% Ratios/Supplemental Data: Net assets, end of period (000's) $ -- $ 1,748 Net expenses to average daily net assets 1.41%**(c) 1.45%**(c) Net investment income to average daily net assets 1.21%** 0.77%** Portfolio turnover rate 88% 41% Average broker commission rate per equity share (d) $ 0.0017 $ 0.0004 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: $ 0.02 (b) + Computed using average shares outstanding throughout the period. * Period from January 2, 1997 (commencement of operations) to February 28, 1997. ** Annualized (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) Fees and expenses voluntarily waived or borne by the Manager were less than $0.01 per share. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .20% and .04% of average daily net assets for the periods ended February 28, 1997 and January 9, 1998, respectively. (d) The average broker commission rate will vary depending on the markets in which trades are executed. (e) All Class I shares of the Fund were exchanged for Class III shares on January 9, 1998. Amount represents ending net asset value per share on January 9, 1998. 20 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class II share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Period from November 29, 1996 Period from October 31, 1997 (commencement of operations) to January 9, 1998 to February 4, 1997 ------------------ ------------------- Net asset value, beginning of period $ 11.40 $ 10.74 ------------------ ------------------- Income (loss) from investment operations: Net investment income 0.03 + 0.05 Net realized and unrealized gain (loss) on investments (1.75) 1.10 ------------------ ------------------- Total from investment operations (1.72) 1.15 ------------------ ------------------- Less distributions to shareholders from: Net investment income (0.14) (0.07) Net realized gains (0.61) 0.00 In excess of net realized gains (0.32) -- ------------------ ------------------- Total distributions (1.07) (0.07) ------------------ ------------------- Net asset value, end of period $ 8.61 (f) $ 11.82 (e) ================== =================== Total Return (a) (15.72%) 10.73% Ratios/Supplemental Data: Net assets, end of period (000's) $ -- $ -- Net expenses to average daily net assets 1.38% *(b) 1.33% *(b) Net investment income to average daily net assets 1.58% * 6.14% * Portfolio turnover rate 88% 41% Average broker commission rate (d) $ 0.0017 $ 0.0004 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: (c) (c) + Computed using average shares outstanding throughout the period. * Annualized (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .07% and .02% of average daily net assets for the periods ended February 4, 1997 and January 9, 1998, respectively. (c) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (d) The average broker commission rate will vary depending on the markets in which trades are executed. (e) All Class II shares of the Fund were exchanged for Class III shares on February 4, 1997. Amount represents ending net asset value per share on February 4, 1997. (f) All Class II shares of the Fund were exchanged for Class III shares on January 9, 1998. Amount represents ending net asset value per share on January 9, 1998. See accompanying notes to the financial statements. 21
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GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28/29 ------------------------------------------------------------------ 1998 1997 1996 1995 1994 * --------- ---------- ----------- --------- --------- Net asset value, beginning of period $ 12.49 $ 10.54 $ 9.52 $ 12.13 $ 10.00 --------- ---------- ----------- --------- --------- Income (loss) from investment operations: Net investment income 0.16 + 0.13 0.10 0.05 0.02 Net realized and unrealized gain (loss) (1.76) 1.96 1.06 (2.37) 2.11 --------- ---------- ----------- --------- --------- Total from investment operations (1.60) 2.09 1.16 (2.32) 2.13 --------- ---------- ----------- --------- --------- Less distributions to shareholders from: Net investment income (0.25) (0.14) (0.01) (0.07) (0.00)(c) Net realized gains (0.71) -- (0.13) (0.22) -- In excess of net realized gains (0.37) -- -- -- -- --------- ---------- ----------- --------- --------- Total distributions (1.33) (0.14) (0.14) (0.29) (0.00) --------- ---------- ----------- --------- --------- Net asset value, end of period $ 9.56 $ 12.49 $ 10.54 $ 9.52 $ 12.13 ========= ========== =========== ========= ========= Total Return (a) (12.94%) 19.98% 12.24% (19.51%) 21.35% Ratios/Supplemental Data: Net assets, end of period (000's) $ 913,615 $1,725,651 $ 907,180 $ 384,259 $ 114,409 Net expenses to average daily net assets 1.24% (e) 1.24% (e) 1.35% 1.58% 1.64% ** Net investment income to average daily net assets 1.30% 1.40% 1.31% 0.85% 0.87% ** Portfolio turnover rate 88% 41% 35% 50% 2% Average broker commission rate per equity share (b) $ 0.0017 $ 0.0004 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.03 $ 0.02 (d) -- (d) + Computed using average shares outstanding throughout the period. * Period from December 9, 1993 (commencement of operations) to February 28, 1994. ** Annualized. (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for equity trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) The per share income distribution was $ 0.004. (d) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (e) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .06% and .035% of average daily net assets for the years ended February 28, 1997 and 1998, respectively. 22 See accompanying notes to the financial statements.
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GMO Emerging Markets Fund (A Series of GMO Trust) Financial Highlights (For a Class IV share outstanding throughout the period) -------------------------------------------------------------------------------- [Download Table] Period from January 9, 1998 (commencement of operations) to February 28, 1998 ---------------------- Net asset value, beginning of period $ 8.62 ---------------------- Income (loss) from investment operations: Net investment income 0.01 + Net realized and unrealized gain 0.93 ---------------------- Total from investment operations 0.94 ---------------------- Net asset value, end of period $ 9.56 ====================== Total Return (a) 10.90% Ratios/Supplemental Data: Net assets, end of period (000's) $ 672,020 Net expenses to average daily net assets 1.22% *(b) Net investment income to average daily net assets 0.65% * Portfolio turnover rate 88% Average broker commission rate (d) $ 0.0017 Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amount: (c) + Computed using average shares outstanding throughout the period. * Annualized (a) Calculation excludes purchase premiums and redemption fees. The total return would have been lower had certain expenses not been waived during the period shown. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .04% of average daily net assets. (c) Fees and expenses voluntarily waived or borne by the Manager were less than $.01 per share. (d) The average broker commission rate will vary depending on the markets in which trades are executed. See accompanying notes to the financial statements. 23
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks long-term capital appreciation consistent with a prudent level of risk through investment in equity and equity-related securities traded in the securities markets of newly industrializing countries in Asia, Latin America, the Middle East, Southern Europe, Eastern Europe and Africa. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully described in the Trust's prospectus. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bear the same total operating expenses (after the voluntary expense waiver) as those shares. Effective January 9, 1998, Class I and Class II shares ceased operations and all shares were exchanged for Class III shares. Additionally, Class IV shares commenced operations on January 9, 1998. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily 24
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. Certain investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices may differ from the value that would have been used had a broader market for the securities existed and the differences could be material to the financial statements. Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Forward currency contracts The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward currency contract is extinguished through delivery or offset by entering into another forward currency contract, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished or offset. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to sell is shown under Note 5, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1998. Swap agreements The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into equity swap agreements which involve a commitment by one party in the agreement to pay interest in exchange 25
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- for a market linked return based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Equity swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there is no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 5 for a summary of all open swap agreements as of February 28, 1998. Options The Fund may write call and put options on securities it owns or in which it may invest. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the transaction to determine the realized gain or loss. If a written put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of February 28, 1998, there were no outstanding written options. The Fund may also purchase put and call options. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. The risk associated with purchasing put and call options is limited to the premium paid. Security lending The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 1998, the Fund loaned securities having a market value of $76,978,599 collateralized by cash in the amount of $82,662,900 which was invested in a short-term instrument. 26
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund is also subject to a .20% Contribuicao Provisoria sobre Movimentacoes Financeiras (CPMF) tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. The Fund declares separate dividends from net investment income on each class of shares. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatments for foreign currency and passive foreign investment company transactions and redemptions in-kind. Gains resulting from such in-kind transactions amounted to $4,464,178. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ------------------- ---------------------------- -------------------- $24,533,715 $(28,886,241) $4,352,526 27
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is 1.60% of the amount invested. In the case of cash redemptions, the fee is .40% of the amount redeemed. These fees may be reduced by 50% with respect to any portion of a purchase or redemption that is offset by a corresponding redemption or purchase, respectively, occurring on the same day. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" and redemption fees are included as part of each class' "shares repurchased", respectively, as summarized in Note 4. For the year ended February 28, 1998, the Fund received $7,298,651 in purchase premiums and $778,355 in redemption fees. There is no premium for reinvested distributions. Investment risk Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. Investing in equity securities of Indian and Russian companies includes the risk of loss from those countries underdeveloped systems of share registration and transfer. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 28
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of 1.00% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares, .15% for Class III shares, and .105% for Class IV shares. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including the management fee but excluding custody fees, brokerage commissions, certain other transaction costs (including stamp duties and transfer taxes), shareholder service fees and extraordinary expenses) exceed .81% of average daily net assets. Prior to June 1, 1996, a similar waiver existed for annual expenses exceeding 1.20%. The Manager has entered into a Consulting Agreement with Dancing Elephant, Ltd. (the "Consultant") with respect to the management of the portfolio. Payments made by the Manager to the Consultant will not affect the amounts payable by the Fund to the Manager or the Fund's expense ratio. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $16,877. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchases and sales of securities Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 1998, aggregated $1,391,405,200 and $1,399,263,560, respectively. At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held was as follows: [Download Table] Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ------------------- -------------------- -------------------- ------------------- $1,892,596,551 $160,272,427 $(354,908,218) $(194,635,791) 29
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 4. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares, including a class' portion of the purchase premiums and redemption fees received by the Fund were as follows: [Enlarge/Download Table] Period from January 2, 1997 Period from March 1, 1997 (commencement of operations) to January 9, 1998 to February 28, 1997 ----------------------------------- ---------------------------------------- Class I: Shares Amount Shares Amount --------------- ---------------- ------------------ ----------------- Shares sold 654,767 $ 8,075,897 140,068 $ 1,542,386 Shares issued to shareholders in reinvestment of distributions 94,886 892,506 - - Shares repurchased (889,721) (7,640,341) - - --------------- ---------------- ------------------ ----------------- Net increase/ (decrease) (140,068) $ 1,328,062 140,068 $ 1,542,386 =============== ================ ================== ================= Period from November 29, 1996 Period from October 31, 1997 to (commencement of operations) January 9, 1998 to February 4, 1997 ----------------------------------- ---------------------------------------- Class II: Shares Amount Shares Amount --------------- ---------------- ------------------ ----------------- Shares sold 1,860,787 $ 20,571,162 5,586,262 $ 63,054,064 Shares issued to shareholders in reinvestment of distributions 215,746 1,989,181 16,729 178,659 Shares repurchased (2,076,533) (17,867,029) (5,602,991) (66,227,117) --------------- ---------------- ------------------ ----------------- Net increase/ (decrease) - $ 4,693,314 - $ (2,994,394) =============== ================ ================== ================= 30
