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0000930413-09-006514.txt : 20091230
0000930413-09-006514.hdr.sgml : 20091230
20091230144514
ACCESSION NUMBER: 0000930413-09-006514
CONFORMED SUBMISSION TYPE: 497
PUBLIC DOCUMENT COUNT: 3
FILED AS OF DATE: 20091230
DATE AS OF CHANGE: 20091230
EFFECTIVENESS DATE: 20091230
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: LAZARD FUNDS INC
CENTRAL INDEX KEY: 0000874964
IRS NUMBER: 000000000
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 497
SEC ACT: 1933 Act
SEC FILE NUMBER: 033-40682
FILM NUMBER: 091266201
BUSINESS ADDRESS:
STREET 1: 30 ROCKEFELLER PLAZA
CITY: NEW YORK
STATE: NY
ZIP: 10112
BUSINESS PHONE: 2126326000
MAIL ADDRESS:
STREET 1: 30 ROCKEFELLER PLAZA
CITY: NEW YORK
STATE: NY
ZIP: 10112
0000874964
S000027245
Lazard Global Listed Infrastructure Portfolio
C000082231
Institutional Shares
C000082232
Open Shares
497
1
c58779_497.htm
3B2 EDGAR HTML -- c58779_preflight.htm

December 31, 2009
Lazard Funds Prospectus
Institutional
Shares
Open
Shares
GLIFX
GLFOX
Global Equity
Lazard Global Listed Infrastructure
Portfolio
Subject to Completion, dated October
15, 2009
The Securities and Exchange Commission has not approved or disapproved the shares described in this Prospectus or determined whether this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The information in
this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
Lazard Funds
Lazard Funds Table of Contents
p
Prospectus1
Lazard Funds Summary Section
p
Lazard Global Listed Infrastructure Portfolio
Investment Objective
The Portfolio seeks total return.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio.
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Institutional Shares |
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Open Shares |
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Shareholder Fees (fees paid directly from your investment)
Maximum Redemption Fee (as a % of amount redeemed, on shares owned for
30 days or less) |
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1.00% |
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1.00% |
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Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage of the value of your investment) |
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Management Fees |
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.90% |
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.90% |
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Distribution and Service (12b-1) Fees |
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None |
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.25% |
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Other Expenses* |
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.53% |
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.58% |
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Total Annual Portfolio Operating Expenses* |
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1.43% |
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1.73% |
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Fee Waiver and Expense Reimbursement* |
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.13% |
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.13% |
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Total Annual Portfolio Operating Expenses After Fee Waiver and Expense Reimbursement** |
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1.30% |
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1.60% |
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* |
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Other Expenses are based on estimated amounts for the current fiscal year. |
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** |
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Reflects a contractual agreement by Lazard Asset Management LLC (the Investment Manager) to waive its fee and, if necessary, reimburse the Portfolio through April 30, 2011, to the extent Total Annual Portfolio Operating Expenses exceed 1.30% and 1.60% of the average daily net assets of the Portfolios Institutional Shares and Open Shares, respectively, exclusive of taxes, brokerage, interest on
borrowings, fees and expenses of Acquired Funds and extraordinary expenses, and excluding shareholder redemption fees or other transaction fees. This agreement can only be amended by agreement of The Lazard Funds, Inc. (the Fund) and the Investment Manager to lower the net amount shown and will terminate automatically in the event of termination of the Investment Management Agreement
between the Investment Manager and the Fund, on behalf of the Portfolio.
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Example
This Example is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Portfolios operating expenses remain the same, giving effect to
the fee waiver in year one only. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
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1 Year |
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3 Years |
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Institutional Shares |
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$132 |
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$440 |
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Open Shares |
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$163 |
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$533 |
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Portfolio Turnover
The Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected
in annual portfolio operating expenses or in the Example, affect the Portfolios performance.
2Prospectus
Principal Investment Strategies
The Portfolio will invest primarily in equity securities, principally common stocks, of infrastructure companies. The Investment Manager intends to focus on companies with a minimum market capitalization of $250 million that own physical infrastructure.
Under normal circumstances, the Portfolio will invest at least 80% of its assets in equity securities of infrastructure companies, which consist of utilities, pipelines, toll roads, airports, railroads, ports and telecommunications and other infrastructure companies, with securities listed on a national or other recognized
securities exchange. The Portfolio will seek to focus its investments in a subset of infrastructure securities that are considered preferred infrastructure securities by the Investment Manager. Generally, the Investment Manager considers securities that are more likely to exhibit certain desirable characteristics,
such as longevity of the issuer, lower risk of capital loss and revenues linked to inflation, to be preferred infrastructure securities.
Under normal market conditions, the Portfolio will invest significantly (at least 40%unless market conditions are not deemed favorable by the Investment Manager, in which case the Portfolio would invest at least 30%) in infrastructure companies organized or located outside the U.S. or doing a substantial
amount of business outside the U.S. The Portfolio will allocate its assets among various regions and countries, including the United States (but in no less than three different countries). The Portfolio may invest in equity securities of companies with some business activities located in emerging market countries.
The allocation of the Portfolios assets to emerging market countries may shift from time to time based on the Investment Managers judgment and analysis of market conditions.
The Investment Manager will generally seek to substantially hedge foreign currency exposure in the Portfolio back to the U.S. dollar, although the Portfolios total foreign currency exposure may not be fully hedged at all times.
The Portfolio may engage in various investment techniques consistent with its investment strategies, including writing put and covered call options on securities (including exchange-traded funds) and entering into other derivatives transactions such as swap agreements, forward currency contracts and options on
indexes and currencies.
Principal Investment Risks
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection
with capital construction programs, high leverage, costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy
conservation policies and other factors. Infrastructure companies may also be affected by or subject to:
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regulation by various government authorities, including rate regulation; |
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service interruption due to environmental, operational or other mishaps; |
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the imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards; and |
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general changes in market sentiment towards infrastructure and utilities assets.
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While stocks have historically been a leading choice of long-term investors, they do fluctuate in price, often based on factors unrelated to the issuers value. Foreign securities carry special risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of
company information, differing auditing and legal standards, and, potentially, less liquidity.
Irrespective of any foreign currency exposure hedging, the Portfolio may experience a decline in the value of its portfolio securities, in U.S. dollar terms, due solely to fluctuations in currency exchange rates.
The securities markets of emerging market countries can be extremely volatile. The Portfolios performance will be influenced by political, social and economic factors affecting companies in emerging market countries. Emerging market countries generally have economic structures that are less diverse and
mature, and political systems that are less stable, than those of developed countries. The value of your investment in the Portfolio will fluctuate, which means you could lose money.
Prospectus3
Because the Portfolio may invest in a smaller number of issuers than other, more diversified, investment portfolios, the Portfolios net asset value may be relatively more susceptible to adverse effects from any single corporate, economic, market, political or regulatory occurrence than if the Portfolios investments
consisted of a larger number of securities.
While the Portfolio may engage in foreign currency transactions primarily for hedging purposes, it also may use these transactions to increase returns. However, there is the risk that these transactions may reduce returns or increase volatility. In addition, derivatives, such as those used in certain foreign currency
transactions, can be illiquid and highly sensitive to changes in the related currency. As such, a small investment in certain derivatives could have a potentially large impact on the Portfolios performance.
Performance Bar Chart and Table
Because the Portfolio has not commenced investment operations prior to the date of this Prospectus, no performance returns are presented in this part of the Prospectus. Annual performance returns provide some indication of the risks of investing in the Portfolio by showing changes in performance from year to
year. Comparison of Portfolio performance to an appropriate index indicates how the Portfolios average annual returns compare with those of a broad measure of market performance. Performance information will be available at www.LazardNet.com or by calling (800) 823-6300. The Portfolios past performance
(before and after taxes) is not necessarily an indication of how the Portfolio will perform in the future.
4Prospectus
Management
Investment Manager
Lazard Asset Management LLC
Portfolio Manager/Analysts
John Mulquiney, portfolio manager/analyst on the Investment Managers Global Listed Infrastructure team, has been with the Portfolio since inception.
Warryn Robertson, portfolio manager/analyst on the Investment Managers Global Listed Infrastructure team, has been with the Portfolio since inception.
Purchase and Sale of Fund Shares
The initial investment minimums are:
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Institutional Shares |
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$ |
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100,000 |
|
|
Open Shares |
|
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$ |
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2,500 |
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IRA Rollover/Transfer (Open Shares only) |
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$ |
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2,500 |
|
|
The subsequent investment minimum is $50.
Portfolio shares are redeemable through the Funds transfer agent, Boston Financial Data Services, Inc. (the Transfer Agent), on any business day by telephone, mail or overnight delivery. Clients of financial intermediaries may be subject to the intermediaries procedures.
Tax Information
All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, and long-term capital gains are generally taxable as such, whether you receive the distribution in cash or reinvest it in additional shares.
Financial Intermediary Compensation
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Portfolio through a broker-dealer or other financial intermediary (such as a bank), the Portfolio and the Investment Manager and its affiliates may pay the intermediary for the sale of Portfolio shares and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your financial intermediarys web site for more information.
Prospectus5
Lazard Funds Overview
p
The Portfolio
Because you could lose money by investing in the Portfolio, be sure to read all risk disclosures carefully before investing.
The Portfolio has adopted a policy to invest at least 80% of its assets in specified securities appropriate to its name and to provide its shareholders with at least 60 days prior notice of any change with respect to this policy.
Information on the Portfolios recent strategies and holdings can be found in the current annual/semi-annual report, when available (see back cover).
The Portfolio invests primarily in equity securities, including common stocks, preferred stocks and convertible securities. Under adverse market conditions, the Portfolio could pursue a defensive strategy by investing some or all of its assets in money market securities to seek to avoid or mitigate losses. In
pursuing such a strategy, the Portfolio may forgo more profitable investment strategies and, as a result, may not achieve its stated investment objective.
Who May Want to Invest?
Consider investing in the Portfolio if you are:
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pursuing a long-term goal such as retirement |
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seeking exposure to infrastructure companies |
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looking to add an equity component to your investment portfolio |
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willing to accept the higher risks of investing in the stock market in exchange for potentially higher long-term returns
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The Portfolio may not be appropriate if you are:
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pursuing a short-term goal or investing emergency reserves |
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uncomfortable with an investment that will fluctuate in value
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You should be aware that the Portfolio:
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is not a bank deposit |
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is not guaranteed, endorsed or insured by any bank, financial institution or government entity, such as the Federal Deposit Insurance Corporation |
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is not guaranteed to achieve its stated goal
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IMPORTANT NOTICE REGARDING DELIVERY OF SHAREHOLDER DOCUMENTS
To reduce expenses, only one copy of the prospectus, and each annual and semi-annual report, will be mailed to those addresses shared by two or more accounts. If you wish to revoke this arrangement and receive individual copies of these documents, you may do so at any time by writing to: Householding Department, 51 Mercedes
Way, Edgewood, New York 11717, or by calling (800) 542-1061. The Fund will begin sending you individual copies 30 days after receiving your request.
6Prospectus
Lazard Funds Investment Objective, Strategies and Risks
p
Lazard Global Listed Infrastructure Portfolio
Investment Objective
The Portfolio seeks total return.
Principal Investment Strategies
The Portfolio will invest primarily in equity securities, principally common stocks, of infrastructure companies. The Investment Manager intends to focus on companies with a minimum market capitalization of $250 million that own physical infrastructure.
Under normal circumstances, the Portfolio will invest at least 80% of its assets in equity securities of infrastructure companies, which consist of utilities, pipelines, toll roads, airports, railroads, ports and telecommunications and other infrastructure companies, with securities listed on a national or other recognized
securities exchange. Infrastructure companies typically derive at least 50% of their revenues from, or have at least 50% of their assets committed to, the generation, production, transmission, sale or distribution of energy or natural resources used to produce energy; distribution, purification and treatment of water;
provision of communications services and media; management, ownership and/or operation of infrastructure assets or construction, development or financing of infrastructure assets, such as pipelines, toll roads, airports, railroads or ports. Infrastructure companies also include energy-related companies organized as
master limited partnerships (MLPs) and their affiliates, and the Portfolio may invest up to 25% of its net assets in these energy-related MLPs and their affiliates.