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Share transactions - continued [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 ------------------------------------ ---------------------------------------- Class III: Shares Amount Shares Amount ------------------ ------------- ------------------- ---------------- Shares sold 41,704,905 $ 476,637,263 54,549,584 $ 626,535,006 Shares issued to shareholders in reinvestment of distributions 17,410,973 170,165,033 759,519 8,422,271 Shares repurchased (101,692,012) (971,123,789) (3,248,382) (35,870,164) ------------------ ------------- ------------------- ---------------- Net increase/ (decrease) (42,576,134) $(324,321,493) 520,670,721 $ 599,087,113 ================== ============= =================== ================ Period from January 9, 1998 (commencement of operations) to February 28, 1998 ---------------------------------------- Class IV: Shares Amount -------------------- ---------------- Shares sold 73,482,774 $ 636,013,851 Shares issued to shareholders in reinvestment of distributions - - Shares repurchased (3,180,305) (29,758,456) -------------------- ---------------- Net increase 70,302,469 $ 606,255,395 ==================== ================ 31
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Financial instruments A summary of outstanding financial instruments at February 28, 1998 is as follows: Forward currency contracts [Enlarge/Download Table] Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ----------------- -------------------- --------------------- ---------------- ----------------- Buys 07/08/98 IDR 210,984,900,000 $ 22,431,944 $ (2,568,056) ----------------- Sales 07/08/98 IDR 210,984,900,000 $ 22,431,944 $ (3,471,185) 05/26/98 INR 2,012,000,000 49,403,330 596,670 06/17/98 KRW 17,580,000,000 10,387,342 (387,342) 06/18/98 KRW 17,400,000,000 10,276,265 (276,265) ----------------- $ (3,538,122) ----------------- See Notes to Schedule of Investments for definitions of currency abbreviations. 32
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreements [Enlarge/Download Table] Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- -------------- ---------------------------------------------------------- -------------------- $10,000,000 3/13/98 Agreement with Goldman Sachs International dated $ (330,794) 3/11/97 to receive (pay) the notional amount multiplied by the return on the Taiwan Weighted Index and to pay the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. 4,990,939 4/1/98 Agreement with Barclays Bank PLC dated 4/2/97 to receive (130,622) (pay) the notional amount multiplied by the return on the Taiwan Weighted Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 10,000,001 4/6/98 Agreement with Goldman Sachs International dated 4/2/97 (170,343) to receive (pay) the notional amount multiplied by the return on the Taiwan Weighted Index and to pay the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. 5,184,028 4/28/98 Agreement with Robert Fleming & Co. Limited dated (575,117) 4/28/97 to receive (pay) the notional amount multiplied by the return on a basket of selected Indian securities (including dividends) and to pay the notional amount multiplied by a fixed rate. 6,000,000 4/29/98 Agreement with Barclays Bank PLC dated 10/29/97 to (784,793) receive (pay) the notional amount multiplied by the return on the Chile IPSA Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 3,315,306 5/12/98 Agreement with Lehman Brothers Finance S.A. dated 323,626 11/12/97 to receive (pay) the notional amount multiplied by the return on the Korea Stock Price Index and to pay the notional amount multiplied by 3 month LIBOR adjusted by a specified spread. 33
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreements - continued [Enlarge/Download Table] Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ----------------- -------------- ---------------------------------------------------------- -------------------- $5,000,000 6/11/98 Agreement with Goldman Sachs International dated $ (1,140,966) 11/12/97 to receive (pay) the notional amount multiplied by the return on the Korea Stock Price Index and to pay the notional amount multiplied by 7 month LIBOR adjusted by a specified spread. 1,527,809 6/27/98 Agreement with Indosuez W. I. Carr Ltd. dated 6/27/97 to 1,094,293 receive the notional amount multiplied by the change in market value of Pohang Iron & Steel common stock (including dividends) and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 1,924,132 6/27/98 Agreement with Indosuez W. I. Carr Ltd. dated 6/27/97 to 809,550 receive the notional amount multiplied by the change in market value of SK Telecom common stock (including dividends) and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 10,000,000 11/3/98 Agreement with Barclays Bank PLC dated 11/4/97 to (3,369,027) receive (pay) the notional amount multiplied by the return on the International Finance Corporation "IFC" Korea Investable Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 10,000,000 11/11/98 Agreement with Barclays Bank PLC dated 11/12/97 to 483,666 receive (pay) the notional amount multiplied by the return on the International Finance Corporation "IFC" Thailand Investable Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 34
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GMO Emerging Markets Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreements - continued [Enlarge/Download Table] Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- -------------- ---------------------------------------------------------- -------------------- $1,271,446 1/18/99 Agreement with Robert Fleming & Co. Limited dated $ 41,546 1/16/98 to receive the notional amount multiplied by the change in market value of State Bank of India common stock (including dividends) and to pay the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. 10,000,000 2/3/99 Agreement with Indosuez W.I. Carr Ltd. dated 2/3/98 to 575,833 receive (pay) the notional amount multiplied by the return on the Thailand SET Index and to pay the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. -------------------- Net unrealized depreciation $ (3,173,148) ==================== Written call option transactions Number of Contracts Premiums -------------- ---------------- Outstanding, beginning of period - $ - Options written 348,065 1,479,681 Options exercised (348,065) (1,479,681) -------------- ---------------- Outstanding, end of period - $ - ============== ================ 35
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GMO Emerging Markets Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 53% of distributions as net capital gain dividends. The Fund has also elected to defer to March 1, 1998 post-October losses of $83,354,330. 36
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GMO Emerging Markets Fund (A Series of GMO Trust) Portfolio Managers ------------------ Mr. R. Jeremy Grantham and Mr. Arjun Divecha are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO since its founding in 1977. Mr. Divecha is the principal of Dancing Elephant Ltd., which serves as consultant to the Fund. Dancing Elephant Ltd. has an exclusive consulting management agreement with GMO. Management Discussion and Analysis of Fund Performance ------------------------------------------------------ The Class III shares of the GMO Emerging Markets Fund returned -12.9% for the fiscal year ended February 28, 1998. The Fund's benchmark, the IFC Investable Composite, returned -21.8% during the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in equity securities throughout the period. Most of the favorable performance relative to the benchmark during the year resulted from the positive impact of the Fund's country bets. During the year, the Fund held overweight positions in Mexico, Russia, Europe and India, which all outperformed the benchmark. During the Asian crisis, the fund was heavily underweight the Southeast Asian markets, greatly helping performance relative to the benchmark. Our overweight positions in Korea and underweight bet in Taiwan negatively impacted relative performance. The Mexican market had a strong rebound on the back of strong economic growth. The European markets, Greece and Portugal continued to do well on prospects of convergence with other European Union countries. Russia, after a strong first half, had a major correction as contagion from the Asian crisis spread. While the Taiwanese market was expensive going into the Asia crisis, its strong economic fundamentals protected it from the meltdown. As a result, it outperformed the other Asian markets. Korea on the other hand was badly hit by the contagion. Outlook The Asian crisis has had a positive impact on the behavior of other emerging market policy makers, especially in Brazil and Russia. In these and other emerging countries, policy makers have acted quickly to address macroeconomic imbalances, lest global investors punish them. In the long run, this bodes well for emerging markets as an asset class. We have been gradually increasing our weights in Asia, reducing our exposure to Latin America and continue to be overweight Russia. The ASEAN markets have now fallen more than 70% from their peak in US$ terms and are already discounting poor profitability and weaker economic conditions. The principal factors that influenced a V shaped recovery in Mexico were a strong bailout package, rapid change in the trade deficit and a strong commitment by the government to implement tough IMF conditions. The first two conditions are now present in Asia. However, hubris amongst Asian governments helped cause the crisis and only when they begin to accept reality will they make the appropriate structural changes that are so desperately needed. We think Thailand and Korea are aggressively addressing these issues and are enthusiastic about them.
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The new political coalition in Thailand has shown a strong willingness to accept and implement tough policies. We continue to be underweight Malaysia, Philippines and are neutral in Indonesia. While Indonesian political risk has increased substantially with Mr. Suharto's recent stroke, the currency has fallen from 2,300 to the dollar to over 8,000. Our currency model has the Indonesian rupiah at the cheapest level we have ever seen in any currency. We continue to be overweight India and Pakistan, and are hopeful that the new coalition government in India will accelerate the pace of reforms. In order to protect the real, the Brazilian government has made all the right moves -- reducing government spending, increasing the pace of liberalization and privatization. We are impressed by their actions, but all of Latin America remains vulnerable to further contagion from Asia as well as a downdraft in the U.S. equity market. As a result we remain close to neutral on Brazil. The Mexican economy continues to surprise with strong economic growth. We have been overweight for quite a while but valuations are starting to get stretched. Accordingly, we are close to neutral but are gradually reducing our weight in Mexico. We also like Chile, which is likely to be a safe harbor if the storm comes to Latin America. We have been underweight South Africa for the last 3 years, but are gradually increasing our weight there. Valuations are starting to get attractive, while inflation is at a 25 year low and interest rates are likely to fall. However, the currency remains vulnerable. Despite the risks, we continue to be overweight Russia. We think the biggest risk to the Russian market will come from capital outflows caused by a volatile external environment and domestic concerns (Mr. Yeltsin's health, etc.). Under this scenario, economic recovery would be threatened by higher domestic interest rates, which would have to be raised in order to defend the rouble. On the other hand, key macroeconomic indicators point to an economic recovery in 1998. The 40% drop in the market during the last quarter led to the big blue chips becoming cheap again. Our portfolio is well positioned to take advantage of the anticipated industrial recovery. We have continued to take profits in Turkey and Hungary. Both these markets had strong moves in 1997, up 100% and 70% respectively, and our model has turned quite negative. We remain positive on Israel; with growth slowing down, we anticipate falling interest rates. Overall, emerging markets in general and Asia in particular are staring to look extremely cheap on a three- to five-year view. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice.
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Comparison of Change in Value of a $10,000 Investment in GMO Emerging Markets Fund Class III Shares and the IFC Investable Composite As of February 28, 1998 -------------------------------- Average Annual Total Return -------------------------------- Since 1 Year Inception -------------------------------- Class 12/9/93 III -14.7% 2.8% -------------------------------- Class 1/9/98 IV n/a 8.7% -------------------------------- [LINE GRAPH APPEARS HERE] GMO EMERGING IFC INVESTABLE DATE MARKETS FUND COMPOSITE ------- ------------ -------------- 12/9/93 $9,840 $10,000 2/28/94 $11,941 $10,914 2/28/95 $9,612 $8,360 2/29/96 $10,746 $9,495 2/28/97 $12,893 $11,006 2/28/98 $11,224 $8,602 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 160 bp on the purchase and 40 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Performance for Class IV shares may be different due to lower shareholder service fees. Past performance is not indicative of future performance. Information is unaudited.
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Pelican Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of Pelican Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Pelican Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 13, 1998
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Pelican Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------- COMMON STOCKS - 84.0% Advertising - 0.1% 3,250 Cordiant Communications Group Plc Sponsored ADR 29,656 11,250 Saatchi & Saatchi Plc ADR* 106,875 ------------- 136,531 ------------- Automotive - 1.3% 10,000 Chrysler Corp 389,375 15,000 General Motors Corp 1,034,063 85,000 Mascotech Industries Inc 1,763,750 ------------- 3,187,188 ------------- Banking and Financial Services - 10.7% 35,000 American Express Co 3,152,188 12,500 Bank of Tokyo-Mitsubishi Ltd (The) ADR 178,125 100,000 Block (HR) Inc 4,706,250 35,000 Chase Manhattan Corp 4,342,188 40,000 Citicorp 5,300,000 20,000 First Chicago NBD Corp 1,643,750 10,000 Nationsbank Corp 685,000 10,000 PNC Bank Corp 555,000 57,500 Travelers Group Inc (The) 3,205,625 5,000 Wells Fargo Co 1,610,000 ------------- 25,378,126 ------------- Chemicals - 0.5% 22,500 Albemarle Corp 548,438 10,000 Bayer A G 421,543 10,000 Georgia Gulf Corp 329,375 ------------- 1,299,356 ------------- Computer and Office Equipment - 1.4% 80,002 Compaq Computer Corp 2,565,064 75,000 Intergraph Corp* 731,250 7,500 Silicon Graphics Inc* 112,969 ------------- 3,409,283 ------------- Consumer Goods - 3.2% 15,000 Black & Decker Corp 755,625 50,000 Eastman Kodak 3,281,250 12,500 Groupe Danone ADR 498,438 25,000 Maytag Corp 1,125,000 62,500 Safety Kleen 1,675,781 7,500 Scotts Company Class A* 255,000 ------------- 7,591,094 ------------- Electronic Equipment - 0.9% 50,000 International Rectifier Corp* 728,125 37,500 National Semiconductor Corp* 895,313 25,000 Stewart & Stevenson Services Corp 610,938 ------------- 2,234,376 ------------- Environmental Control - 0.2% 35,000 Wheelabrator Technologies Inc 570,938 ------------- See accompanying notes to the financial statements. 1
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Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------- Food and Beverage - 3.7% 75,000 Anheuser-Busch Cos Inc 3,515,625 7,500 Archer Daniels Midland 168,281 10,000 Coors (Adolph) Co 312,500 40,000 Nestle SA ADR 3,502,320 12,500 Riviana Foods Inc 273,438 25,000 RJR Nabisco Holdings Corp 864,063 ------------- 8,636,227 ------------- Health Care - 1.3% 25,000 Baxter International Inc 1,415,625 45,000 Beverly Enterprises Inc* 683,438 50,000 Owens and Minor Holdings Co 887,500 5,000 Quest Diagnostics Inc* 77,500 ------------- 3,064,063 ------------- Insurance - 5.1% 5,000 Aetna Inc 436,875 25,000 Allstate Corp 2,331,250 20,000 Chartwell Re Corp 612,500 5,000 Cigna Corp 955,000 5,000 Gallagher (Arthur J) and Co 206,563 7,500 Oxford Health Plans Inc* 128,906 115,000 Reliance Group Holdings Inc 1,955,000 50,000 Sedgwick Group ADR 613,320 130,000 TIG Holdings Inc 3,453,125 25,000 USF & G Corp 610,938 60,000 Willis Corroon Group Plc ADR 705,000 ------------- 12,008,477 ------------- Machinery - 1.1% 30,000 Cincinnati Milacron Inc 926,250 25,000 Coltec Industries Inc* 651,563 5,000 Cummins Engine Inc 289,375 10,000 FMC Corp* 723,750 ------------- 2,590,938 ------------- Manufacturing - 8.8% 20,000 American Greetings Corp 912,500 12,500 Champion Enterprises Inc* 314,063 25,000 Clayton Homes Inc 496,875 95,000 Corning Inc 3,859,375 30,000 General Electric Co 2,332,500 50,000 Griffon Corp* 821,875 45,000 International Business Machines Corp 4,699,688 85,000 Owens Corning 2,624,375 25,000 Rockwell International Corp 1,512,500 15,000 Tenneco Inc 616,875 30,000 United Technologies Corp 2,679,375 ------------- 20,870,001 ------------- 2 See accompanying notes to the financial statements.
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Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------- Metals and Mining - 1.5% 5,000 Alcan Aluminum Ltd 155,313 35,000 Allegheny Teledyne Inc 949,375 50,000 Amcol International Corp 712,500 150,000 Philip Services Corp* 1,434,375 15,000 Placer Dome Inc 193,125 ------------- 3,444,688 ------------- Oil and Gas - 6.5% 17,500 Amerada Hess Corp 1,037,969 15,000 Cabot Oil & Gas Corp, Class A 315,000 5,000 Dresser Industries Inc 223,438 50,000 EEX Corp* 428,125 40,000 Enron Oil & Gas Co 855,000 50,000 Gulf Canada Resources Ltd* 293,750 50,000 Lasmo Plc ADR 678,125 20,000 Mitchell Energy Class A 545,000 40,000 Mitchell Energy Class B 1,097,500 10,000 Mobil Corp 724,375 105,000 Occidental Petroleum Corp 2,684,063 5,206 Texaco Inc 290,560 35,000 Union Texas Petroleum Holdings Inc 706,563 40,000 Unocal Corp 1,507,500 75,000 USX - Marathon Group 2,592,188 50,000 Westcoast Energy Inc 1,262,500 ------------- 15,241,656 ------------- Paper and Allied Products - 1.1% 10,000 Abitibi-Consolidated Inc 143,125 35,000 Fort James Corp 1,588,125 17,500 Weyerhaeuser Co 873,906 ------------- 2,605,156 ------------- Pharmaceuticals - 2.1% 10,000 Allergan Inc 350,000 5,000 Glaxo Wellcome Plc ADR 271,563 35,000 Lilly (Eli) and Co 2,303,438 25,000 Medpartners Inc* 300,000 35,000 Mylan Laboratories Inc 713,125 22,755 PharMerica Inc* 295,815 10,000 Smithkline Beecham PLC 618,750 ------------- 4,852,691 ------------- Primary Processing - 0.4% 10,000 Du Pont (E I) De Nemours & Co Inc 613,125 20,000 Intermet Corp 395,000 ------------- 1,008,125 ------------- Real Estate - 2.6% 25,000 Boston Properties Inc 850,000 25,000 Crown American Realty Trust 231,250 5,000 Equity Residential Properties Trust 239,688 See accompanying notes to the financial statements. 3
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Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------- Real Estate - continued 100,000 JP Realty Inc 2,512,500 50,000 Summit Properties Inc 1,012,500 25,000 United Dominion Realty Trust Inc 350,000 35,000 Walden Residential Properties Inc 866,250 ------------- 6,062,188 ------------- Refining - 0.2% 25,000 Quaker State Corp 378,125 ------------- Retail Trade - 5.6% 25,000 Costco Co Inc* 1,221,875 75,000 Federated Department Stores* 3,515,625 5,000 Saks Holdings Inc * 130,625 75,000 Sears Roebuck & Co 3,979,688 50,000 Toys R Us Inc* 1,312,500 65,000 Wal-Mart Stores Inc 3,010,313 ------------- 13,170,626 ------------- Services - 3.6% 15,000 Hilton Hotels Corp 447,188 25,000 Manpower Inc 1,054,688 25,000 Ogden Corp 687,500 5,000 Time Warner Inc 337,500 230,000 Waste Management Inc 5,750,000 25,000 Waste Management International Plc* 151,563 ------------- 8,428,439 ------------- Technology - 7.3% 32,500 Avnet Inc 2,071,875 50,000 Data General Corp* 1,031,250 72,500 Digital Equipment Corp* 4,127,969 55,000 Electronics for Imaging Inc* 1,213,438 62,500 Information Resources Inc* 875,000 20,000 Intel Corp 1,793,750 75,000 Storage Technology Corp* 5,118,750 12,500 Xerox Corp 1,108,594 ------------- 17,340,626 ------------- Telecommunications - 6.4% 7,500 AT&T Corp 456,563 50,000 CBS Corporation 1,546,875 40,000 Cox Communications Inc* 1,542,500 85,000 GTE Corp 4,600,625 22,500 MCI Communications Corp 1,075,781 12,500 SBC Communications Inc 945,313 35,000 US West Inc* 1,822,188 100,000 US West Media Group 3,218,750 ------------- 15,208,595 ------------- Tobacco - 0.3% 47,500 Imperial Tobacco Group Plc 650,156 ------------- 4 See accompanying notes to the financial statements.
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Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) ---------------------------------------------------------------------------------------------- Transportation - 2.8% 12,500 America West Holdings Corp, Class B* 310,156 10,000 AMR Corp* 1,265,625 50,000 Canadian Pacific Ltd 1,428,125 7,500 Delta Air Lines Inc 847,969 15,000 Ryder System Inc 550,313 35,000 Sabre Group Holdings Inc* 1,155,000 15,000 US Airways Group Inc* 949,688 ------------- 6,506,876 ------------- Utilities - 5.3% 25,000 Calpine Corp* 396,875 40,000 Duke Energy Co 2,222,500 20,000 Energy Group Plc 1,028,750 35,000 Houston Industries Inc 905,625 100,000 Niagara Mohawk Power Corp* 1,281,250 5,000 Pacific Corp 120,938 90,000 Texas Utilities 3,639,375 25,000 TransCanada Pipeline Ltd 564,063 75,000 Unicom Corp 2,404,670 ------------- 12,564,046 ------------- TOTAL COMMON STOCKS (Cost $121,343,480) 198,438,591 ------------- PREFERRED STOCKS - 0.6% Metals and Mining - 0.2% 25,000 Freeport-McMoran Corp Preferred 556,250 ------------- Primary Processing - 0.0% 500 Armco Inc Convertible Preferred $3.625 24,000 ------------- Transportation - 0.4% 16,500 Navistar International Corp Preferred $6.00 836,344 ------------- TOTAL PREFERRED STOCKS (Cost $1,756,758) 1,416,594 ------------- Par Value DEBT OBLIGATIONS - 14.5% Banking and Financial Services - 0.5% $ 99,101 Citicorp, Variable Rate Note, 6.50% due 5/1/04 99,276 1,000,000 General Motors Acceptance Corp, 5.50% due 12/15/01 973,510 ------------- 1,072,786 ------------- Food and Beverage - 0.6% 500,000 Anheuser-Busch Cos Inc, 7.10% due 6/15/07 519,970 130,000 Anheuser-Busch Cos Inc, 8.50% due 3/1/17 134,477 750,000 General Foods Corp, 7.00% due 6/15/11 748,493 ------------- 1,402,940 ------------- Manufacturing - 0.5% 1,250,000 International Business Machines Corp, 6.50% due 1/15/28 1,220,588 ------------- See accompanying notes to the financial statements. 5
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Pelican Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Par Value Description Value ($) ---------------------------------------------------------------------------------------------- Real Estate - 0.8% $ 1,750,000 HMH Properties Inc, 9.50% due 5/15/05 1,859,375 ------------- Technology - 1.5% 2,500,000 Digital Equipment Corp, 7.125% due 10/15/02 2,546,708 1,000,000 VLSI Technology Inc, 8.25% due 10/01/05 1,013,750 ------------- 3,560,458 ------------- Transportation - 1.0% 1,000,000 AMR Corp, 9.00% due 8/1/12 1,186,650 1,000,000 United Air Lines Inc, 9.13% due 1/15/12 1,174,720 ------------- 2,361,370 ------------- U.S. Government - 9.6% 6,000,000 U.S. Treasury Bond, 11.13% due 8/15/03 7,524,360 1,250,000 U.S. Treasury Bond, 10.75% due 8/15/05 1,628,325 2,750,000 U.S. Treasury Bond, 7.25% due 5/15/16 3,137,998 7,500,000 U.S. Treasury Note, 4.75% due 8/31/98 7,471,875 1,250,000 U.S. Treasury Note, 7.75% due 2/15/01 1,323,236 1,500,000 U.S. Treasury Note, 6.625% due 5/15/07 1,597,965 ------------- 22,683,759 ------------- TOTAL DEBT OBLIGATIONS (Cost $32,299,844) 34,161,276 ------------- SHORT-TERM INVESTMENT - 0.7% 1,760,000 State Street Bank and Trust Co Repurchase Agreement, dated 2/27/98, due 3/2/98, with a maturity value of $1,760,587 and an effective yield of 4.00%, collateralized by a U.S. Treasury Note, with a rate of 5.875% due 08/31/99 with an aggregate market value of $1,799,268 (Cost $1,760,000). 1,760,000 ------------- TOTAL INVESTMENTS - 99.8% (Cost $157,160,082) 235,776,461 Other Assets and Liabilities (net) - 0.2% 509,349 ------------- TOTAL NET ASSETS - 100.0% $ 236,285,810 ============ Notes to the Schedule of Investments: ADR - American Depositary Receipt Variable Rate Notes - The rates shown on variable rate notes are the current interest rates at February 28, 1998, which are subject to change based on the terms of the security, including varying reset dates. * Non-income producing security. 6 See accompanying notes to the financial statements.