The Portfolio will seek to focus its investments in a subset of infrastructure securities that are considered preferred infrastructure securities by the Investment Manager. Generally, the Investment Manager considers securities that are more likely to exhibit certain desirable characteristics, such as longevity of
the issuer, lower risk of capital loss and revenues linked to inflation, to be preferred infrastructure securities.
Under normal market conditions, the Portfolio will invest significantly (at least 40%unless market conditions are not deemed favorable by the Investment Manager, in which case the Portfolio would invest at least 30%) in infrastructure companies organized or located outside the U.S. or doing a substantial
amount of business outside the U.S. The Portfolio will allocate its assets among various regions and countries, including the United States (but in no less than three different countries). The Portfolio considers a company that derives at least 50% of its revenue from business outside the U.S. or has at least 50%
of its assets outside the U.S. as doing a substantial amount of business outside the U.S. The Portfolio may invest in equity securities of companies with some business activities located in emerging market countries. The allocation of the Portfolios assets to emerging market countries may shift from time to time
based on the Investment Managers judgment and analysis of market conditions.
The Investment Manager will generally seek to substantially hedge foreign currency exposure in the Portfolio back to the U.S. dollar, although the Portfolios total foreign currency exposure may not be fully hedged at all times.
The Portfolio may engage in various investment techniques consistent with its investment strategies, including writing put and covered call options on securities (including exchange-traded funds) and entering into other derivatives transactions such as swap agreements, forward currency contracts and options on
indexes and currencies.
Prospectus7
Principal Investment Risks
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection
with capital construction programs, high leverage, costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy
conservation policies and other factors. Infrastructure companies may also be affected by or subject to:
|
|
|
|
|
regulation by various government authorities, including rate regulation; |
|
|
|
|
|
service interruption due to environmental, operational or other mishaps; |
|
|
|
|
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the imposition of special tariffs and changes in tax laws, regulatory policies and accounting standards; |
|
|
|
|
|
general changes in market sentiment towards infrastructure and utilities assets; |
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difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital markets; |
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inexperience with and potential losses resulting from a developing deregulatory environment; |
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costs associated with compliance with and changes in environmental and other regulations; and |
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technological innovations that may render existing plants, equipment or products obsolete.
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An investment in MLP units involves some risks that differ from an investment in the common stock of a corporation. Investing in MLPs involves certain risks related to investing in the underlying assets of the MLPs and risks associated with pooled investment vehicles. MLPs holding credit-related
investments are subject to interest rate risk and the risk of default on payment obligations by debt issuers.
While stocks have historically been a leading choice of long-term investors, they do fluctuate in price, often based on factors unrelated to the issuers value. Foreign securities carry special risks, such as exposure to currency fluctuations, less developed or less efficient trading markets, political instability, a lack of
company information, differing auditing and legal standards, and, potentially, less liquidity.
Irrespective of any foreign currency exposure hedging, the Portfolio may experience a decline in the value of its portfolio securities, in U.S. dollar terms, due solely to fluctuations in currency exchange rates.
The securities markets of emerging market countries can be extremely volatile. The Portfolios performance will be influenced by political, social and economic factors affecting companies in emerging market countries. Emerging market countries generally have economic structures that are less diverse and
mature, and political systems that are less stable, than those of developed countries. The value of your investment in the Portfolio will fluctuate, which means you could lose money.
Because the Portfolio may invest in a smaller number of issuers than other, more
8Prospectus
diversified, investment portfolios, the Portfolios net asset value may be relatively more susceptible to adverse effects from any single corporate, economic, market, political or regulatory occurrence than if the Portfolios investments consisted of a larger number of securities.
While the Portfolio may engage in foreign currency transactions primarily for hedging purposes, it also may use these transactions to increase returns. However, there is the risk that these transactions may reduce returns or increase volatility. In addition, derivatives, such as those used in certain foreign currency
transactions, can be illiquid and highly sensitive to changes in the related currency. As such, a small investment in certain derivatives could have a potentially large impact on the Portfolios performance.
Prospectus9
Lazard Funds Fund Management
p
Investment Manager
Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112-6300, serves as the Investment Manager of the Portfolio. The Investment Manager provides day-to-day management of the Portfolios investments and assists in the overall management of the Funds affairs. The Investment
Manager and its global affiliates provide investment management services to client discretionary accounts with assets totaling approximately $107.9 billion as of September 30, 2009. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of the Portfolio.
The Fund has agreed to pay the Investment Manager an investment management fee at the annual rate of 0.90% of the Portfolios average daily net assets. The investment management fees are accrued daily and paid monthly.
A discussion regarding the basis for the approval of the investment management agreement between the Fund, on behalf of the Portfolio, and the Investment Manager will be available in the Funds annual report to shareholders for the year ended December 31, 2009.
Portfolio Management
The Investment Manager will manage the Portfolio on a team basis. The team is involved in all levels of the investment process. This team approach allows for every portfolio manager/analyst to benefit from the views of his or her peers. The portfolio management team is comprised of multiple team members.
Although their roles and the contributions they make may differ, each member of the team participates in the management of the Portfolio. Members of the portfolio management team discuss the portfolio, including making investment recommendations, overall portfolio composition, and the like. Research
analysts perform fundamental research on companies (based on, for example, geographic regions) in which the Portfolio may invest.
The persons who are primarily responsible for the day-to-day management of the assets of the Portfolio are John Mulquiney and Warryn Robertson.
Biographical Information of Principal Portfolio Manager/Analysts
John Mulquiney is a portfolio manager/analyst on the Investment Managers Global Listed Infrastructure team. Prior to joining the Investment Manager in August 2005, Mr. Mulquiney worked at Tyndall Australia and in the Asset and Infrastructure Group at Macquarie Bank, where he undertook transactions and
developed valuation models for airports, electricity generators, rail projects and health infrastructure. Mr. Mulquiney is a Chartered Financial Analyst Charterholder.
Warryn Robertson is a portfolio manager/analyst on the Investment Managers Global Listed Infrastructure team. Prior to joining the Investment Manager in April 2001, Mr. Robertson spent three years with Capital Partners, an independent advisory house, where he was an associate director developing business
valuations for infrastructure assets and other alternative equity investments including airports, toll roads, timber plantations, power stations and coal mines. Mr. Robertson is a member of the Securities Institute of Australia and the Institute of Chartered Accountants.
Additional information about the portfolio manager/analysts, including compensation, other accounts managed and ownership of shares of the Portfolio, is contained in the Funds Statement of Additional Information (SAI).
Administrator
State Street Bank and Trust Company (State Street), located at One Lincoln Street, Boston, Massachusetts 02111, serves as the Portfolios administrator.
Distributor
Lazard
Asset Management Securities LLC (the Distributor) acts as distributor
for the Funds shares.
Custodian
State Street acts as custodian of the Portfolios investments. State Street may enter into subcustodial arrangements on behalf of the Portfolio for the holding of foreign securities.
10Prospectus
Lazard Funds Shareholder Information
p
General
Portfolio shares are sold and redeemed, without a sales charge, on a continuous basis at the net asset value (NAV) next determined after an order in proper form is received by the Transfer Agent or another authorized entity.
The Fund will determine the NAV of Portfolio shares as of the close of regular session trading on the New York Stock Exchange (the NYSE) (normally 4:00 p.m. Eastern time). The Fund values equity securities for which market quotations are readily available at market value. Securities and other assets for
which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board of Directors.
Calculation of the Portfolios NAV may not take place contemporaneously with the determination of the prices of portfolio assets used in such calculation. If a significant event materially affecting the value of securities occurs between the close of the exchange or market on which the security is principally
traded and the time when the Portfolios NAV is calculated, or when current market quotations otherwise are determined not to be readily available or reliable, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. Fair valuing
of foreign securities may be determined with the assistance of a pricing service, using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant American Depositary Receipts or futures contracts.
The effect of using fair value pricing is that the NAV will reflect the affected securities values as determined in the judgment of the Board of Directors or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different
from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios NAVs. Foreign securities may trade on days when the Portfolio is not open for business, thus affecting the value of the Portfolios assets on days when Portfolio shareholders may
not be able to buy or sell Portfolio shares.
Minimum Investment
All purchases made by check should be in U.S. Dollars and made payable to The Lazard Funds, Inc. Third party checks will not be accepted. The Fund will not accept cash or cash equivalents (such as currency, money orders or travelers checks) for the purchase of Fund shares. Please note the following
minimums in effect for initial investments:
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Institutional Shares |
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$ |
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100,000 |
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Open Shares |
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$ |
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2,500 |
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IRA Rollover/Transfer (Open Shares only) |
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$ |
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2,500 |
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The subsequent investment minimum is $50.
The minimum investment requirements may be waived or lowered for investments effected through banks and other institutions that have entered into arrangements with the Fund or the Distributor and for investments effected on a group basis by certain other entities and their employees, such as pursuant to
a payroll deduction plan and asset-based or wrap programs. Please consult your financial intermediary for information about minimum investment requirements. The Fund reserves the right to change or waive the minimum initial, and subsequent, investment requirements at any time.
How to Buy Shares
Through the Transfer Agent:
Shareholders who do not execute trades through a brokerage account should submit their purchase requests to the Transfer Agent by telephone or mail, as follows:
Initial Purchase
By Mail
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1. |
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Complete a Purchase Application. Indicate the services to be used. |
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2. |
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Send the Purchase Application and a check for $2,500 or more for Open Shares, or $100,000 or more for Institutional Shares, payable to The Lazard Funds, Inc. to:
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regular mail
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
Prospectus11
overnight delivery
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
By Wire
Your bank may charge you a fee for this service.
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1. |
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Call (800) 986-3455 toll-free from any state and provide the following:
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the Portfolio and Class of shares to be invested in |
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name(s) in which shares are to be registered |
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address |
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social security or tax identification number |
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dividend payment election |
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amount to be wired |
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name of the wiring bank, and |
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name and telephone number of the person to be contacted in connection with the order.
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An account number will then be assigned.
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2. |
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Instruct the wiring bank to transmit the specified amount in federal funds, giving the wiring bank the account name(s) and assigned account number, to State Street:
ABA #: 011000028 State Street Bank and Trust Company Boston, Massachusetts Custody and Shareholder Services Division DDA 9905-2375 Attention: (Name of Portfolio and Class of Shares) The Lazard Funds, Inc. Shareholders Name and Account Number |
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3. |
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Complete a Purchase Application. Indicate the services to be used. Mail the Purchase Application to the address set forth in Item 2 under Initial PurchaseBy Mail above.
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Additional Purchases
By Mail
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1. |
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Make a check payable to The Lazard Funds, Inc. Write the shareholders account number on the check. |
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2. |
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Mail the check and the detachable stub from the Statement of Account (or a letter providing the account number) to the address set forth in Item 2 under Initial PurchaseBy Mail above.
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By Wire
Instruct the wiring bank to transmit the specified amount in federal funds to State Street, as instructed in Item 2 under Initial PurchaseBy Wire above.
By ACH
Shareholders may purchase additional shares of the Portfolio by automated clearing house (ACH). To set up the ACH purchases option, call (800) 986-3455. ACH is similar to making Automatic Investments (described below under Shareholder InformationInvestor ServicesAutomatic Investments), except that
shareholders may choose the date on which to make the purchase. The Fund will need a voided check or deposit slip before shareholders may purchase by ACH.
By Exchange
Shareholders may purchase additional shares of the Portfolio by exchange from another Portfolio, as described below under Shareholder InformationInvestor ServicesExchange Privilege.