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Pelican Fund (A Series of GMO Trust) Statement of Assets and Liabilities - February 28, 1998 -------------------------------------------------------------------------------- [Enlarge/Download Table] Assets: Investments, at value (cost $157,160,082) (Note 1) $ 235,776,461 Cash 11,578 Dividends and interest receivable 838,586 Receivable for investments sold 1,038,953 Receivable for Fund shares sold 22,300 ------------------ Total assets 237,687,878 ------------------ Liabilities: Payable for investments purchased 525,731 Payable for Fund shares repurchased 650,145 Payable to affiliate for management fee (Note 2) 159,110 Accrued expenses and other liabilities 67,082 ------------------ Total liabilities 1,402,068 ------------------ Net Assets (equivalent to $17.78 per share based on 13,286,924 shares outstanding, unlimited shares authorized) $ 236,285,810 ================== Net Assets consist of: Paid-in capital $ 149,625,042 Accumulated undistributed net investment income 404,381 Accumulated undistributed net realized gain 7,640,008 Net unrealized appreciation 78,616,379 ------------------ Net assets $ 236,285,810 ================== See accompanying notes to the financial statements. 7
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Pelican Fund (A Series of GMO Trust) Statement of Operations - Year Ended February 28, 1998 -------------------------------------------------------------------------------- Investment income: Dividends (net of withholding taxes of $42,926) $ 3,678,075 Interest 2,271,970 -------------- Total income 5,950,045 -------------- Expenses: Management fee (Note 2) 1,967,796 Custodian and transfer agent fees 143,247 Audit fees 34,838 Registration fees 19,772 Legal fees 6,007 Trustees fee (Note 2) 1,916 Miscellaneous 9,843 -------------- Total expenses 2,183,419 Less: expenses waived or borne by Manager (Note 2) (108,905) -------------- Net expenses 2,074,514 -------------- Net investment income 3,875,531 -------------- Realized and unrealized gain (loss): Net realized gain on investments 33,485,867 Change in net unrealized appreciation (depreciation) on investments 18,746,336 -------------- Net realized and unrealized gain 52,232,203 -------------- Net increase in net assets resulting from operations $ 56,107,734 ============== 8 See accompanying notes to the financial statements.
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Pelican Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28, 1998 February 28, 1997 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income $ 3,875,531 $ 3,995,498 Net realized gain 33,485,867 9,036,632 Change in net unrealized appreciation (depreciation) 18,746,336 19,894,742 ---------------- ---------------- Net increase in net assets resulting from operations 56,107,734 32,926,872 ---------------- ---------------- Distributions to shareholders from: Net investment income (4,850,393) (3,383,491) Net realized gains (30,617,038) (6,758,143) ---------------- ---------------- (35,467,431) (10,141,634) ---------------- ---------------- Fund share transactions: (Note 5) Proceeds from sale of shares 21,012,484 22,372,007 Net asset value of shares issued to shareholders in payment of distributions declared 33,903,533 9,313,111 Cost of shares repurchased (46,639,378) (24,339,781) ---------------- ---------------- Net increase in net assets resulting from Fund share transactions 8,276,639 7,345,337 ---------------- ---------------- Total increase in net assets 28,916,942 30,130,575 Net assets: Beginning of period 207,368,868 177,238,293 ---------------- ---------------- End of period (including accumulated undistributed net investment income of $404,381 and $1,473,363, respectively) $ 236,285,810 $ 207,368,868 ================ ================ See accompanying notes to the financial statements. 9
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Pelican Fund (A Series of GMO Trust) Financial Highlights (For a share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28/29, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ----------- ----------- ----------- --------------------------- Net asset value, beginning of period $ 16.31 $ 14.52 $ 11.99 $ 12.08 $ 11.37 ----------- ----------- ----------- ------------ ------------ Income from investment operations: Net investment income 0.32 0.33 0.31 0.37 0.29 Net realized and unrealized gain 4.13 2.27 3.04 0.46 1.40 ----------- ----------- ----------- ------------ ------------ Total from investment operations 4.45 2.60 3.35 0.83 1.69 ----------- ----------- ----------- ------------ ------------ Less distributions to shareholders: From net investment income (0.40) (0.27) (0.29) (0.37) (0.37) From net realized gains (2.58) (0.54) (0.53) (0.55) (0.61) ----------- ----------- ----------- ------------ ------------ Total distributions (2.98) (0.81) (0.82) (0.92) (0.98) ----------- ----------- ----------- ------------ ------------ Net asset value, end of period $ 17.78 $ 16.31 $ 14.52 $ 11.99 $ 12.08 =========== =========== =========== ============ ============ Total Return (a) 28.97% 18.40% 28.54% 7.38% 15.14% Ratios/Supplemental Data: Net assets, end of period (000's) $ 236,286 $ 207,369 $ 177,238 $ 117,920 $ 101,165 Net expenses to average daily net assets 0.95% 0.95% 1.05% 1.10% 1.10% Net investment income to average daily net assets 1.77% 2.10% 2.42% 2.51% 2.42% Portfolio turnover rate 28% 27% 32% 40% 49% Average broker commission rate (b) $ 0.0662 $ 0.0556 N/A N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.01 $ 0.01 $ - $ - $ 0.01 (a) The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. 10 See accompanying notes to the financial statements.
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Pelican Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies The Pelican Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC ("the Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which will issue a separate series of shares. The Fund seeks long-term capital growth primarily through investment in equity securities. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term debt obligations with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees. Repurchase agreements The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, realization of collateral by the Fund may be delayed or limited. 11
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Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to return of capital dividends, and differing treatments for amortization of discount on bonds and partnership interests. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Accumulated Undistributed Net Accumulated Net Realized Investment Income Gain/(Loss) Paid-in Capital ---------------------------- ------------------------ --------------- $(94,120) $94,155 $(35) Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. 12
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Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Expenses The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such a manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. 2. Management fee and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .90% of average daily net assets. GMO has agreed to waive a portion of its fee and bear other expenses until further notice to the extent that the Fund's annual expenses (including the management fee but excluding brokerage commissions and transfer taxes) exceed .95% of average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $1,916. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchases and sales of securities For the year ended February 28, 1998, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows: [Enlarge/Download Table] Purchases Proceeds -------------------- --------------------- U.S. Government securities $ 5,587,383 $ 91,617 Investments (non-U.S. Government securities) 54,787,626 81,390,660 At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held was as follows: [Enlarge/Download Table] Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation ------------------------- --------------------------- ------------------------- ---------------------- $157,895,749 $80,609,075 $2,728,363 $77,880,712 13
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Pelican Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 4. Principal shareholder At February 28, 1998, 39% of the outstanding shares of the Fund were held by one shareholder. 5. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows: [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 ---------------------------- ---------------------------- Shares sold 1,196,670 1,487,108 Shares issued to shareholders in reinvestment of distributions 2,012,397 632,940 Shares repurchased (2,636,304) (1,610,011) ----------------- ------------------ Net increase 572,763 510,037 Fund shares: Beginning of period 12,714,161 12,204,124 ----------------- ------------------ End of period 13,286,924 12,714,161 ================= ================== 14
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Pelican Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) -------------------------------------------------------------------------------- For fiscal year ended February 28, 1998, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 72.18% distributions as net capital gain dividends. 15
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GMO Pelican Fund (A Series of the GMO Trust) Portfolio Manager ----------------- Mr. Richard Mayo is responsible for the management of the GMO Pelican Fund. Mr. Mayo has been a portfolio manager with GMO since its founding in 1977 and began his career in the last 1960's. Management Discussion and Analysis of Fund Performance ------------------------------------------------------ The market's move the last year can only be described as awesome. As I write ------- this and as we start the new fiscal year, the stock market is trying to reach the 9000 level on the Dow Jones Average and now some forecasters are saying the 10000 goal will be reached before the year 2000. This has been one of the great markets of the century. The conditions for this move in stocks (up 144% since December 1994) have been an almost perfect investing environment. Inflation has steadily declined and is now less than 2%; interest rates are now below 6% and corporations have steadily improved profitability and now are earning record returns on capital. We have achieved good returns in this market phase but in hindsight we have not fully exploited the opportunities in this environment. We are somewhat out of sync with other investor's view of risk. In our view, risks have been rising. The turmoil in Southeast Asia will certainly add to economic instability in the world and depress economic growth in the future. This will limit the ability of corporations to expand their profitability that has increased so robustly in this cycle. We have also been influenced by our belief that we may be near the end of the rise in profit margins that have been dramatic in this cycle. After tax profit margins have reached 6.4% up from the low of 3.9%. The dilemma is that the present level of the stock market requires continued increases. According to our valuation formula investors are expecting earnings to grow 8.0-9.0% annually for the next ten years (assuming present interest rates). If revenues grow at the present rate of 5.0%, profit margins must rise to 7.3%. We think this is unlikely for a series of reasons. Restructuring and downsizing benefits may have been fully exploited. The favorable cost environment, specifically labor expenses, may be shifting unfavorably (see the graph below). The strength of the dollar reduces the value of foreign profits, and the economic dislocations in Southeast Asia, as well as the anemic growth in Japan, are beginning to impact the profitability of more U.S. companies. IBM, Motorola, Intel and Compaq are just a few of the companies that have discussed the negative impact. There will be more.
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U.S. Employment Cost Index (% Year-Over-Year) [A LINE GRAPH DEPICTING THE PERCENTAGE GROWTH OF U.S. EMPLOYMENT COST INDEX FROM 1980 TO 1998 APPEARS HERE.] We think profit growth this year will be less than 5.0%. Our skepticism seems justified when you look at the chart below. S&P 500 Bottom Up Operating EPS Estimates [A LINE GRAPH DEPICTING THE S&P BOTTOM UP OPERATING EPS ESTIMATES FROM JUNE 1997 TO MARCH 1998 APPEARS HERE.] Wall Street analysts have steadily reduced the expectations and now expect corporate profits to be up only 2.0% in the first quarter. This has alarmed investors because many expect the first half shortfall to be made up in the second half.