Through a Lazard Brokerage Account
Shareholders who have a brokerage account with Lazard Capital Markets LLC should contact their account representative for specific instructions on how to purchase Portfolio shares.
Purchases through the Automatic Investment Plan
(Minimum $50)
Investors may participate in the Automatic Investment Plan by making subsequent investments in Open Shares of the Portfolio at regular intervals selected by the investor. The Automatic Investment Plan enables an investor to make regularly scheduled investments and may provide investors with a convenient
way to invest for long-term financial goals. To enroll in the Automatic Investment Plan, call (800) 986-3455.
Individual Retirement Accounts (Open Shares Only)
The Fund may be used as an investment for IRAs. Completion of a Lazard Funds IRA application is required. For a Direct IRA Account (an account other than an IRA rollover) a $5 establishment fee and a $15 annual maintenance and custody fee is payable to State Street for each IRA Fund account; in
addition, a $10 termination fee will be charged and paid to State Street when the account is closed. For more information on IRAs, call (800) 986-3455.
12Prospectus
Market Timing/Excessive Trading
The Portfolio is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term market movements. Excessive trading, market timing or other abusive trading practices may disrupt investment management strategies and harm performance and
may create increased transaction and administrative costs that must be borne by the Portfolio and its shareholders, including those not engaged in such activity. In addition, such activity may dilute the value of Portfolio shares held by long-term investors. The Funds Board of Directors has approved policies and
procedures with respect to frequent purchases and redemptions of Portfolio shares that are intended to discourage and prevent these practices, including regular monitoring of trading activity in Portfolio shares. The Fund will not knowingly accommodate excessive trading, market timing or other abusive trading
practices.
The Fund routinely reviews Portfolio share transactions and seeks to identify and deter abusive trading practices. The Fund monitors for transactions that may be harmful to the Portfolio, either on an individual basis or as part of a pattern of abusive trading practices. The Portfolio reserves the right to refuse,
with or without notice, any purchase or exchange request that could adversely affect the Portfolio, its operations or its shareholders, including those requests from any individual or group who, in the Funds view, is likely to engage in excessive trading, market timing or other abusive trading practices. Where a
particular account appears to be engaged in abusive trading practices, the Fund will seek to restrict future purchases of Portfolio shares by that account or may temporarily or permanently terminate the availability of the exchange privilege, or reject in whole or part any exchange request, with respect to such
investors account. The Fund may deem a shareholder to be engaged in abusive trading practices without advance notice and based on information unrelated to the specific trades in the shareholders account. For instance, the Fund may determine that the shareholders account is linked to another account that
was previously restricted or a third party intermediary may provide information to the Fund with respect to a particular account that is of concern to the Fund. Accounts under common ownership, control or perceived affiliation may be considered together for purposes of determining a pattern of excessive
trading practices. An investor who makes more than six exchanges per Portfolio during any twelve-month period, or who makes exchanges that appear to coincide with a market timing strategy, may be deemed to be engaged in excessive trading. In certain cases, the Fund may deem a single roundtrip trade or
exchange (redeeming or exchanging the Portfolios shares followed by purchasing or exchanging into shares of the Portfolio) as a violation of the Funds policy against abusive trading practices. The Funds actions may not be subject to appeal.
The Portfolio deducts a 1.00% redemption fee on sales of shares owned for 30 days or less (not charged on shares acquired through reinvestment of dividends or distributions), except that no redemption fee will be charged with respect to shares purchased through certain omnibus account and other service
arrangements established by certain brokers and other financial intermediaries and approved by the Distributor and under certain other circumstances. See Shareholder InformationHow to Sell SharesRedemption Fee below.
Redemption fees are only one way for the Fund to deter abusive trading practices. To discourage attempts to arbitrage pricing of international securities (among other reasons), the Board of Directors has adopted policies and procedures providing that if events materially affecting the value of securities occur
between the close of the exchange or market on which the security is principally traded and the time when the Portfolios NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of Directors. See Shareholder
InformationGeneral. The codes of ethics of the Fund, the Investment Manager and the Distributor in respect of personal trading contain limitations on trading in Portfolio shares.
As described below, the Fund may take up to seven days to pay redemption proceeds. This may occur when, among other circumstances, the investor redeeming shares is engaged in excessive trading or if the redemption request otherwise would be disruptive to efficient portfolio management or would
otherwise adversely affect the Portfolio.
All of the policies described in this section apply uniformly to all Portfolio accounts. However, while the Fund and the Investment Manager will take reasonable steps to prevent trading practices deemed to be harmful
Prospectus13
to the Portfolio by monitoring Portfolio share trading activity, they may not be able to prevent or identify such trading. If the Fund is not able to prevent abusive trading practices, such trading may disrupt investment strategies, harm performance and increase costs to all Portfolio investors, including those not
engaged in such activity. The Funds policy on abusive trading practices does not apply to automatic investment or automatic exchange privileges.
Securities trading in foreign markets are particularly susceptible to time zone arbitrage. As a result, the Portfolio may be at greater risk for market timing than funds that invest solely in securities trading in U.S. markets.
Distribution and Servicing Arrangements
The Fund has adopted a plan under rule 12b-1 (the 12b-1 plan) that allows the Portfolio to pay the Distributor a fee, at the annual rate of 0.25% of the value of the average daily net assets of the Portfolios Open Shares, for distribution and services provided to holders of Open Shares. Because these fees are
paid out of the Portfolios assets on an on-going basis, over time these recurring fees may cost shareholders more than paying other types of sales charges. Institutional Shares do not pay a rule 12b-1 fee. Third parties may receive payments pursuant to the 12b-1 plan.
The Investment Manager or the Distributor may provide additional cash payments out of its own resources to financial intermediaries that sell shares and/or provide other services. Such payments are in addition to any fees paid by the Fund under rule 12b-1.
The receipt of such payments pursuant to the 12b-1 plan or from the Investment Manager or Distributor could create an incentive for the third party to offer the Portfolio instead of other mutual funds where such payments are not received. Further information is contained in the SAI, and you should consult
your financial intermediary for further details.
How to Sell Shares
General
Checks for sale proceeds ordinarily will be mailed within seven days. Where the shares to be sold have been purchased by check or through the Automatic Investment Plan, the sale proceeds, net of any applicable redemption fee, will be transmitted to you promptly upon bank clearance of your purchase check,
which may take up to 15 calendar days. Redemption requests may also be satisfied, in whole or in part, through a redemption-in-kind (a payment in portfolio securities instead of cash).
Redemption Fee
The Portfolio will impose a redemption fee equal to 1.00% of the NAV of Portfolio shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such shares were acquired. This fee will be calculated based on the shares NAV at redemption and deducted from the redemption
proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of
calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the first in, first out method, which assumes that the shares redeemed or exchanged are the ones held the longest.
The Fund, in its discretion, may waive or reverse the redemption fee for Portfolio shares redeemed or exchanged: (1) through systematic, nondiscretionary rebalancing or asset allocation programs that have been approved by the Distributor and the Transfer Agent; (2) in connection with the Funds Systematic
Withdrawal Plan, described below; (3) by a fund-of-funds; (4) involuntarily, such as a redemption resulting from failure to maintain a minimum investment or due to a Portfolio merger or liquidation; (5) in connection with a conversion from one share class to another share class of the same Portfolio; (6) in the
event of shareholder death or post-purchase disability; (7) to return an excess contribution in an IRA or qualified plan account; (8) in connection with required minimum distributions from an IRA or qualified plan account; (9) in programs with financial intermediaries that include on their platforms qualified
default investment alternatives for participant-directed individual account plans (with respect to which Department of Labor regulations restrict the imposition of redemption fees and similar fees) and where adequate systems designed to deter abusive trading practices are in place; (10) by certain accounts under
situations deemed appropriate by the Fund, including where the capability to charge a fee does not exist or is not practical and
14Prospectus
where adequate systems designed to deter abusive trading practices are in place; or (11) in the event of transactions documented as inadvertent or prompted by bona fide emergencies or other exigent circumstances. In certain situations, a financial intermediary, wrap sponsor or other omnibus account holder may
apply the Portfolios redemption fees to the accounts of their underlying shareholders. If this is the case, the Portfolio will rely in part on the account holder to monitor and assess the redemption fee on the underlying shareholder accounts in accordance with this Prospectus. The redemption fee may be waived,
modified or terminated at any time, or from time to time, without advance notice.
Selling Shares
Through the Transfer Agent:
Shareholders who do not execute trades through a brokerage account should submit their sale requests to the Transfer Agent by telephone or mail, as follows:
By Telephone:
A shareholder may redeem shares by calling the Transfer Agent. To redeem shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such redemption. To place a redemption request, or to have telephone redemption
privileges added to your account, please call the Transfer Agents toll-free number, (800) 986-3455. In order to confirm that telephone instructions for redemptions are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a
form of personal identification be provided.
By Mail:
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1. |
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Write a letter of instruction to the Fund. Indicate the dollar amount or number of shares to be sold, the Portfolio and Class, the shareholders account number, and social security or taxpayer identification number. |
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Sign the letter in exactly the same way the account is registered. If there is more than one owner of the account, all must sign. |
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If shares to be sold have a value of $50,000 or more, the signature(s) must be guaranteed by a domestic bank, savings and loan institution, domestic credit union, member bank of the Federal Reserve System, broker-dealer, registered securities association or clearing agency, or other participant in a signature
guarantee program. Signature guarantees by a notary public are not acceptable. Further documentation may be requested to evidence the authority of the person or entity making the redemption request. In addition, all redemption requests that include instructions for redemption proceeds to be sent
somewhere other than the address on file must be signature guaranteed. |
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Send the letter to the Transfer Agent at the following address:
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regular mail
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
overnight delivery
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
Through a Lazard Brokerage Account:
Shareholders who have a brokerage account with Lazard Capital Markets LLC should contact their account representative for specific instructions on how to sell Portfolio shares.
Investor Services
Automatic Reinvestment Plan allows your dividends and capital gain distributions to be reinvested in additional shares of the Portfolio or another portfolio.
Automatic Investments allows you to purchase Open Shares through automatic deductions from a designated bank account.
Systematic Withdrawal Plan allows you to receive payments at regularly scheduled intervals if your account holds at least $10,000 in Portfolio shares at the time plan participation begins. The maximum regular withdrawal amount for monthly withdrawals is 1% of the value of your Portfolio shares at the time
plan participation begins.
Exchange Privilege allows you to exchange shares of the Portfolio that have been held for seven days or more for shares of the same Class of another portfolio in an identically registered account. Shares will be exchanged at the next determined NAV, subject to any applicable redemption fee. There is no other
cost associated with
Prospectus15
this service. All exchanges are subject to the minimum initial investment requirements.
A shareholder may exchange shares by writing or calling the Transfer Agent. To exchange shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such exchanges or a signed letter requesting that the exchange privilege
be added to the account. The Transfer Agents toll-free number for exchanges is (800) 986-3455. In order to confirm that telephone instructions for exchanges are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a
form of personal identification be provided.
The Fund reserves the right to limit the number of times shares may be exchanged between portfolios, to reject any telephone exchange order, or to otherwise modify or discontinue the exchange privilege at any time. If an exchange request is refused, the Fund will take no other action with respect to the
shares until it receives further instructions from the investor. See Shareholder InformationHow to Buy SharesMarket Timing/ Excessive Trading for more information about restrictions on exchanges.
General Policies
In addition to the policies described above, the Fund reserves the right to:
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redeem an account, with notice, if the value of the account falls below $1,000 due to redemptions |
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convert Institutional Shares held by a shareholder whose account is less than $100,000 to Open Shares, upon written notice to the shareholder |
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suspend redemptions or postpone payments when the NYSE is closed for any reason other than its usual weekend or holiday closings or when trading is restricted by the Securities Exchange Commission (the SEC) |
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change or waive the required minimum investment amounts |
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delay sending out redemption proceeds for up to seven days (this usually applies to very large redemptions received without notice, excessive trading, or during unusual market conditions) |
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make a redemption-in-kind (a payment in portfolio securities instead of in cash) if it is determined that a redemption is too large and/or may cause harm to the Portfolio and its shareholders
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Also in addition to the policies described above, the Fund may refuse or restrict purchase or exchange requests for Portfolio shares by any person or group if, in the judgment of the Funds management:
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the Portfolio would be unable to invest the money effectively in accordance with its investment objective and policies or could otherwise be adversely affected |
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if the Portfolio receives or anticipates receiving simultaneous orders that may significantly affect the Portfolio (e.g., amounts equal to 1% or more of the Portfolios total assets)
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The Fund also reserves the right to close the Portfolio to investors at any time.
Account Policies, Dividends and Taxes
Account Statements
You will receive quarterly statements detailing your account activity. All investors will also receive an annual statement detailing the tax characteristics of any dividends and distributions that you have received in your account. You will also receive confirmations of each trade executed in your account.
To reduce expenses, only one copy of the most recent annual and semi-annual reports of the Fund may be mailed to your household, even if you have more than one account with the Fund. Call the Transfer Agent at the telephone number listed on the inside back cover if you need additional copies of
annual or semi-annual reports or account information.
Dividends and Distributions
Any income dividends are anticipated to be paid quarterly. Capital gains, if any, are normally distributed annually, but may be distributed more frequently. Annual year end distribution estimates are expected to be available on or about November 18, 2010 at www.LazardNet.com or by calling (800) 823-6300.
Estimates for any spillback distributions (income and/or capital gains from the 2009 fiscal year that were not distributed by December 31, 2009) are expected to be available on or about August 10, 2010 at www.LazardNet.com or by calling (800) 823-6300.
16Prospectus
Dividends and distributions of the Portfolio will be reinvested in additional shares of the same Class of the Portfolio at the NAV on the ex-dividend date, and credited to the shareholders account on the payment date or, at the shareholders election, paid in cash. Each share Class of the Portfolio will generate
a different dividend because each has different expenses. Dividend checks and account statements will be mailed approximately two business days after the payment date.
Tax Information
Please be aware that the following tax information is general and refers to the provisions of the Internal Revenue Code of 1986, as amended (the Code), which are in effect as of the date of this Prospectus. You should consult a tax adviser about the status of your distributions from your Portfolio.
All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, and long-term capital gains are generally taxable as such, whether you receive the distribution in cash or reinvest it in additional shares. An exchange of the Portfolios shares for shares of another portfolio of
the Fund will be treated as a sale of the Portfolios shares, and any gain on the transaction may be subject to income taxes.
Keep in mind that distributions may be taxable to you at different rates which depend on the length of time the Portfolio held the applicable investment, not the length of time that you held your Portfolio shares. The tax status of any distribution is the same regardless of how long you have been in the
Portfolio and whether you reinvest your distributions or take them in cash. High portfolio turnover and more volatile markets can result in taxable distributions to shareholders, regardless of whether their shares increased in value. When you do sell your Portfolio shares, a taxable capital gain or loss may be
realized, except for IRA or other tax-deferred accounts.
Federal law requires the Portfolio to withhold taxes on distributions paid to shareholders who:
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fail to provide a social security number or taxpayer identification number |
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fail to certify that their social security number or taxpayer identification number is correct |
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fail to certify that they are exempt from withholding
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Prospectus17
Lazard Funds Other Performance of the Investment Manager
p
Lazard Global Listed Infrastructure Composite (Prior Performance of Similar Accounts)
This is not the Portfolios Performance
Lazard Global Listed Infrastructure Portfolios investment objective, policies and strategies are substantially similar to those used by the Investment Manager in advising certain discretionary accounts (the Other Accounts). The chart below shows the historical investment performance for a composite (the
Global Listed Infrastructure Composite) of the Other Accounts (consisting of all similarly managed, fully discretionary and fee paying accounts) and for the Portfolios benchmark indices. The Global Listed Infrastructure Composite should not be interpreted as indicative of the Portfolios future performance.
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Annual Total Returns for the Year Ended December 31, |
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2007 |
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2008 |
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Global Listed Infrastructure Composite |
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4.9% |
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(31.5)% |
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UBS Global 50/50 Infrastructure & Utilities Index* |
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4.7% |
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(38.7)% |
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MSCI World Index** |
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9.0% |
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(40.7)% |
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Average Annual Total Returns (for the periods ended December 31, 2008) |
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Inception Date |
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One Year |
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Since Inception |
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Global Listed Infrastructure Composite |
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9/1/06 |
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(31.5)% |
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(8.3)% |
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UBS Global 50/50 Infrastructure & Utilities Index* |
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N/A |
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(38.7)% |
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(14.2)% |
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MSCI World Index** |
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N/A |
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(40.7)% |
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(5.8)% |
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* |
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The UBS Global 50/50 Infrastructure & Utilities Index tracks a 50% exposure to the global developed-market utilities sector and a 50% exposure to the global developed-market infrastructure sector. The index is unmanaged, has no fees or costs and is not available for investment. |
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** |
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The MSCI World Index is a market capitalization-weighted index of companies representative of the market structure of 22 developed market countries in North America, Europe and the Asia/Pacific region. The index is unmanaged, has no fees or costs and is not available for investment.
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The year-to-date performance of the Global Listed Infrastructure Composite through September 30, 2009 is 12.6%.
Certain Other Accounts are not subject to certain investment limitations, diversification requirements and other restrictions imposed by the Investment Company Act of 1940, as amended, and the Code which, if applicable, may have adversely affected the performance of the Global Listed Infrastructure
Composite. The performance results of the Global Listed Infrastructure Composite reflect actual fees charged to the Other Accounts, except custodian fees of separately managed accounts. However, the Portfolio bears fees and operational expenses not typically borne by managed accounts (including distribution
and servicing fees of Open Shares). The Global Listed Infrastructure Composite performance would have been lower than that shown above if the Other Accounts had been subject to the fees and expenses of the Portfolio.
Additionally, although it is anticipated that the Portfolio and the Other Accounts will hold similar securities, their investment results are expected to differ. In particular, differences in asset size and cash flows may result in different securities selections, differences in the relative weightings of securities or
differences in the prices paid for particular portfolio holdings. However, such differences do not alter the conclusion that the Portfolio and the Other Accounts have substantially similar investment objectives, policies and strategies.
The returns of the Global Listed Infrastructure Composite are dollar-weighted based upon beginning period market values. This calculation methodology differs from guidelines of the SEC for calculating performance of mutual funds.
18Prospectus
Lazard Funds Privacy Notice Regarding Shareholder Financial Information
p
The Fund recognizes and appreciates the importance of respecting the privacy of our shareholders. Our shareholders trust is our most important asset, and we are committed to safeguarding against the unauthorized use of, and access to, shareholder information. This Privacy Notice explains our current policies
and practices with respect to non-public personal information of our prospective, current and former shareholders.
In order to adequately service its shareholders, the Fund regularly collects certain non-public personal information about its shareholders. We limit the collection of information to the minimum amount required to deliver useful products and superior service to our shareholders, to comply with legal requirements
and to support our business needs. We may collect non-public personal information about you from the following sources:
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Information we receive from you on applications, questionnaires or other forms, including, but not limited to, your name, address, social security or other tax identification number, age, employment information, assets owned and income. |
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Information about your transactions with us, our affiliates or others, such as your account balance and holdings, payment history and transaction information. |
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Information we may receive from our due diligence, such as your creditworthiness and your credit history. |
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Information obtained from our communications and correspondence with you.
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The Fund does not disclose any non-public personal information about its shareholders or former shareholders to any third party, except as required by law. The Fund may, however, disclose such non-public personal information to its affiliates in order to provide products or services to you or to support our
business needs. In order to maintain the confidentiality of such information, we restrict access to non-public information about our shareholders to those employees who need to know that information. We maintain physical, electronic and procedural safeguards to guard the non-public personal information of our
shareholders and former shareholders.
Please note that the Fund will treat your information as confidential, as described above. It is not necessary for you to respond to this notice or to separately request confidentiality.
Prospectus19
[This Page Intentionally Left Blank]

No person has been
authorized to give any information or to make any representations not contained
in this Prospectus, and information or representations not contained herein must
not be relied upon as having been authorized by the Fund or the Distributor.
This Prospectus does not constitute an offer of any security other than the
registered securities to which it relates or an offer to any person in any
jurisdiction where such offer would be unlawful.
Investment Manager
Lazard Asset Management LLC
30 Rockefeller Plaza
New York, New York 10112-6300
Telephone: (800) 823-6300
Distributor
Lazard Asset Management Securities LLC
30 Rockefeller Plaza
New York, New York 10112-6300
Custodian
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Transfer Agent and Dividend Disbursing Agent
Boston Financial Data Services, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Telephone: (800) 986-3455
Independent Registered Public Accounting Firm
Anchin, Block & Anchin LLP
1375 Broadway
New York, New York 10018
http://www.anchin.com
Legal Counsel
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
http://www.stroock.com
For more information about the Portfolio, the following
documents are available, free of charge, upon request:
Annual and Semi-Annual Reports (Reports):
The Funds annual and semi-annual reports to shareholders contain additional information on the Portfolios investments. In the annual report, you will find a broad discussion of the market conditions and investment strategies that significantly affected the Portfolios performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Portfolio, including its operations and investment policies. It is incorporated by reference and is legally considered a part of this Prospectus.
Disclosure of Portfolio Holdings
The Portfolio will publicly disclose its portfolio holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds.shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form
N-Q or Form N-CSR for the period that includes the date as of which the information was current.
A description of the Funds policies and procedures with respect to the disclosure of the Portfolios portfolio holdings is available in the Funds SAI.
Wherever
theres opportunity, theres Lazard.SM
You can get a free copy of the Reports and the SAI at http://www.LazardNet.com, or request the Reports and the SAI and other information and discuss your questions about the Portfolio, by contacting the Fund at:
The Lazard Funds, Inc.
30 Rockefeller Plaza
New York, New York 10112 - 6300
Telephone: (800) 823-6300
http://www.LazardNet.com
You can review the Reports and the SAI at the Public Reference Room of the SEC in Washington, D.C. For information, call (202) 551-8090. You can get text-only copies:
After paying a duplicating fee, by writing the Public Reference Branch
of the SEC, 100 F Street NE, Room 1580, Washington, D.C. 20549-1520, or by e-mail
request to publicinfo@sec.gov.
Free from the SECs Website at http://www.sec.gov.
Investment Company Act file no. 811-06312
Lazard Asset Management LLC 30 Rockefeller Plaza New York, NY 10112-6300 800-823-6300 www.LazardNet.com
© 2009 The Lazard Funds, Inc. and
Lazard Asset Management Securities LLC
THE LAZARD FUNDS, INC.
30 Rockefeller Plaza
New York, New York 10112-6300
(800) 823-6300
STATEMENT OF ADDITIONAL INFORMATION
December 31, 2009
The Lazard Funds, Inc. (the "Fund") is a no-load, open-end management investment company known as a mutual fund. This Statement of Additional Information, which is not a prospectus, supplements
and should be read in conjunction with the current Prospectus of the Fund, dated May 1, 2009, as may be revised from time to time, relating to the following thirteen portfolios (individually, a "Portfolio" and collectively, the "Portfolios"):
Lazard U.S. Equity Value Portfolio |
Lazard International Small Cap Equity Portfolio |
("Equity Value Portfolio") |
("International Small Cap Portfolio") |
Lazard U.S. Strategic Equity Portfolio |
Lazard Global Listed Infrastructure Portfolio |
("Strategic Equity Portfolio") |
("Global Listed Infrastructure Portfolio") |
Lazard U.S. Mid Cap Equity Portfolio |
Lazard Emerging Markets Equity Portfolio |
("Mid Cap Portfolio") |
("Emerging Markets Portfolio") |
Lazard U.S. Small-Mid Cap Equity Portfolio |
Lazard Developing Markets Equity Portfolio |
("Small-Mid Cap Portfolio") |
("Developing Markets Portfolio") |
Lazard International Equity Portfolio |
Lazard U.S. High Yield Portfolio |
("International Equity Portfolio") |
("High Yield Portfolio") |
Lazard International Equity Select Portfolio |
Lazard Capital Allocator Opportunistic Strategies |
("International Equity Select Portfolio") |
Portfolio ("Opportunistic Strategies Portfolio") |
Lazard International Strategic Equity Portfolio |
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("International Strategic Portfolio") |
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Each Portfolio currently offers two classes of sharesInstitutional Shares and Open Shares. Institutional Shares and Open Shares are identical, except as to minimum investment requirements
and the services offered to, and expenses borne by, each Class.