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If this is not achieved this could be troublesome for the market. Presently, if we used the Federal Reserve market model, stocks are approximately 18% overvalued and any doubts about profitability may create reactions in the market similar to the sell off in August and October of 1997. FED'S S&P 500 VALUATION MODEL* (percent) [A LINE GRAPH DEPICTING THE FEDERAL RESERVE S&P 500 VALUATION MODEL FROM 1980 TO 1998 APPEARS HERE.] We have tried to build a portfolio that does better in a difficult environment and our experiences in August and October were encouraging. Our return of -1.64% was a 3.96% gain over the S&P's 5.60% decline in August. This was due mainly to the recovery in small stocks that started in August and continued to the first of October. At that point we started reducing this segment due to the major advances of some of the stocks, but also due to the fear that smaller companies would be penalized in a more difficult market because of their lower liquidity.
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Pelican Fund As of February 28, 1998 Pelican Fund* S&P 500 ----- ------- RISK Beta 0.93 1.00 % of LT Debt to Capital 44% 42% LIQUIDITY Market Cap ($000) 25,288 61,300 PROFITABILITY Return on Equity 14.4% 19.0% Return on Capital 7.8% - EBITDA Margin 16.6% 16.9% Net Profit Margin 5.4% 6.5% Earnings 5 Yr Hist Gr Rate 21% 15% VALUATION Price/Earnings Trailing 4 Qtrs 18.9 23.3 Price to Cashflow 9.8 13.7 Price to Book 2.7 4.0 Price to Sales 1.06 1.66 Dividend Yield 1.8% 1.5% * Equally Weighted Looking at the characteristics of the present portfolio you can see we have maintained a risk profile (measured by beta) that is less than the market. In addition we have gravitated to stocks with low expectations to avoid the penalty of disappointments. We are expecting improvement in our selections but favorable performance may require some patience - something investors don't have at the moment. In other words, at this stage of the market we think there is more to gain by investing in stocks that can still improve long term returns on capital and possibly experience a positive valuation change, rather than invest in those companies that have improved and the stock price reflects the change without a discount for some cyclical erosion. In the chart you can also see we own stocks with market caps significantly below average. For the last year we have maintained our bias against the "Mega Fifty" stocks. Very simply, we think their valuations are at extreme levels and are unlikely to produce good returns going forward. Our view has not been shared by the majority of investors and they have continued to do better than the market. The fifty largest stocks exceeded the S&P by 5.5% in 1997, and in 1998 through February they are 1.5% ahead. Our fears are expressed in the charts below. The out-performance is demonstrated in the top chart and the valuation measures in the charts below show the very high levels versus the past. These stocks are perceived as safe havens but given their lofty valuations we don't think they will give the protection expected in a market sell off. They didn't in August and October of last year.
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Exhibit 3. The Biggest Have Outperformed For A Number Of Years Biggest 50 Stocks/Large-Cap Universe-- Cumulative Relative Performance [LINE GRAPH APPEARS HERE] Source: Prudential Securities Inc. Price/Sales [LINE GRAPH APPEARS HERE] Source: Compusheet; Prudential Securities Inc. Price/Cash Flow [LINE GRAPH APPEARS HERE] Source: Compusheet; Prudential Securities Inc. Return On Equity (ROE) [LINE GRAPH APPEARS HERE] Source: Compusheet; Prudential Securities Inc. We hope to make money with an eclectic portfolio that excludes very overvalued areas (the Mega Fifty) and sectors that are experiencing profit declines - segments of technology and major energy companies. We can't find any sectors that are significantly undervalued comparable to last year. At the beginning of 1997 we were buying all the cable TV stocks thinking they were 30-40% undervalued, adding to our small stock exposure, and accumulated electric utilities and telephone companies into the second quarter. The cable TV stocks have doubled in the last 12 months. Small stocks, the utilities and telephone companies underperformed for the year but each had a quarter of major outperformance; small stocks in the third quarter and telephone and utility stocks were up 17% vs. the S&P gain of 2.87%. Due to these price moves we have cut back in these areas and in technology as well. The technology sector outperformed the group (i.e., Microsoft, Cisco and Dell Computer) and we took profits aggressively as our concerns about deteriorating profitability were reinforced by negative earnings estimate revisions caused by slowing final demand aggravated by the major exposure to Southeast Asia.
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With the funds generated from these profits we have responded opportunistically. We are waiting for good risk reward situations to present themselves to add to good values presently in the portfolio. Waste Management Inc. was a major frustration in the last year. We were too optimistic about its potential profitability improvement and getting a new chief executive proved troublesome. First they hired the former president of Sprint. Unfortunately he left after three months so for five months the company has been led by an interim CEO, a man with excellent capabilities, but the market required more certainty. We stayed with the investment believing margins that were 40% below the top tier in the industry, could be improved by a new and motivated management. The stock sold off dramatically in October and January and each time we added to the position. This poor performance cost the portfolio 1.5% relatively. Patience was rewarded in March. USA Waste, the most profitable waste services company has agreed to acquire Waste Management Inc. and the stock has rallied 25%, recapturing half of last year's performance. Another sector ignored last year was retail. For instance Federated Department Stores was ignored in the first half providing an opportunity to buy the stock at 14 times earnings (the market at the time was 20 times earnings) with no hint of profit difficulties. A more controversial opportunity occurred in October when Sears announced it was experiencing a dramatic increase in credit card charge offs. The stock, which peaked at $65.00 per share in early summer dropped as low as $40.00 per share in October. This allowed us the opportunity to buy the stock at 15 times a worst case scenario, which now seems to be an exaggerated fear. The stock has rebounded recently to $50.00 per share. More recently Toys-R-Us declined precipitously and reduced earnings expectations. We responded similarly to the Sears situation, encouraged by the company's announced $1 billion stock buyback. The Toys-R-Us situation will probably not be as good as Sears and Federated, but the risk-reward at its lows looked very attractive. Another success in the past year was Digital Equipment. We had bought the stock earlier but were convinced to add significantly to the position when the stock traded down to $25.00 per share. Our analysis suggested the company's assets were worth at least $50.00 per share. In December Compaq confirmed our analysis by announcing a merger worth $60.00 per share at the time. I have mentioned these examples because they reflect the types of situations we are trying to find today to put in the portfolio, which are low expectation opportunities where perceptions are excessively negative. The chances of improvement in profitability have risen (without paying for it) and the value of the companies' assets may be worth more to a strategic buyer limiting the downside risk. Data General is an example like Digital Equipment, and Occidental Petroleum could attract the attention of a larger oil company that is struggling to grow revenues in an environment of declining oil prices. Listed below are the major additions or increases in the last six months and they are opportunities created by the rotational aspects of the market. That is, if it appears not to be a short-term performer, sell it and go to where the action is.
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Federated Department Stores Sears Roebuck Corning Occidental Petroleum Unicom Stewart & Stevenson Our experience to date is that good investments are created and interest can shift quickly. A great example is Electronics for Imaging. The stock in 1997 went from $52.00 to $14.00 (earnings were very disappointing but this was due to an inventory adjustment by its customers). The inventory shift is almost over and the stock has doubled in three months. We will keep looking for opportunities but think they will be more limited so we will concentrate the portfolio in few positions. This has and will create more volatility in month to month relative performance particularly when the major market cap stocks make a major move like January to mid February. We fear this less going forward because the market has obviously broadened in March and good values with potential catalysts or favorable news are clearly doing well in the present market phase. However, risk must not be ignored. The concentration of 1997 may erode in 1998 giving us a better opportunity for picking stocks. We will respond opportunistically and hope to deliver the best risk adjusted performance. We feel that thinking about risk in the future will benefit portfolio returns. We were encouraged recently by an analysis done by Business Week which picked the Pelican Fund for the A team of risk adjusted results. We hope to stay there. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice.
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Comparison of Change in Value of a $10,000 Investment in GMO Pelican Fund and the S&P 500 Index As of February 28, 1998 ------------------------------------------ Average Annual Total Return ------------------------------------------ Since Inception 1 Year 5 Year 5/31/89 ------------------------------------------ Class III 29.0% 19.7% 15.3% ------------------------------------------ [LINE GRAPH APPEARS HERE] Date GMO Pelican Fund S&P 500 Index ---- ---------------- ------------- 5/31/89 $10,000 $10,000 2/28/90 $9,931 $10,617 2/28/91 $10,743 $12,174 2/29/92 $12,380 $14,120 2/28/93 $14,098 $15,625 2/28/94 $16,232 $16,927 2/28/95 $17,430 $18,173 2/29/96 $22,618 $24,478 2/28/97 $26,824 $30,882 2/28/98 $34,595 $41,691 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited.
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Global Hedged Equity Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Hedged Equity Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 23, 1998
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares/ Par Value Description Value ($) ------------------------------------------------------------------------------------------------- MUTUAL FUNDS - 93.3% United States - 93.3% 2,945,382 GMO Core Fund 58,878,192 866,061 GMO Emerging Markets Fund 8,279,540 925,419 GMO Evolving Countries Fund * 7,967,862 2,457,043 GMO International Core Fund 57,003,401 324,966 GMO International Small Companies Fund 3,971,090 574,921 GMO REIT Fund 7,427,979 620,765 GMO Small Cap Growth Fund 7,622,992 440,959 GMO Small Cap Value Fund 8,060,732 ----------------- 159,211,788 ----------------- TOTAL MUTUAL FUNDS (Cost $166,000,283) 159,211,788 ----------------- STOCK AND EQUIVALENTS - 0.1% Hong Kong - 0.0% 11,703 Johnson Electric Holdings Ltd 41,618 ----------------- Italy - 0.0% 12,500 Grassetto SPA (b) - ----------------- Malaysia - 0.0% 9,000 Malaysian Resources Corp 6,098 ----------------- United Kingdom - 0.0% 7,847 Amstrad Plc 4,910 8,000 Costain Group Plc * 3,954 1,115,129 Signet Group * - 17,870 Viglen Technology Plc * 10,004 17,870 Viglen Technology Plc Entitlement Letters - ----------------- 18,868 ----------------- United States - 0.1% 1,300 Pennzoil Co 87,019 ----------------- TOTAL STOCK AND EQUIVALENTS (Cost $155,218) 153,603 ----------------- DEBT OBLIGATIONS - 6.0% United Kingdom - 0.0% GBP 29,128 Viglen Technology Plc Floating Rate Note, 6.75% due 9/1/2000 47,959 GBP 7,684 Viglen Technology Plc Floating Rate Note, 6.99% due 1/1/2001 12,652 ----------------- 60,611 ----------------- U.S. Government - 3.1% $ 5,250,000 U.S. Treasury Note, 5.50% due 11/15/98 (a) 5,249,180 ----------------- See accompanying notes to the financial statements. 1
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Par Value ($) Description Value ($) ------------------------------------------------------------------------------------------------- U.S. Government Agency - 2.9% 5,000,000 Student Loan Marketing Association, 6.05% due 10/26/09 4,979,688 ---------------- TOTAL DEBT OBLIGATIONS (Cost $10,305,339) 10,289,479 ---------------- SHORT-TERM INVESTMENTS - 2.2% Cash Equivalents - 0.9% 1,500,000 Wachovia Bank Time Deposit, 5.63%, due 3/2/98 1,500,000 ---------------- U.S. Government - 1.3% 2,350,000 U.S. Treasury Bill, 5.39% due 1/7/99 (a) 2,245,854 ---------------- TOTAL SHORT-TERM INVESTMENTS (Cost $3,747,806) 3,745,854 ---------------- TOTAL INVESTMENTS - 101.6% (Cost $180,208,646) 173,400,724 Other Assets and Liabilities (net) - (1.6%) (2,695,055) ---------------- TOTAL NET ASSETS - 100.0% $ 170,705,669 ================ Notes to the Schedule of Investments: GBP - British Pound (a) This security is held as collateral for open futures contracts. (b) Bankrupt issuer. * Non-income producing security. A dividend has not been declared for the twelve months ended February 28, 1998. 2 See accompanying notes to the financial statements.