To obtain a copy of the Fund's Prospectus, please write or call the Fund at the address and telephone number above.
The Fund's most recent Annual Report and Semi-Annual Report to Shareholders are separate documents supplied with this Statement of Additional Information, and the financial statements,
accompanying notes and report of independent registered public accounting firm appearing in the Annual Report are incorporated by reference into this Statement of Additional Information.
TABLE OF CONTENTS |
|
Page |
Description of the Fund and Portfolios |
1 |
Investment Restrictions |
23 |
Management |
25 |
Determination of Net Asset Value |
39 |
Portfolio Transactions |
40 |
How to Buy and How to Sell Shares |
44 |
Distribution and Servicing Arrangements |
46 |
Dividends and Distributions |
48 |
Taxation |
48 |
Additional Information About the Fund and Portfolios |
52 |
Counsel and Independent Registered Public Accounting Firm |
63 |
Appendix |
65 |
DESCRIPTION OF THE FUND AND PORTFOLIOS
The Fund is a Maryland corporation organized on May 17, 1991. Each Portfolio is a separate series of the Fund, an open-end management investment company, known as a mutual fund. Each Portfolio
is a diversified investment company, which means that, with respect to 75% of its total assets, the Portfolio will not invest more than 5% of its total assets in the securities of any single issuer nor hold more than 10% of the outstanding voting
securities of any single issuer.
Lazard Asset Management LLC serves as the investment manager (the "Investment Manager") to each of the Portfolios.
Lazard Asset Management
Securities LLC (the "Distributor") is the distributor of each Portfolio's shares.
Certain Portfolio Securities
The following information supplements and should be read in conjunction with the Fund's Prospectus.
Depositary Receipts. Each Portfolio may invest in the securities of foreign issuers in the form of American Depositary Receipts and American Depositary
Shares (collectively, "ADRs") and Global Depositary Receipts and Global Depositary Shares (collectively, "GDRs"). These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. GDRs are receipts issued outside the United States, typically by non-United States banks and trust
companies, that evidence ownership of either foreign or domestic securities. Generally, ADRs in registered form are designed for use in the United States securities markets and GDRs in bearer form are designed for use outside the United States.
These securities may be purchased through "sponsored" or "unsponsored" facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary. A
depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities, and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities.
Foreign Government Obligations; Securities of Supranational Entities. Each Portfolio may invest in obligations issued or guaranteed by one or more
foreign governments or any of their political subdivisions, agencies or instrumentalities that are determined by the Investment Manager to be of comparable quality to the other obligations in which the Portfolio may invest. Such securities also
include debt obligations of supranational entities. Supranational entities include international organizations designated or supported by governmental entities to promote economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for Reconstruction and Development (the World Bank), the European Coal and Steel Community, the Asian Development Bank and the InterAmerican Development Bank.
Foreign Securities. Each Portfolio may invest in non-U.S. securities as described in the Portfolio's Prospectus.
Fixed-Income Securities. The High Yield and Opportunistic Strategies Portfolios may invest in fixed-income securities as described in the Prospectus. In
addition, Equity Value and Strategic Equity Portfolios each may invest up to 20% of its assets in U.S. Government securities and investment grade debt obligations of U.S. corporations; Mid Cap, Small-Mid Cap and International Small Cap Portfolios
may each invest up to 20% of its assets in investment grade debt securities; and International Equity, International Equity Select, International Strategic and Global Listed Infrastructure Portfolios may each invest up to 20% of its assets in
investment grade fixed-income securities and short-term money market instruments.
Convertible Securities. Convertible securities may be converted at either a stated price or stated rate into underlying shares of common stock.
Convertible securities have characteristics similar to both fixed-income and equity securities. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible preferred stock is senior to common stock, of the same issuer. Because of the subordination feature, however, convertible securities typically
have lower ratings than similar non-convertible securities.
Although to a lesser extent than with fixed-income securities, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stock. A unique feature of convertible securities is that
as the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis and so may not experience market value declines to the same extent as the underlying common stock. When the market price
of the underlying common stock increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common stock. While no securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
Convertible securities provide for a stable stream of income with generally higher yields than common stocks, but there can be no assurance of current income because the issuers of the
convertible securities may default on their obligations. A convertible security, in addition to providing fixed income, offers the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases
in the market price of the underlying common stock. There can be no assurance of capital appreciation, however, because securities prices fluctuate. Convertible securities generally offer lower interest or dividend yields than non-convertible
securities of similar quality because of the potential for capital appreciation.
Warrants. A warrant is a form of derivative that gives the holder the right to subscribe to a specified amount of the issuing corporation's capital stock
at a set price for a specified period of time. A Portfolio may invest up to 5% of its total assets in warrants, except that this limitation does not apply to warrants purchased by the Portfolio that are sold in units with, or attached to, other
securities.
Participation Interests. Each Portfolio may purchase from financial institutions participation interests in securities in which the Portfolio may invest.
Each Portfolio may invest in corporate obligations denominated in U.S. or foreign currencies that are originated, negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting
of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one or more of which administers the security on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell such securities to
third parties called "Participants." Each Portfolio may invest in such securities either by participating as a Co-Lender at origination or by acquiring an interest in the
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security from a Co-Lender or a Participant (collectively, "participation interests"). Co-Lenders and Participants interposed between the Portfolio and the corporate borrower (the "Borrower"), together with Agent Banks, are
referred to herein as "Intermediate Participants."
Each Portfolio also may purchase a participation interest in a portion of the rights of an Intermediate Participant, which would not establish any direct relationship between the Fund, on
behalf of the Portfolio, and the Borrower. A participation interest gives the Portfolio an undivided interest in the security in the proportion that the Portfolio's participation interest bears to the total principal amount of the security. These
instruments may have fixed, floating or variable rates of interest with remaining maturities of 13 months or less. If the participation interest is unrated, or has been given a rating below that which is permissible for purchase by the Portfolio,
the participation interest will be collateralized by U.S. Government securities, or, in the case of unrated participation interests, the Investment Manager must have determined that the instrument is of comparable quality to those instruments in
which the Portfolio may invest. The Portfolio would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement of the Portfolio's rights against the Borrower, but also for the receipt and
processing of payments due to the Portfolio under the security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower, if the Borrower fails to pay principal and interest when due the
Portfolio may be subject to delays, expenses and risks that are greater than those that would be involved if the Portfolio were to enforce its rights directly against the Borrower. Moreover, under the terms of a participation interest, the Portfolio
may be regarded as a creditor of the Intermediate Participant (rather than of the Borrower), so that the Portfolio also may be subject to the risk that the Intermediate Participant may become insolvent. Similar risks may arise with respect to the
Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Portfolio were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank's creditors. In such case, the Portfolio might
incur certain costs and delays in realizing payment in connection with the participation interest or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation of the Borrower to
repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper conduct by the Agent Bank or Intermediate Participant.
Variable and Floating Rate Securities. Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the
obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from
daily up to annually, or may be event based, such as a change in the prime rate.
Each Portfolio may invest in floating rate debt instruments ("floaters"). The interest rate on a floater is a variable rate which is tied to another interest rate, such as a money-market index
or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. Because of the interest rate reset feature, floaters provide the Portfolio with a certain degree of protection against rises in interest rates,
although the Portfolio will participate in any declines in interest rates as well.
Each Portfolio also may invest in inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed or inversely to a multiple of the applicable index. An inverse floating rate security may exhibit greater price volatility than a fixed rate obligation of similar credit quality.
Municipal Obligations. (High Yield Portfolio only) Municipal obligations are debt obligations issued by states, territories and possessions of the United
States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or multi-state agencies or authorities, to obtain funds for various public purposes, and include certain industrial development bonds issued by or
on
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behalf of public authorities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue bonds are payable from the revenue derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source, but not from
the general taxing power. Industrial development bonds, in most cases, are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality, but generally are guaranteed by the corporate entity on whose behalf they are
issued. Notes are short-term instruments which are obligations of the issuing municipalities or agencies and are sold in anticipation of a bond sale, collection of taxes or receipt of other revenues. Municipal obligations include municipal
lease/purchase agreements which are similar to installment purchase contracts for property or equipment issued by municipalities. Municipal obligations bear fixed, floating or variable rates of interest which are determined in some instances by
formulas under which the municipal obligation's interest rate will change directly or inversely to changes in interest rates or an index, or multiples thereof, in many cases subject to a maximum and minimum. Certain municipal obligations are subject
to redemption at a date earlier than their stated maturity pursuant to call options, which may be separated from the related municipal obligations and purchased and sold separately. High Yield Portfolio also may acquire call options on specific
municipal obligations. The Portfolio generally would purchase these call options to protect it from the issuer of the related municipal obligation redeeming, or other holder of the call option from calling away, the municipal obligation before
maturity.
While, in general, municipal obligations are tax exempt securities having relatively low yields as compared to taxable, non-municipal obligations of similar quality, certain municipal
obligations are taxable obligations offering yields comparable to, and in some cases greater than, the yields available on other permissible Portfolio investments. Dividends received by shareholders on Portfolio shares which are attributable to
interest income received by the Portfolio from municipal obligations generally will be subject to federal income tax. High Yield Portfolio may invest in municipal obligations, the ratings of which correspond with the ratings of other permissible
Portfolio investments. The Portfolio currently intends to invest no more than 25% of its assets in municipal obligations. However, this percentage may be varied from time to time without shareholder approval.
Zero Coupon, Pay-In-Kind and Step Up Securities. (High Yield Portfolio only) High Yield Portfolio may invest in zero coupon U.S. Treasury securities,
which are Treasury Notes and Bonds that have been stripped of their unmatured interest coupons, the coupons themselves and receipts or certificates representing interests in such stripped debt obligations and coupons. Zero coupon securities also are
issued by corporations and financial institutions which constitute a proportionate ownership of the issuer's pool of underlying U.S. Treasury securities. A zero coupon security pays no interest to its holder during its life and is sold at a discount
to its face value at maturity. The Portfolio may invest in pay-in-kind bonds which are bonds which generally pay interest through the issuance of additional bonds. High Yield Portfolio also may purchase step up coupon bonds which are debt securities
which typically do not pay interest for a specified period of time and then pay interest at a series of different rates. The market prices of these securities generally are more volatile and are likely to respond to a greater degree to changes in
interest rates than the market prices of securities that pay interest periodically having similar maturities and credit qualities. In addition, unlike bonds that pay interest throughout the period to maturity, the Portfolio will realize no cash
until the cash payment date unless a portion of such securities are sold and, if the issuer defaults, the Portfolio may obtain no return at all on its investment. Federal income tax law requires the holder of a zero coupon security or of certain
pay-in-kind or step up bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income taxes, High Yield Portfolio
may be required to distribute such income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
4
Mortgage-Related Securities. (High Yield Portfolio and, to a limited extent, Equity Value, Strategic Equity, Mid Cap, Small-Mid Cap and Opportunistic
Strategies Portfolios only) Mortgage-related securities are a form of derivative collateralized by pools of commercial or residential mortgages. Pools of mortgage loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. These securities may include complex instruments such as collateralized mortgage obligations and stripped mortgage-backed securities, mortgage pass-through securities, interests in real estate mortgage
investment conduits ("REMICs"), adjustable rate mortgages, real estate investment trusts or other kinds of mortgage-backed securities, including those with fixed, floating and variable interest rates, those with interest rates based on multiples of
changes in a specified index of interest rates and those with interest rates that change inversely to changes in interest rates, as well as those that do not bear interest.
Residential Mortgage-Related Securities. Each of these Portfolios may invest in mortgage-related securities representing participation interests in pools
of one- to four-family residential mortgage loans issued by governmental agencies or instrumentalities, such as the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), or issued by private entities. Similar to commercial mortgage-related securities, residential mortgage-related securities have been issued using a variety of structures, including multi-class structures featuring
senior and subordinated classes.
Mortgage-related securities issued by GNMA include GNMA Mortgage Pass-Through Certificates (also know as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United States. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by FNMA include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of FNMA and are not backed by or entitled to the full faith and credit of the United States. Fannie
Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by FHLMC include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs"). Freddie Macs are not guaranteed by the
United States or by any Federal Home Loan Bank and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC
guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate
payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable.
Commercial Mortgage-Related Securities. Each of these Portfolios may invest in commercial mortgage-related securities which generally are multi-class
debt or pass-through certificates secured by mortgage loans on commercial properties. Similar to residential mortgage-related securities, commercial mortgage-related securities have been issued using a variety of structures, including multi-class
structures featuring senior and subordinated classes. These mortgage-related securities generally are constructed to provide protection to the senior classes investors against potential losses on the underlying mortgage loans. This protection is
generally provided by having the holders of the subordinated class of securities ("Subordinated Securities") take the first loss if there are defaults on the underlying commercial mortgage loans. Other protection, which may benefit all of the
classes or particular classes, may include issuer guarantees, reserve funds, additional Subordinated Securities, cross-collateralization and over-collateralization.
Subordinated Securities. Each of these Portfolios may invest in Subordinated Securities issued or sponsored by commercial banks, savings and loan
institutions, mortgage bankers, private mortgage
5
insurance companies and other non-governmental issuers. Subordinated Securities have no governmental guarantee, and are subordinated in some manner as to the payment of principal and/or interest to the holders of more
senior mortgage-related securities arising out of the same pool of mortgages. The holders of Subordinated Securities typically are compensated with a higher stated yield than are the holders of more senior mortgage-related securities. On the other
hand, Subordinated Securities typically subject the holder to greater risk than senior mortgage-related securities and tend to be rated in a lower rating category, and frequently a substantially lower rating category, than the senior
mortgage-related securities issued in respect of the same pool of mortgage. Subordinated Securities generally are likely to be more sensitive to changes in prepayment and interest rates and the market for such securities may be less liquid than is
the case for traditional fixed-income securities and senior mortgage-related securities.
Collateralized Mortgage Obligations ("CMOs") and Multi-Class Pass-Through Securities. Each of these Portfolios may invest in CMOs, which are multiclass
bonds backed by pools of mortgage pass-through certificates or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or FHLMC pass-through certificates, (b) unsecuritized mortgage loans insured by the Federal Housing Administration or
guaranteed by the Department of Veterans' Affairs, (c) unsecuritized conventional mortgages, (d) other mortgage-related securities or (e) any combination thereof.
Each class of CMOs, often referred to as a "tranche," is issued at a specific coupon rate and has a stated maturity or final distribution date. Principal prepayments on collateral underlying a
CMO may cause it to be retired substantially earlier than the stated maturities or final distribution dates. The principal and interest on the underlying mortgages may be allocated among the several classes of a series of a CMO in many ways. One or
more tranches of a CMO may have coupon rates which reset periodically at a specified increment over an index, such as the London Interbank Offered Rate ("LIBOR") (or sometimes more than one index). These floating rate CMOs typically are issued with
lifetime caps on the coupon rate thereon. Each of these Portfolios also may invest in inverse floating rate CMOs. Inverse floating rate CMOs constitute a tranche of a CMO with a coupon rate that moves in the reverse direction to an applicable index
such as the LIBOR. Accordingly, the coupon rate thereon will increase as interest rates decrease. Inverse floating rate CMOs are typically more volatile than fixed or floating rate tranches of CMOs. High Yield Portfolio may invest, to a limited
extent, in residual interests in real estate mortgage investment conduits ("REMICs"). See "Taxation."
Many inverse floating rate CMOs have coupons that move inversely to a multiple of the applicable indexes. The coupon varying inversely to a multiple of an applicable index creates a leverage
factor. Inverse floaters based on multiples of a stated index are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and loss of principal. The markets for inverse floating
rate CMOs with highly leveraged characteristics may at times be very thin. Each Portfolio's ability to dispose of its positions in such securities will depend on the degree of liquidity in the markets for such securities. It is impossible to predict
the amount of trading interest that may exist in such securities, and therefore the future degree of liquidity.
Stripped Mortgage-Backed Securities. Each of these Portfolios also may invest in stripped mortgage-backed securities which are created by segregating the
cash flows from underlying mortgage loans or mortgage securities to create two or more new securities, each with a specified percentage of the underlying security's principal or interest payments. Mortgage securities may be partially stripped so
that each investor class received some interest and some principal. When securities are completely stripped, however, all of the interest is distributed to holders of one type of security, known as an interest-only security, or IO, and all of the
principal is distributed to holders of another type of security known as a principal-only security, or PO. Strips can be created in a pass-through structure or as tranches of a CMO. The yields to maturity on IOs and POs are very sensitive to the
rate of principal payments (including prepayments) on the related underlying mortgage assets. If the underlying mortgage assets experience
6
greater than anticipated prepayments of principal, the Portfolio may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated prepayments of principal,
the yield on POs could be materially and adversely affected.
Private Entity Securities. Each of these Portfolios may invest in mortgage-related securities issued by commercial banks, savings and loan institutions,
mortgage bankers, private mortgage insurance companies and other non-governmental issuers. Timely payment of principal and interest on mortgage-related securities backed by pools created by non-governmental issuers often is supported partially by
various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. There can be no assurance that the
private insurers or mortgage poolers can meet their obligations under the policies, so that if the issuers default on their obligations the holders of the security could sustain a loss. No insurance or guarantee covers the Portfolio or the price of
the Portfolio's shares. Mortgage-related securities issued by non-governmental issuers generally offer a higher rate of interest than government-agency and government-related securities because there are no direct or indirect government guarantees
of payment.
CMO Residuals. CMO Residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing.
The cash flow generated by the mortgage assets underlying series of CMOs is applied first to make required payments of principal of and interest on the CMOs and second to pay the related
administrative expenses of the issuer. The residual in a CMO structure generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO
Residual represents dividend or interest income and/or a return of capital. The amount of residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMOs,
prevailing interest rates, the amount of administrative expenses and the prepayment experience on the mortgage assets. In particular, the yield to maturity on CMO Residuals is extremely sensitive to prepayments on the related underlying mortgage
assets in the same manner as an IO class of stripped mortgage-back securities. See "Stripped Mortgage-Backed Securities" above. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on
the related CMO residual will also be extremely sensitive to the level of the index upon which interest rate adjustments are based. As described above with respect to stripped mortgage-back securities, in certain circumstances, the Portfolio may
fail to fully recoup its initial investment in a CMO Residual.
CMO Residuals generally are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers. CMO Residuals may not have the liquidity of
other more established securities trading in other markets. Transactions in CMO Residuals are generally completed only after careful review of the characteristics of the securities in question. In addition, whether or not registered under the
Securities Act of 1933, as amended (the "Securities Act"), CMO Residuals may be subject to certain restrictions of transferability. Ownership of certain CMO Residuals imposes liability for certain of the expenses of the related CMO issuer on the
purchaser. The Investment Manager will not purchase any CMO Residual that imposes such liability on the Portfolio.
Other Mortgage-Related Securities. Other mortgage-related securities in which a Portfolio may invest include securities other than those described above
that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S.
7
Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
Real Estate Investment Trusts. Each Portfolio may invest in Real Estate Investment Trusts ("REITs"). A REIT is a corporation, or a business trust that
would otherwise be taxed as a corporation, which meets the definitional requirements of the Internal Revenue Code of 1986, as amended (the "Code"). The Code permits a qualifying REIT to deduct dividends paid, thereby effectively eliminating
corporate level federal income tax and making the REIT a pass-through vehicle for federal income tax purposes. To meet the definitional requirements of the Code, a REIT must, among other things, invest substantially all of its assets in interests in
real estate (including mortgages and other REITs) or cash and government securities, derive most of its income from rents from real property or interest on loans secured by mortgages on real property, and distribute to shareholders annually a
substantial portion of its otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs. Equity REITs, which may include operating or finance companies, own real estate directly and the value of, and income
earned by, the REITs depends upon the income of the underlying properties and the rental income they earn. Equity REITs also can realize capital gains (or losses) by selling properties that have appreciated (or depreciated) in value. Mortgage REITs
can make construction, development or long-term mortgage loans and are sensitive to the credit quality of the borrower. Mortgage REITs derive their income from interest payments on such loans. Hybrid REITs combine the characteristics of both equity
and mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate. The values of securities issued by REITs are affected by tax and regulatory requirements and by perceptions of management skill. They also are
subject to heavy cash flow dependency, defaults by borrowers or tenants, self-liquidation and the possibility of failing to qualify for tax-free status under the Code or to maintain exemption from the Investment Company Act of 1940, as amended (the
"1940 Act").
Asset-Backed Securities. (High Yield Portfolio only) Asset-backed securities are a form of derivative. The securitization techniques used for
asset-backed securities are similar to those used for mortgage-related securities. These securities include debt securities and securities with debt-like characteristics. The collateral for these securities has included credit card and automobile
receivables, home equity loans, boat loans, computer leases, airplane leases, mobile home loans, recreational vehicle loans and hospital account receivables. The Portfolio may invest in these and other types of asset-backed securities that may be
developed in the future.
Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities may provide the Portfolio with a less effective security interest
in the related collateral than do mortgage-backed securities. Therefore, there is the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these securities.
Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most organizations that issue asset-backed securities relating to motor vehicle installment purchase obligations perfect their interests in their respective
obligations only by filing a financing statement and by having the servicer of the obligations, which is usually the originator, take custody thereof. In such circumstances, if the servicer were to sell the same obligations to another party, in
violation of its duty not to so do, there is a risk that such party could acquire an interest in the obligations superior to that of the holders of the securities. Also, although most such obligations grant a security interest in the motor vehicle
being financed, in most states the security interest in a motor vehicle must be noted on the certificate of title to
8
perfect such security interest against competing claims of other parties. Due to the large number of vehicles involved, however, the certificate of title to each vehicle financed, pursuant to the obligations underlying the
securities, usually is not amended to reflect the assignment of the seller's security interest for the benefit of the holders of the securities. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities. In addition, various state and federal laws give the motor vehicle owner the right to assert against the holder of the owner's obligation certain defenses such owner would have against the seller of
the motor vehicle. The assertion of such defenses could reduce payments on the related securities.
Investment Companies. Each Portfolio, except Small-Mid Cap and International Equity Portfolios, may invest, to the extent permitted under the 1940 Act,
in securities issued by investment companies which principally invest in securities of the type in which the Portfolio invests. Under the 1940 Act, a Portfolio's investment in such securities, subject to certain exceptions, currently is limited to
(i) 3% of the total voting stock of any one investment company, (ii) 5% of the Portfolio's total assets with respect to any one investment company and (iii) 10% of the Portfolio's total assets in the aggregate. Small-Mid Cap and International Equity
Portfolios may not purchase securities of other investment companies except in connection with a merger, consolidation, acquisition or reorganization, and may purchase securities of any one closed-end fund in an amount up to 5% of the Portfolio's
total assets and may purchase securities of closed-end funds in the aggregate in an amount of up to 10% of the Portfolio's total assets. Investments in the securities of investment companies may involve duplication of advisory fees and certain other
expenses. The Portfolios do not intend to invest in investment companies affiliated with the Fund or the Investment Manager.