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GMO Global Hedged Equity Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Assets and Liabilities - February 28, 1998 --------------------------------------------------------------------------------------------------- Assets: Investments, at value (cost $180,208,646) (Note 1) $ 173,400,724 Foreign currency, at value (cost $406,404) (Note 1) 400,975 Cash 92,468 Dividends and interest receivable 113,672 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,621,533 Receivable for variation margin on open futures contracts (Notes 1 and 6) 60,056 Foreign withholding taxes receivable 119,959 Receivable for expenses waived or borne by Manager (Note 2) 77,522 --------------- Total assets 175,886,909 --------------- Liabilities: Payable for open swap contracts (Notes 1 and 6) 4,121,031 Payable for Fund shares repurchased 714,919 Payable for open forward foreign currency contracts (Notes 1 and 6) 178,780 Payable to affiliate for (Note 2): Management fee 86,022 Shareholder service fee 2,210 Accrued expenses 78,278 --------------- Total liabilities 5,181,240 --------------- Net assets $ 170,705,669 =============== Net assets consist of: Paid-in capital $ 190,539,226 Distributions in excess of net investment income (1,571,288) Distributions in excess of net realized gain (876,658) Net unrealized depreciation (17,385,611) --------------- $ 170,705,669 =============== Net assets attributable to Class III Shares $ 170,705,669 =============== Shares outstanding - Class III 19,571,340 =============== Net asset value per share - Class III $ 8.72 =============== See accompanying notes to the financial statements. 3
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GMO Global Hedged Equity Fund (A Series of GMO Trust) [Enlarge/Download Table] Statement of Operations - Year Ended February 28, 1998 --------------------------------------------------------------------------------------------------- Investment income: Dividends (net of foreign tax expense of $275,665) $ 3,277,634 Dividends from investment company shares 2,449,297 Interest (including security lending income of $26,087) 2,435,206 ----------------- Total income 8,162,137 ----------------- Expenses: Management fee (Note 2) 1,509,937 Custodian fees 376,553 Audit fees 41,139 Transfer agent fees 28,203 Legal fees 13,598 Registration fees 6,500 Trustees fee (Note 2) 2,196 Stamp duties and transfer taxes 423 Miscellaneous 2,288 Fees waived or borne by Manager (Note 2) (850,401) ----------------- 1,130,436 Shareholder service fee - Class III (Note 2) 217,705 ----------------- Net expenses 1,348,141 ----------------- Net investment income 6,813,996 ----------------- Realized and unrealized gain (loss): Net realized gain (loss) on: Investments 39,032,089 Realized gain distributions from investment company shares 15,458,182 Closed futures contracts (25,202,111) Closed swap contracts (8,619,045) Foreign currency, forward contracts and foreign currency related transactions (2,891,897) ----------------- Net realized gain 17,777,218 ----------------- Change in net unrealized appreciation (depreciation) on: Investments (25,158,057) Open futures contracts (4,744,737) Open swap contracts 232,859 Foreign currency, forward contracts and foreign currency related transactions 1,995,454 ----------------- Net unrealized loss (27,674,481) ----------------- Net realized and unrealized loss (9,897,263) ----------------- Net decrease in net assets resulting from operations $ (3,083,267) ================= 4 See accompanying notes to the financial statements.
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Statement of Changes in Net Assets -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 ------------------- ------------------- Increase (decrease) in net assets: Operations: Net investment income $ 6,813,996 $ 6,639,580 Net realized gain 17,777,218 21,603,070 Change in net unrealized appreciation (depreciation) (27,674,481) (21,597,390) ------------------ --------------- Net increase (decrease) in net assets resulting from operations (3,083,267) 6,645,260 ------------------ --------------- Distributions to shareholders from: Net investment income - Class III (6,516,906) (5,664,462) Net realized gains - Class III (19,721,985) - In excess of net realized gains - Class III (7,564,405) - ------------------ --------------- (33,803,296) (5,664,462) ------------------ --------------- Net share transactions - Class III (Note 5) (89,109,720) (87,212,602) ------------------ --------------- Total decrease in net assets (125,996,283) (86,231,804) Net assets: Beginning of period 296,701,952 382,933,756 ------------------ --------------- End of period (including distributions in excess of net investment income of $1,571,288 and $927,940, respectively) $ 170,705,669 $ 296,701,952 ================== =============== See accompanying notes to the financial statements. 5
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Financial Highlights (For a Class III share outstanding throughout each period) -------------------------------------------------------------------------------- [Enlarge/Download Table] Year Ended February 28/29, ------------------------------------------------------------- 1998 1997 1996 1995* ----------- ---------- ---------- ----------- Net asset value, beginning of period $ 10.69 $ 10.64 $ 10.12 $ 10.00 ---------- ---------- ---------- --------- Income from investment operations: Net investment income 0.35 0.24 0.21 0.11 Net realized and unrealized gain (loss) (0.52) 0.01 0.55 0.08 ---------- ---------- ---------- --------- Total from investment operations (0.17) 0.25 0.76 0.19 ---------- ---------- ---------- --------- Less distributions to shareholders: From net investment income (0.35) (0.20) (0.24) (0.07) From net realized gains (1.05) - - - In excess of net realized gains (0.40) - - - ---------- ---------- ---------- --------- Total distributions (1.80) (0.20) (0.24) (0.07) ---------- ---------- ---------- --------- Net asset value, end of period $ 8.72 $ 10.69 $ 10.64 $ 10.12 ========== ========= ========== ========= Total Return (a) (1.63%) 2.34% 7.54% 1.92% Ratios/Supplemental Data: Net assets, end of period (000's) $170,706 $296,702 $ 382,934 $ 214,638 Net expenses to average daily net assets 0.58% 0.91%(c) 0.78% 0.92% Net investment income to average daily net assets 2.93% 1.99% 2.44% 2.85% Portfolio turnover rate 277% 463% 214% 194% Average broker commission rate (b) $ 0.0104 $ 0.0084 N/A N/A Fees and expenses voluntarily waived or borne by the Manager consisted of the following per share amounts: $ 0.04 $ 0.02 $ 0.005 $ 0.006 * Period from July 29, 1994 (commencement of operations) to February 28, 1995. ** Annualized (a) Calculation excludes purchase premiums and redemption fees. The total returns would have been lower had certain expenses not been waived during the periods shown. (b) For fiscal years beginning on or after September 1, 1995, a fund is required to disclose its average commission rate per share for security trades on which commissions are charged. The average broker commission rate will vary depending on the markets in which trades are executed. (c) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximates .02% of average daily net assets. 6 See accompanying notes to the financial statements.
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements February 28, 1998 -------------------------------------------------------------------------------- 1. Significant accounting policies GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series into classes. The Fund seeks total return consistent with minimal exposure to general equity market risk, either directly or through investment in other Funds of the Trust ("underlying Funds"). On August 20, 1998, the Fund began to invest a substantial portion of its assets in underlying Funds. On June 1, 1996, the Fund began to offer three classes of shares: Class I, Class II and Class III. The principal economic difference among the classes of shares is the level of shareholder service fee borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested with GMO, as more fully outlined in the Trust's prospectus. Class III shares are the continuation of the Trust's shares that existed prior to June 1, 1996, and bore the same total operating expenses (after the voluntary expense waiver) as those shares. On August 20, 1997, the Fund revised its voluntary expense waiver to include certain expenses incurred indirectly by the Fund through investment in underlying Funds (see Note 2). Effective January 9, 1998, Class I and Class II shares ceased to be offered. The following is a summary of significant accounting policies which are in conformity with generally accepted accounting principles and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Portfolio valuation Shares of underlying Funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are available are valued at the last quoted sale price on each business day, or if there is no such reported sale, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates market value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. 7
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Foreign currency translation The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings, other assets and liabilities are translated to U.S. dollars based on the prevailing exchange rates each business day. Income and expenses denominated in foreign currencies are translated at prevailing exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent net exchange gains and losses on disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Futures contracts The Fund may purchase index futures contracts. Stock index futures contracts represent commitments for future delivery of cash based upon the level of a specified index of equity securities at a specified price at a given date. The Fund may use futures contracts to manage its exposure to the stock and currency markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government obligations in accordance with the initial margin requirements of the broker or exchange. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is subsequently settled. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 1998. 8
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 1998. Options The Fund may write call and put options on securities it owns or in which it may invest. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are offset against the proceeds or amounts paid on the transaction to determine the realized gain or loss. If a written put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as a writer of an option has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 1998, there were no outstanding written options. The Fund may also purchase put and call options. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. The risk associated with purchasing put and call options is limited to the premium paid. 9
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreements The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into swap agreements to manage its exposure to the equity markets. The Fund enters into total return swap agreements which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return based on a notional amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Total return swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there is no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 6 for a summary of open swap agreements as of February 28, 1998. Security lending The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay in recovery or even loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 1998, the fund had no securities on loan. Taxes The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for federal income tax purposes. Therefore, no provision for federal income or excise tax is necessary. Taxes on foreign interest and dividend income have been withheld in accordance with the applicable country's tax treaty with the United States. 10
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Distributions to shareholders The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments for foreign currency and passive foreign investment company transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 1998. This reclassification has no impact on net investment income, realized gain/loss and net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under federal tax rules versus generally accepted accounting principles. The calculation of net investment income per share in the financial highlights table excludes these adjustments. Distributions in Accumulated Excess of Net Undistributed Investment Income Net Realized Gain Paid-in Capital ----------------------- ------------------------- ------------------- ($940,438) $758,903 $181,535 Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Differences in the recognition or classification of income for financial statement and tax purposes which result in temporary over-distributions for financial statement purposes are classified as distributions in excess of net investment income or accumulated net realized gains. Security transactions and related investment income Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the accretion of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Allocation of operating activity The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated in such manner as deemed equitable by the Trustees, taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on 11