For purposes of considering a Portfolio's status as a "diversified company" under Section 5(b)(1) of the 1940 Act, investments in other investment companies are excluded from the
diversification test, in accordance with the language in Section 5(b)(1). As a result, the Opportunistic Strategies Portfolio (which invests primarily in Underlying Funds (as defined in the Prospectus)), may hold fewer securities than other
diversified mutual funds not focusing on investments in other investment companies, although the Portfolio will gain additional diversification through the Underlying Funds' portfolios of investments. However, the Portfolio does not intend to limit
its investments to Underlying Funds that are "diversified companies" or to otherwise monitor the diversification of the Underlying Funds' investments. It is currently intended that the Portfolio will investment in approximately 10 to 30 Underlying
Funds.
With respect to the Opportunistic Strategies Portfolio's investments in ETFs (defined below), the Fund may enter into an agreement with certain ETFs pursuant to Securities and Exchange
Commission ("SEC") exemptive orders obtained by the ETFs and on which the Opportunistic Strategies Portfolio may rely. These agreements and orders also may require the Investment Manager to vote the Portfolio's Underlying Fund shares in proportion
to votes cast by other ETF stockholders. The Opportunistic Strategies Portfolio also may invest in an Underlying Fund in excess of the limits in (i)-(iii) above if it complies with Section 12(d)(1)(F) of the 1940 Act, which limits the amount the
Portfolio, the other Portfolios and other affiliated persons of the Portfolio can invest in any one Underlying Fund to 3% of the Underlying Fund's total outstanding stock. To comply with provisions of the 1940 Act, on any matter upon which
Underlying Fund stockholders are solicited to vote the Investment Manager will vote Underlying Fund shares in the same general proportion as shares held by other stockholders of the Underlying Fund.
Exchange-Traded Funds. Investments in investment companies may include shares of exchange-traded funds (collectively, "ETFs"), which are designed to
provide investment results generally corresponding to a securities index. ETFs usually are units of beneficial interest in an investment trust or represent undivided ownership interests in a portfolio of securities, in each case with respect to a
portfolio of all or substantially all of the component securities of, and in substantially the same weighting as, the
9
relevant benchmark index. ETFs are listed on an exchange and trade in the secondary market on a per-share basis.
The values of ETFs are subject to change as the values of their respective component securities fluctuate according to market volatility. Investments in ETFs that are designed to correspond to
an equity index, for example, involve certain inherent risks generally associated with investments in a broadly based portfolio of common stocks, including the risk that the general level of stock prices may decline, thereby adversely affecting the
value of ETFs invested in by each Portfolio. Moreover, a Portfolio's investments in ETFs may not exactly match the performance of a direct investment in the respective indices to which they are intended to correspond due to the temporary
unavailability of certain index securities in the secondary market or other extraordinary circumstances, such as discrepancies with respect to the weighting of securities.
Most ETFs are open-end investment companies, and, as a result, investments in such ETFs may not be purchased by the Small-Mid Cap or International Equity Portfolios except in connection with a
merger, consolidation, acquisition or reorganization.
Master Limited Partnerships. (Global Listed Infrastructure and Opportunistic Strategies Portfolios only) Each of these Portfolios may invest in equity
securities of master limited partnerships ("MLPs"). An MLP generally has two classes of partners, the general partner and the limited partners. The general partner normally controls the MLP through an equity interest plus units that are subordinated
to the common (publicly traded) units for an initial period and then only converting to common if certain financial tests are met. As a motivation for the general partner to successfully manage the MLP and increase cash flows, the terms of most MLPs
typically provide that the general partner receives a larger portion of the net income as distributions reach higher target levels. As cash flow grows, the general partner receives a greater interest in the incremental income compared to the
interest of limited partners. The general partner's incentive compensation typically increases up to 50% of incremental income. Nevertheless, the aggregate amount distributed to limited partners will increase as MLP distributions reach higher target
levels. Given this incentive structure, the general partner has an incentive to streamline operations and undertake acquisitions and growth projects in order to increase distributions to all partners.
MLP common units represent an equity ownership interest in a partnership, providing limited voting rights and entitling the holder to a share of the company's success through distributions
and/or capital appreciation. Unlike stockholders of a corporation, common unit holders do not elect directors annually and generally have the right to vote only on certain significant events, such as mergers, a sale of substantially all of the
assets, removal of the general partner or material amendments to the partnership agreement. MLPs are required by their partnership agreements to distribute a large percentage of their current operating earnings. Common unit holders generally have
first right to a minimum quarterly distribution prior to distributions to the convertible subordinated unit holders or the general partner (including incentive distributions). Common unit holders typically have arrearage rights if the minimum
quarterly distribution is not met. In the event of liquidation, MLP common unit holders have first right to the partnership's remaining assets after bondholders, other debt holders, and preferred unit holders have been paid in full. MLP common units
trade on a national securities exchange or over-the-counter. Some limited liability companies ("LLCs") may be treated as MLPs for federal income tax purposes. Similar to MLPs, LLCs typically do not pay federal income tax at the entity level and are
required by their operating agreements to distribute a large percentage of their current operating earnings. In contrast to MLPs, LLCs have no general partner and there are no incentives that entitle management or other unit holders to increased
percentages of cash distributions as distributions reach higher target levels. In addition, LLC common unit holders typically have voting rights with respect to the LLC, whereas MLP common units have limited voting rights. MLP common units and other
equity securities can be affected by macro economic and other factors affecting the stock market in general, expectations of interest rates, investor
10
sentiment towards MLPs or its business sector, changes in a particular issuer's financial condition, or unfavorable or unanticipated poor performance of a particular issuer (in the case of MLPs, generally measured in terms
of distributable cash flow). Prices of common units of individual MLPs and other equity securities can also be affected by fundamentals unique to the partnership or company, including earnings power and coverage ratios.
MLP convertible subordinated units are typically issued by MLPs to founders, corporate general partners of MLPs, entities that sell assets to the MLP, and institutional investors, and may be
purchased in direct placements from such persons. The purpose of the convertible subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed to common unit holders. Convertible
subordinated units generally are not entitled to distributions until holders of common units have received specified minimum quarterly distributions, plus any arrearages, and may receive less in distributions upon liquidation. Convertible
subordinated unit holders generally are entitled to a minimum quarterly distribution prior to the payment of incentive distributions to the general partner, but are not entitled to arrearage rights. Therefore, they generally entail greater risk than
MLP common units. They are generally convertible automatically into the senior common units of the same issuer at a one-to-one ratio upon the passage of time or the satisfaction of certain financial tests. These units do not trade on a national
exchange or over-the-counter, and there is no active market for convertible subordinated units. The value of a convertible security is a function of its worth if converted into the underlying common units. Convertible subordinated units generally
have similar voting rights to MLP common units. Because convertible subordinated units generally convert to common units on a one-toone ratio, the price that the Portfolio could be expected to pay upon purchase or to realize upon resale is generally
tied to the common unit price less a discount. The size of the discount varies depending on a variety of factors including the likelihood of conversion, and the length of time remaining to conversion, and the size of the block purchased.
MLP I-Shares represent an indirect investment in MLP I-units. I-units are equity securities issued to affiliates of MLPs, typically a limited liability company, that own an interest in and
manage the MLP. The issuer has management rights but is not entitled to incentive distributions. The I-Share issuer's assets consist exclusively of MLP I-units. Distributions by MLPs to I-unit holders are made in the form of additional I-units,
generally equal in amount to the cash received by common unit holders of MLPs. Distributions to I-Share holders are made in the form of additional I-Shares, generally equal in amount to the I-units received by the I-Share issuer. The issuer of the
I-Share is taxed as a corporation for federal income tax purposes; however, the MLP does not allocate income or loss to the I-Share issuer. Accordingly, investors receive a Form 1099, are not allocated their proportionate share of income of the MLPs
and are not subject to state income tax filing obligations. The price of I-Shares and their volatility tend to be correlated to the price of common units, although the price correlation is not precise.
Illiquid Securities. Each Portfolio may invest up to 15% (10% in the case of Small-Mid Cap, International Equity, International Small Cap and Emerging
Markets Portfolios) of the value of its net assets in securities as to which a liquid trading market does not exist, provided such investments are consistent with the Portfolio's investment objective. These securities may include securities that are
not readily marketable, such as securities that are subject to legal or contractual restrictions on resale (such as private placements and certain restricted securities), repurchase agreements providing for settlement in more than seven days after
notice, certain mortgage-related securities, and certain privately negotiated, non-exchange traded options and securities used to cover such options. As to these securities, a Portfolio is subject to the risk that should the Portfolio desire to sell
them when a ready buyer is not available at a price that is deemed to be representative of their value, the value of the Portfolio's net assets could be adversely affected.
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Money Market Instruments; Temporary Defensive Positions. When the Investment Manager determines that adverse market conditions exist, a Portfolio may
adopt a temporary defensive position and invest some or all of its assets in money market instruments, including U.S. Government securities, repurchase agreements, bank obligations and commercial paper and other short-term obligations ("Money Market
Instruments"). For Emerging Markets and Developing Markets Portfolios, when the Investment Manager believes it is warranted for defensive purposes, each Portfolio may invest without limitation in high quality fixed-income securities or equity
securities of U.S. companies. Each Portfolio also may purchase Money Market Instruments when it has cash reserves or in anticipation of taking a market position.
Investment Techniques
The following information supplements and should be read in conjunction with the Fund's Prospectus.
Borrowing Money. Each Portfolio may borrow to the extent permitted under the 1940 Act, which permits an investment company to borrow in an amount up to
331/3% of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (including the amount borrowed) at the time the
borrowing is made. While such borrowings exceed 5% of a Portfolio's total assets, the Portfolio will not make any additional investments. Money borrowed will be subject to interest costs. In addition, each Portfolio other than Small-Mid Cap and
International Equity Portfolios may borrow for investment purposes to the extent permitted under the 1940 Act. See "Leverage" below.
Leverage. (All Portfolios, except Small-Mid Cap and International Equity Portfolios) Leveraging (buying securities using borrowed money) exaggerates the
effect on net asset value of any increase or decrease in the market value of the Portfolio's investment. Money borrowed for leveraging is limited to 331/3% of the value of the
Portfolio's total assets. Interest costs may or may not be recovered by appreciation of the securities purchased; in certain cases, interest costs may exceed the return received on the securities purchased. For borrowings for investment purposes,
the 1940 Act requires the Portfolio to maintain continuous asset coverage (total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the required coverage should decline as a result of market
fluctuations or other reasons, the Portfolio may be required to sell some of its portfolio holdings within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. The Portfolio also may be required to maintain minimum average balances in connection with such borrowing or pay a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
Each Portfolio may enter into reverse repurchase agreements with banks, brokers or dealers. This form of borrowing involves the transfer by the Portfolio of an underlying debt instrument in
return for cash proceeds based on a percentage of the value of the security. Each Portfolio retains the right to receive interest and principal payments on the security. As a result of these transactions, the Portfolio is exposed to greater
potential fluctuation in the value of its assets and its net asset value per share. At an agreed upon future date, the Portfolio repurchases the security at principal plus accrued interest. To the extent a Portfolio enters into a reverse repurchase
agreement, the Portfolio will maintain in a segregated custodial account permissible liquid assets at least equal to the aggregate amount of its reverse repurchase obligations, plus accrued interest, in certain cases, in accordance with releases
promulgated by the SEC. The SEC views reverse repurchase transactions as collateralized borrowing by a Portfolio. Except for these transactions, each Portfolio's borrowings generally will be unsecured.