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. (See Note 2). Purchases and redemptions of Fund shares The premium on cash purchases of Fund shares is .37% of the amount invested. Prior to June 30, 1997, the premium on cash purchases was .50% of the amount invested. In the case of cash redemptions, the fee is 1.40% of the amount redeemed. The Manager may waive the fee on cash redemptions if it is not necessary to incur costs relating to the early termination of hedging transactions to meet redemption requests. All purchase premiums and redemption fees are paid to and are recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. Purchase premiums are included as part of each class' "shares sold" and redemption fees are included as part of each class' "shares repurchased", respectively, as summarized in Note 5. For the year ended February 28, 1998, the Fund received $2,343 in purchase premiums and no redemption fees. There is no premium for reinvested distributions. Normally, no purchase premium is charged with respect to in-kind purchases of Fund shares. A purchase premium of up to 0.10% may be charged on certain in-kind transactions. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. Fees and other transactions with affiliates GMO earns a management fee paid monthly at the annual rate of .65% of average daily net assets. Effective June 1, 1996, the Fund adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .28% for Class I shares, .22% for Class II shares and .15% for Class III shares. The Fund will invest in Class III shares of each underlying Fund being offered. Like the management fee (as described below), the shareholder service fee of each class of the Fund's shares will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of underlying Funds. GMO has agreed to waive a portion of its fee (but not below zero) and bear other expenses until further notice to the extent that the Fund's annual expenses (including the management fee but 12
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- excluding custody fees, brokerage commissions, certain other transaction costs (including transfer taxes), shareholder service fees and extraordinary expenses ("fund expenses")) plus the amount of fees and expenses (excluding shareholder service fee and fund expenses (as defined above) incurred indirectly by the Fund through investment in underlying Funds) exceed .50% of average daily net assets. Because GMO will not waive the management fees below zero, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund through investment in underlying Funds may exceed .50% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 1998, was $2,196. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. Purchases and sales of securities For the year ended February 28, 1998, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows: [Enlarge/Download Table] Purchases Proceeds ---------------------- --------------------- U.S. Government securities $ 302,077,695 $ 313,850,234 Investments (non-U.S. Government securities) 266,435,906 355,676,538 At February 28, 1998, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows: [Enlarge/Download Table] Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation ------------------------- ----------------------------- -------------------------- -------------------------- $182,567,708 $1,989,887 $11,156,871 $9,166,984 4. Principal shareholders At February 28, 1998, 42% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. 13
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- 5. Share transactions The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares, including purchase premiums and redemption fees received by the Fund, were as follows: [Enlarge/Download Table] Year Ended Year Ended February 28, 1998 February 28, 1997 --------------------------------------------- --------------------------------------------- Class III: Shares Amount Shares Amount -------------------- --------------------- -------------------- -------------------- Shares sold 58,635 $ 595,622 2,716,101 $ 28,751,811 Shares issued to shareholders in reinvestment of distributions 3,493,801 30,813,859 335,863 3,585,825 Shares repurchased (11,741,685) (120,519,201) (11,267,323) (119,550,238) -------------------- --------------------- -------------------- -------------------- Net decrease (8,189,249) $ (89,109,720) (8,215,359) $ (87,212,602) ==================== ===================== ==================== ==================== 6. Financial instruments A summary of outstanding financial instruments at February 28, 1998 is as follows: Short futures contracts [Enlarge/Download Table] Number of Net Unrealized Contracts Type Expiration Date Contract Value Depreciation ----------------- --------------------- ---------------------- -------------------- --------------------- 341 S&P 500 March 1998 $ 89,555,125 $ (6,718,780) 6 MIB30 March 1998 973,908 (123,148) 8 DAX March 1998 2,074,776 (181,777) 32 TOPIX March 1998 3,232,170 (11,252) 9 HANG SENG March 1998 671,295 (59,273) 21 FT-SE 100 March 1998 4,997,176 (475,682) 13 ALL ORDS March 1998 597,797 (15,539) 17 OMX March 1998 583,483 (12,584) 16 MATIF CAC 40 March 1998 1,803,572 (235,264) 11 IBEX March 1998 639,223 (54,314) --------------------- $ (7,887,613) ===================== At February 28, 1998, the Fund had cash and/or securities to cover any margin requirements on open futures contracts. 14
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts [Enlarge/Download Table] Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys 4/17/98 ATS 1,752,850 $ 137,649 $ 149 4/17/98 AUD 1,571,426 1,071,477 54,977 4/17/98 BEF 12,792,375 342,369 (130) 3/6/98 CHF 2,014,320 1,373,074 (13,263) 4/17/98 CHF 3,956,761 2,712,456 (8,044) 3/6/98 DEM 2,841,280 1,565,944 (648) 4/17/98 DEM 6,496,856 3,589,869 (6,911) 4/17/98 DKK 2,036,356 295,028 28 3/6/98 ESP 69,409,400 450,698 (487) 4/17/98 ESP 139,068,000 904,107 (2,300) 4/17/98 FIM 1,121,192 204,065 (435) 3/6/98 FRF 7,731,100 1,269,859 (1,181) 4/17/98 FRF 18,111,701 2,982,479 (12,198) 3/6/98 GBP 1,745,955 2,874,296 14,823 4/17/98 GBP 4,937,196 8,109,851 76,544 4/17/98 HKD 7,828,943 1,010,072 13,072 4/17/98 IEP 46,996 64,030 (970) 3/6/98 ITL 1,422,181,550 794,727 1,608 4/17/98 ITL 2,471,765,950 1,380,518 (2,482) 4/17/98 JPY 528,827,500 4,214,101 (35,899) 4/17/98 MYR 2,605,440 706,872 116,872 3/6/98 NLG 1,851,388 904,670 (898) 4/17/98 NLG 4,108,600 2,013,016 (6,653) 4/17/98 NOK 1,459,809 193,316 (3,684) 4/17/98 NZD 278,024 162,462 5,462 3/6/98 SEK 3,155,589 394,170 4,591 4/17/98 SEK 8,703,750 1,088,659 1,616 15
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued [Enlarge/Download Table] Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Buys - continued 4/17/98 SGD 700,916 432,210 39,210 ------------------- $ 232,769 =================== Sales 4/17/98 ATS 2,567,200 201,599 12,142 4/17/98 AUD 2,261,293 1,541,863 14,269 4/17/98 BEF 18,837,500 504,158 27,524 3/6/98 CHF 2,014,320 1,373,074 26,926 4/17/98 CHF 3,685,526 2,526,518 138,938 8/20/98 CHF 2,014,320 1,402,562 11,294 3/6/98 DEM 2,841,280 1,565,944 34,056 4/17/98 DEM 6,496,856 3,589,869 191,110 8/20/98 DEM 2,841,280 1,581,278 (726) 4/17/98 DKK 2,779,560 402,703 21,702 3/6/98 ESP 69,409,400 450,698 9,302 4/17/98 ESP 139,068,000 904,107 51,227 8/20/98 ESP 69,409,400 453,449 30 4/17/98 FIM 1,645,560 299,503 17,976 3/6/98 FRF 7,731,100 1,269,859 30,141 4/17/98 FRF 18,111,701 2,982,479 165,467 8/20/98 FRF 7,731,100 1,282,111 165 3/6/98 GBP 1,745,955 2,874,296 28,704 4/17/98 GBP 5,369,055 8,819,223 163,418 8/20/98 GBP 1,745,955 2,850,439 (14,746) 4/17/98 HKD 11,700,450 1,509,565 (30,555) 4/17/98 IEP 68,273 93,019 9,623 3/6/98 ITL 1,422,181,550 794,727 14,273 4/17/98 ITL 2,282,743,600 1,274,946 68,634 16
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Forward currency contracts - continued [Enlarge/Download Table] Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ------------------ ------------------------- --------------------- ------------------- ------------------- Sales - continued 8/20/98 ITL 1,422,181,550 $ 794,955 $ (2,247) 4/17/98 JPY 856,180,000 6,822,695 (22,695) 4/17/98 MYR 3,258,200 883,969 28,436 3/6/98 NLG 1,851,388 904,670 20,330 4/17/98 NLG 4,108,600 2,013,016 108,976 8/20/98 NLG 1,851,388 913,720 94 4/17/98 NOK 1,511,600 200,174 15,895 4/17/98 NZD 318,016 185,831 11,402 3/6/98 SEK 3,155,589 394,170 6,830 4/17/98 SEK 8,703,750 1,088,659 63,697 8/20/98 SEK 3,155,589 396,122 (5,105) 4/17/98 SGD 928,690 572,664 (6,523) ------------------- $ 1,209,984 =================== Currency Abbreviations: ATS Austrian Schilling HKD Hong Kong Dollar AUD Australian Dollar IEP Irish Pound BEF Belgian Franc ITL Italian Lira CHF Swiss Franc JPY Japanese Yen DEM German Mark MYR Malaysian Ringgit DKK Danish Krona NLG Netherlands Guilder ESP Spanish Peseta NOK Norwegian Kroner FIM Finnish Markka NZD New Zealand Dollar FRF French Franc SEK Swedish Krona GBP British Pound SGD Singapore Dollar 17
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Notes to Financial Statements - continued -------------------------------------------------------------------------------- Swap agreements [Enlarge/Download Table] Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------------- --------------- ------------------------------------------------------ ------------------- $ 9,000,000 09/30/98 Agreement with Deutsche Bank AG dated 9/30/97 to pay $ (2,992) (receive) the notional amount multiplied by the return on the EAFE Index (including dividends) and to receive the notional amount multiplied by 6 month LIBOR adjusted by a specified spread. 15,500,000 05/29/98 Agreement with Swiss Bank Corporation dated 5/30/97 (390,729) to pay (receive) the notional amount multiplied by the return on the EAFE Index (including dividends) and to receive the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. 25,641,923 05/29/98 Agreement with Swiss Bank Corporation dated 5/30/97 (3,727,310) to pay (receive) the notional amount multiplied by the return on the EAFE x-Japan Index (including dividends) and to receive the notional amount multiplied by 12 month LIBOR adjusted by a specified spread. ------------------- Net unrealized depreciation $ (4,121,031) =================== 18
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Federal Tax Information - (Unaudited) ------------------------------------------------------------------------------- For the fiscal year ended February 28, 1998, all the Fund's distributions are from investment company taxable income, except that the Fund has designated 54% of distributions as net capital gain dividends. The Fund has elected to defer to March 1, 1998 post-October losses of $5,813,966. 19
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GMO Global Hedged Equity Fund (A Series of GMO Trust) Portfolio Managers ------------------ Mr. R. Jeremy Grantham, Mr. Christopher Darnell and Mr. Forrest Berkley are primarily responsible for the day-to-day management of the Fund's portfolio. Mr. Grantham has been with GMO since its founding in 1977. Mr. Darnell has been with GMO and involved in portfolio management for more than 16 years. Mr. Berkley has been with GMO and involved in portfolio management for more than 10 years. Management Discussion and Analysis of Fund Performances ------------------------------------------------------- The Class III shares of the Global Hedged Equity Fund returned -1.63% for the fiscal year ending February 28, 1998. During that period the Fund's benchmark, The Salomon 3 Month T-Bill, returned +5.27%. The Fund's objective is to outperform the Salomon 3 Month T-Bill Index by adding the alpha (value added) of our U.S. and international equity funds, as well as the value added of our asset allocation strategy, to a short-term fixed income return. As of February 28, 1998, the Fund held 44% of its assets in U.S. equities, 35% in developed international equities and 12% in emerging markets equities. The remaining 9% of the Fund was invested in U.S. Treasuries and cash holdings. The equity exposure is fully hedged using EAFE futures and international equity swaps combined to represent the GMo EAFE-Lite Index, as well as S&P 500 futures. In August, the GMO Global Hedged Equity Fund converted into a fund-of-funds by exchanging its portfolio securities for GMO mutual fund shares of equivalent value. The purpose of the conversion was to enable the Fund to implement more effectively its investment strategies. The Fund currently invests in the GMO Core Fund, GMO REIT Fund, GMO Small Cap Growth Fund, GMO Small Cap Value Fund, GMO Evolving Countries Fund, GMO Emerging Markets Fund, GMO International Small Companies Fund and GMO International Core Fund. The conversion does not represent any change in the investment strategies of the Fund, but only in the implementation of these strategies. The GMO Global Hedged Equity Fund's performance for the fiscal year was negatively impacted by the poor performance of the GMO International Core Fund relative to EAFE-Lite. For the fiscal year, the GMO International Core Fund returned 11.7%, trailing the GMO EAFE-Lite Index by 7.1%. Returns for the Fund relative to the benchmark were negatively impacted by the Fund's value orientation in a market that favored large, growth-oriented international stocks. The emerging markets position also negatively impacted the relative performance of the GMO Global Hedged Equity Fund. The 12% weight in emerging markets was hedged half with S&P 500 futures and half with EAFE futures and international equity swaps. This position reflected the expectation that emerging markets would outperform richly valued developed equity markets. However, during the year, developed markets continued to trend upwards, while emerging markets fell sharply in the wake of the financial collapse in Southeast Asia. For the fiscal year, the U.S. equity funds as a group returned 34.4%, slightly underperforming the S&P 500 return of 35.0%. The GMO Core Fund, which accounts for 72% of the U.S. equity holdings, outperformed the S&P 500 Index by 1.7%. However, diversification into the GMO Small Cap Value, Small Cap Growth and REIT Funds was unsuccessful in adding value. The small cap funds did well against their respective mandates, but lagged the S&P 500 Index, which continued its record-breaking run. The 9% Treasury position was enhanced with bond futures for most of the fiscal year. As interest rate spreads narrowed, this exposure added value for the period. Outlook ------- We continue to believe that valuation levels of developed equity markets are high. In the U.S., we are maintaining positions in the GMO Small Cap Value, Small Cap Growth and REIT Funds which, in our view, have better return potential than the S&P 500. In out GMO International Core portfolio we are emphasizing small and value stocks. We are also maintaining a significant exposure to emerging equity markets, which we expect to rebound from currently depressed levels. We expect this positioning of our international portfolio to outperform both GMO EAFE-Lite and the S&P 500 during the current fiscal year. The views expressed here are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management. They are not meant as investment advice.
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Global Hedged Comparison of Change in Value of a $10,000 Investment in GMO Global Hedged Equity Fund Class III Shares and the Salomon Brothers 3 Month Treasury Bill Index As of February 28, 1998 ---------------------------------- Average Annual Total Return ---------------------------------- Since Inception 1 Year 7/29/94 ---------------------------------- Class III -3.6% 2.2% ---------------------------------- [LINE GRAPH APPEARS HERE] GMO Global Hedged Equity Salomon Brothers 3 Month Date Fund Class III Shares Treasury Bill Index ---------- ------------------------ ------------------------ 7/29/94 $9,963 $10,000 2/28/95 $10,155 $10,297 2/29/96 $10,769 $10,882 2/28/97 $11,021 $11,451 2/28/98 $10,811 $12,054 Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been waived during the periods shown and do not include the effect of taxes on reinvested distributions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 37 bp on the purchase and 140 bp on the redemption. Transaction fees are paid to the Fund to cover trading costs. Class III shares are a redesignation of the single class of shares that has been offered by the Fund since inception. Past performance is not indicative of future performance Information is unaudited.
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GMO Foreign Fund (A Series of GMO Trust) Annual Report February 28, 1998
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Report of Independent Accountants To the Trustees of GMO Trust and the Shareholders of GMO Foreign Fund (A Series of GMO Trust) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Fund at February 28, 1998, the results of its operations for the year then ended, the changes in its net assets and the financial highlights for the periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 1998 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts April 23, 1998
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GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- STOCK AND EQUIVALENTS - 93.9% Argentina - 0.2% 57,500 YPF SA ADR 1,818,438 ------------------ Australia - 3.8% 346,591 Australia and New Zealand Banking Group Ltd 2,384,763 572,816 Broken Hill Proprietary Ltd 5,658,348 2,840,000 Burns Philp & Co Ltd 464,340 501,000 Burswood Ltd 361,785 229,100 Caltex Australia Ltd 733,550 323,232 Capral Aluminum Ltd 682,626 5,674,100 Crown Ltd * 2,705,836 237,472 Dominion Mining Ltd Warrants 12/31/98 * 3,236 494,945 Dominion Mining Ltd * 101,154 690,504 Email Ltd 1,552,339 465,510 Foodland Associated 3,504,272 1,462,358 Goodman Fielder Ltd 2,530,427 3,365,000 Menzies Gold NL * 378,247 3,072,793 MIM Holdings Ltd 1,716,539 296,888 Newcrest Mining Ltd * 398,442 390,000 Oil Search Ltd 757,209 54,000 Orogen Minerals Ltd GDR 144A 1,161,000 4,101,235 Pasminco Ltd 4,556,959 602,001 Pioneer International Ltd 1,742,981 326,990 Qantas Airways Ltd 559,132 616,496 Rothmans Holdings Ltd 3,729,493 661,499 Western Mining Corp Holdings Ltd 2,244,218 529,994 Westpac Banking Corp 3,675,575 511,706 Wills (WD & HO) Holdings Ltd 700,685 ------------------ 42,303,156 ------------------ Austria - 0.4% 42,920 Bank Austria AG (Participating Certificate) 2,531,192 4,613 Oesterreichische Brau Beteiligungs AG 270,244 7,170 Radex-Heraklith AG 288,076 1,991 Universale Bau AG 69,391 4,107 VA Technologie AG (Bearer) 567,084 3,140 Wienerberger Baustoffindustrie AG 606,201 ------------------ 4,332,188 ------------------ Belgium - 2.9% 28,925 Almanij NV 1,660,137 1,109 Bekaert SA 750,485 6,000 CBR Cimenteries NPV 526,962 25,192 Cie Francois De Enterprises 7,027,667 14,350 Credit Commercial Dexia 2,060,945 19,398 Electrabel SA 4,707,096 6,397 Generale Banque NPV 3,026,877 17,305 GIB Holdings Ltd 852,315 See accompanying notes to the financial statements. 1
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GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- Belgium - continued 5,032 Kredietbank NPV 2,323,908 2,713 Petrofina SA Bruxelles 925,216 1,510 Royale Belge NPV 478,677 24,780 Solvay Et Cie 1,554,538 33,775 Tractebel 3,466,761 715 UCB Cap NPV 2,872,597 ------------------ 32,234,181 ------------------ Brazil - 0.0% 6,439,529 Gerdau SA Preferred 102,563 158,537 Metalurgica Gerdau SA 3,788 2,809,994 Metalurgica Gerdau SA Preferred 87,098 ------------------ 193,449 ------------------ Canada - 0.9% 137,220 Abitibi Consolidated Inc 1,957,324 29,693 Alliance Forest Products Inc Preferred * 588,373 10,200 Alliance Forest Products Inc (c) * 202,115 10,500 Avenor Inc 222,447 12,000 Boliden Ltd Installment Receipt 144A * 30,777 283,000 Boliden Ltd * 725,819 50,000 Burcon Properties Ltd * 518,217 36,700 Burcon Properties Ltd * 380,371 99,149 Cambridge Shopping Centres Ltd 1,034,580 15,000 Cambridge Shopping Centres Ltd * 156,519 82,500 Canadian Hotel Income Properties 547,816 33,500 Canfor Corp 240,101 101,500 Iamgold (International African Mining Gold) * 349,471 116,600 KAP Resources Ltd Class A Warrants 8/5/2000 * 32,772 220,100 KAP Resources Ltd * 290,755 200,000 Meridian Gold Inc * 611,320 633,600 Semi-Tech Class A * 253,769 38,800 St Laurent Paperboard * 440,305 99,000 Tembec Inc Class A * 605,207 24,140 Trizec Hahn Corp (Sub-Voting) 595,379 ------------------ 9,783,437 ------------------ Denmark - 0.0% 12,300 Alm Brand AS Class B 444,473 ------------------ France - 8.5% 9,350 Accor SA 2,158,903 34,745 Alcatel Alsthom Cie Generale d'Electricite SA 4,519,118 31,136 Axa SA 3,011,718 2 See accompanying notes to the financial statements.
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GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- France - continued 4,788 Axa UAP Certificates 7/1/99 1,494 31,516 Banque Nationale de Paris 1,904,650 46,500 BIC SA 3,685,331 21,046 Bouygues 2,951,642 4,080 Cap Gemini SA 469,023 5,278 Chargeurs International SA 311,952 5,943 Christian Dior 720,275 12,983 Club Mediterranee SA Rights 3/11/98 * 18,869 12,983 Club Mediterranee SA * 963,717 3,200 Colas SA 515,006 7,843 Compagnie Generale d'Industrie et de Participations 3,373,292 6,890 Credit Local de France SA 879,177 16,505 Credit Lyonnais * 1,206,179 7,679 Dollfus-Mieg and Cie * 158,895 108,305 Elf Aquitaine SA 12,325,880 2,871 Elf Gabon 490,346 10,339 Eridania Beghin-Say SA 1,843,931 18,576 Financiere de Paribas SA 1,766,310 45,550 France Telecom SA * 2,207,465 1,739 Gaz Et Eaux 742,522 6,474 Generale Des Eaux 1,018,531 11,021 Generale Des Eaux Warrants 5/2/2001 * 11,040 8,463 Groupe Andre * 931,184 3,038 Groupe Axime * 497,914 17,938 Groupe Danone 3,623,392 2,299 Guyenne Et Gascogne 755,101 5,500 Imetal 684,649 4,389 Labinal SA 1,226,765 12,000 Lafarge Coppee SA 885,429 36,617 Lagardere Groupe 1,328,958 62,365 Lyonnaise Des Eaux 8,224,181 23,310 Michelin SA Class B 1,443,178 4,318 Pathe SA 829,669 33,523 Pechiney SA Class A 1,486,424 23,970 Pernod-Ricard 1,566,705 18,953 Peugeot SA 2,698,567 52,112 Rhone Poulenc SA Class A 2,401,384 6,796 Saint-Gobain 952,004 60,594 Seita 2,646,960 16,483 Sidel (Bearer) 1,142,312 18,755 Societe Generale Paris 2,827,457 15,100 Sommer Allibert 588,700 35,350 SPIE Batignolles 2,200,213 See accompanying notes to the financial statements. 3
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GMO Foreign Fund (A Series of GMO Trust) Schedule of Investments - continued (showing percentage of total net assets) February 28, 1998 [Enlarge/Download Table] Shares Description Value ($) -------------------------------------------------------------------------------------------------- France - continued 4,196 Strafor Facom 327,315 6,000 Sylea (Bearer) 708,462 54,656 Thomson CSF 1,884,922 30,344 Total SA 3,328,783 12,602 TV Francaise 1,365,902 9,260 Vallourec 638,091 6,835 Worms et Compagnie SA 426,539 ------------------ 94,876,426 ------------------ Germany - 7.4% 128,500 Bankgesellschaft Berlin AG 2,729,674 61,990 Bayer AG 2,635,365 135,000 Bayerische Hypotheken und Wechsel-Bank AG 2,447,445 11,602 BHF Bank AG 338,838 27,200 Brau und Brunnen * 2,450,585 9,945 Cologne Reinsurance (Registered) 11,891,803 141,000 Commerzbank AG 5,104,670 178,010 Continental AG 4,276,752 26,500 Daimler-Benz 2,165,560 35,500 Deutsche Bank AG 2,437,416 227,000 Deutsche Telekom AG 4,509,354 169,940 Dresdner Bank 7,777,114 3,641 Dyckerhoff AG (Non Voting) 1,015,207 9,800 Holzmann (Philipp) *