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Lending Portfolio Securities. Each Portfolio may lend securities from its portfolio to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. In connection with such loans, the Portfolio remains the owner of the loaned securities and continues to be entitled to payments in amounts equal to the interest, dividends or other distributions
payable on the loaned securities. The Portfolio also has the right to terminate a loan at any time. The Portfolio may call the loan to vote proxies if a material issue affecting the Portfolio's investment is to be voted upon. Loans of portfolio
securities may not exceed 331/3% of the value of the Portfolio's total assets. The Portfolio will receive collateral consisting of cash, U.S. Government securities or irrevocable
letters of credit which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. If the collateral consists of a letter of credit or securities, the borrower will pay the Portfolio a
loan premium fee. If the collateral consists of cash, the Portfolio will reinvest the cash and pay the borrower a pre-negotiated fee or "rebate" from any return earned on the investment. Should the borrower of the securities fail financially, the
Portfolio may experience delays in recovering the loaned securities or exercising its rights in the collateral. Loans are made only to borrowers that are deemed by the Investment Manager to be of good financial standing. In a loan transaction, the
Portfolio will also bear the risk of any decline in value of securities acquired with cash collateral.
Derivatives. Each Portfolio may invest in, or enter into, derivatives, such as options, futures contracts, options on futures contracts and swap
agreements, for a variety of reasons, including to hedge certain market risks, to provide a substitute for purchasing or selling particular securities or to increase potential income gain. Derivatives may provide a cheaper, quicker or more
specifically focused way for the Portfolio to invest than "traditional" securities would.
Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole. Derivatives permit a
Portfolio to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Portfolio can increase or decrease the level of risk, or change the character of the risk, of its
portfolio by making investments in specific securities. However, derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in derivatives could have a large potential impact on a
Portfolio's performance.
If a Portfolio invests in derivatives at inopportune times or judges market conditions incorrectly, such investments may lower the Portfolio's return or result in a loss. A Portfolio also could
experience losses if its derivatives were poorly correlated with its other investments, or if the Portfolio were unable to liquidate its position because of an illiquid secondary market. The market for many derivatives is, or suddenly can become,
illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for derivatives.
The Fund will not be a commodity pool (i.e., a pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is registered with the Commodity Futures Trading Commission (the "CFTC")). In addition, the Fund has claimed an exclusion from the definition of commodity pool operator and, therefore, is not subject to
registration or regulation as a pool operator under the Commodity Exchange Act.
Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter derivatives. Exchange-traded derivatives generally are
guaranteed by the clearing agency which is the issuer or counterparty to such derivatives. This guarantee usually is supported by a daily variation margin system operated by the clearing agency in order to reduce overall credit risk. As a result,
unless the clearing agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased on an exchange. In contrast, no clearing agency guarantees over-the-counter derivatives. Therefore, each party to an
over-the-counter derivative bears the
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risk that the counterparty will default. Accordingly, the Investment Manager will consider the creditworthiness of counterparties to over-the-counter derivatives in the same manner as it would review the credit quality of a
security to be purchased by the Portfolio. Over-the-counter derivatives are less liquid than exchange-traded derivatives since the other party to the transaction may be the only investor with sufficient understanding of the derivative to be
interested in bidding for it.
Successful use of derivatives by a Portfolio also is subject to the Investment Manager's ability to predict correctly movements in the direction of the relevant market and to the extent the
transaction is entered into for hedging purposes, to ascertain the appropriate correlation between the transaction being hedged and the price movements of the futures contract. For example, if a Portfolio uses futures to hedge against the
possibility of a decline in the market value of securities held in its portfolio and the prices of such securities instead increase, the Portfolio will lose part or all of the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. Furthermore, if in such circumstances the Portfolio has insufficient cash, it may have to sell securities to meet daily variation margin requirements. The Portfolio may have to sell such
securities at a time when it may be disadvantageous to do so.
Pursuant to regulations and/or published positions of the SEC, a Portfolio may be required to segregate permissible liquid assets to cover its obligations relating to its transactions in
derivatives. To maintain this required cover, the Portfolio may have to sell securities at disadvantageous prices or times since it may not be possible to liquidate a derivative position at a reasonable price. The segregation of such assets will
have the effect of limiting the Portfolio's ability to otherwise invest those assets.
Futures TransactionsIn General. (All Portfolios, except Small-Mid Cap and International Equity Portfolios) Each Portfolio may enter into futures
contracts in U.S. domestic markets, or on exchanges located outside the United States. Foreign markets may offer advantages such as trading opportunities or arbitrage possibilities not available in the United States. Foreign markets, however, may
have greater risk potential than domestic markets. For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only to the broker for performance of the contract. In addition, any
profits a Portfolio might realize in trading could be eliminated by adverse changes in the currency exchange rate, or the Portfolio could incur losses as a result of those changes. Transactions on foreign exchanges may include both commodities which
are traded on domestic exchanges and those which are not. Unlike trading on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the CFTC.
Engaging in these transactions
involves risk of loss to the Portfolio which could adversely affect the value
of the Portfolio's net assets. Although each of these Portfolios intends to purchase
or sell futures contracts only if there is an active market for such contracts,
no assurance can be given that a liquid market will exist for any particular
contract at any particular time. Many futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. Once the daily limit has been reached
in a particular contract, no trades may be made that day at a price beyond that
limit or trading may be suspended for specified periods during the trading day.
Futures contract prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Portfolio to substantial losses.
Specific Futures Transactions. Each Portfolio other than Small-Mid Cap, International Equity and High Yield Portfolios may purchase and sell stock index
futures contracts. A stock index future obligates the Portfolio to pay or receive an amount of cash equal to a fixed dollar amount specified in the futures contract multiplied by the difference between the settlement price of the contract on the
contract's
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last trading day and the value of the index based on the stock prices of the securities that comprise it at the opening of trading in such securities on the next business day.
Each Portfolio other than Mid Cap, Small-Mid Cap and International Equity Portfolios may purchase and sell interest rate futures contracts. An interest rate future obligates the Portfolio to
purchase or sell an amount of a specific debt security at a future date at a specific price.
Each Portfolio, except Small-Mid Cap and International Equity Portfolios, may buy and sell foreign currency futures. A currency future obligates the Portfolio to purchase or sell an amount of a
specific currency at a future date at a specific price.
OptionsIn General. (All Portfolios, except Small-Mid Cap and International Equity Portfolios) Each of these Portfolios may buy and sell (write)
covered call and put options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security or securities at the exercise price at any time during the option period, or at a specific
date. Conversely, a put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security or securities at the exercise price at any time during the option period, or at a specific date.
A covered call option written by a Portfolio is a call option with respect to which the Portfolio owns the underlying security or otherwise covers the transaction by segregating permissible
liquid assets. A put option written by a Portfolio is covered when, among other things, the Portfolio segregates permissible liquid assets having a value equal to or greater than the exercise price of the option to fulfill the obligation undertaken.
The principal reason for writing covered call and put options is to realize, through the receipt of premiums, a greater return than would be realized on the underlying securities alone. A Portfolio receives a premium from writing covered call or put
options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some
options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen events, at times
have rendered certain of the clearing facilities inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can
be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options. If, as a
covered call option writer, a Portfolio is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.
Specific Options Transactions. Each Portfolio other than Small-Mid Cap and International Equity Portfolios may buy and sell call and put options in
respect of specific securities (or groups or "baskets" of specific securities) or indices listed on national securities exchanges or traded in the over-the-counter market. An option on an index is similar to an option in respect of specific
securities, except that settlement does not occur by delivery of the securities comprising the index. Instead, the option holder receives an amount of cash if the closing level of the index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option. Thus, the effectiveness of purchasing or writing index options will depend upon price movements in the level of the index rather than the price of a particular
security.
15
As the writer (seller) of a call option, a Portfolio would receive cash (the premium) from the purchaser of the option, and the purchaser has the right to receive from the Portfolio the cash
value of the underlying index or any appreciation in the underlying security over the exercise price on the expiration date or otherwise upon exercise. In effect, the Portfolio forgoes, during the life of the option, the opportunity to profit from
increases in the market value of the underlying security or securities held by the Portfolio with respect to which the option was written above the sum of the premium and the exercise price. For index options, this will depend, in part, on the
extent of correlation of the performance of the Portfolio's portfolio securities with the performance of the relevant index. Covered call option writing will generally limit the Portfolio's ability to benefit from the full appreciation potential of
its stock investments underlying the options, and the Portfolio retains the risk of loss (less premiums received) if the value of these stock investments declines. The Portfolio's written call options on individual stocks will be "covered" because
the Portfolio will hold the underlying stock in its portfolio throughout the term of the option. The Portfolio also will "cover" its written index call option positions by either segregating liquid assets in an amount equal to the contract value of
the index or by entering into offsetting positions.
A Portfolio may write call options that are "at-the-money" (the exercise price of the option is equal to the value of the underlying index or stock when the option is written),
"close-to-the-money" (with an exercise price close to the current cash value of the underlying index or the market value of the underlying security when the option is written), "out-of-the-money" (with an exercise price above the current cash value
of the underlying index or the market value of the underlying security when the option is written) or "in-the-money" (with an exercise price below the current cash value of the underlying index or market value of the underlying security when the
option is written), based on market conditions and other factors.
Each Portfolio other than Small-Mid Cap and International Equity Portfolios may buy and sell call and put options on foreign currency. These options convey the right to buy or sell the
underlying currency at a price which is expected to be lower or higher than the spot price of the currency at the time the option is exercised or expires.
Each Portfolio other than Small-Mid Cap and International Equity Portfolios may purchase cash-settled options on interest rate swaps, interest rate swaps denominated in foreign currency and
equity index swaps in pursuit of its investment objective. Interest rate swaps involve the exchange by a Portfolio with another party of their respective commitments to pay or receive interest (for example, an exchange of floating-rate payments for
fixed-rate payments) denominated in U.S. dollars or foreign currency. Equity index swaps involve the exchange by the Portfolio with another party of cash flows based upon the performance of an index or a portion of an index of securities which
usually includes dividends. A cash-settled option on a swap gives the purchaser the right, but not the obligation, in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date. These
options typically are purchased in privately negotiated transactions from financial institutions, including securities brokerage firms.
Successful use by a Portfolio of options will be subject to the Investment Manager's ability to predict correctly movements in the prices of individual stocks, the stock market generally,
foreign currencies or interest rates. To the extent the Investment Manager's predictions are incorrect, the Portfolio may incur losses.
Swap Agreements. To the extent consistent with the Portfolio's investment objective and management policies as set forth herein, each Portfolio other
than Small-Mid Cap and International Equity Portfolios may enter into equity, interest rate, index, total return and currency rate swap agreements. These transactions are entered into in an attempt to obtain a particular return when it is considered
desirable to do so, possibly at a lower cost to the Portfolio than if the Portfolio had invested
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directly in the asset that yielded the desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than a year. In a standard swap
transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged
or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested
at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make
payments to the other to the extent interest rates exceed a specified rate or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent interest rates fall below a specified level
or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by a Portfolio would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Portfolio's current obligations (or rights)
under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The risk of loss with respect to
swaps is limited to the net amount of payments that the Portfolio is contractually obligated to make. If the other party to a swap defaults, the Portfolio's risk of loss consists of the net amount of payments that the Portfolio contractually is
entitled to receive.
Future Developments. A Portfolio may take advantage of opportunities in options and futures contracts and options on futures contracts and any other
derivatives which are not presently contemplated for use by the Portfolio or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Portfolio's investment objective and legally
permissible for the Portfolio. Before entering into such transactions or making any such investment, the Portfolio will provide appropriate disclosure in its Prospectus or this Statement of Additional Information.
Foreign Currency Transactions. (All Portfolios, except Small-Mid Cap Portfolio) Foreign currency transactions may be entered into for a variety of
purposes, including: to fix in U.S. dollars, between trade and settlement date, the value of a security the Portfolio has agreed to buy or sell; to hedge the U.S. dollar value of securities the Portfolio already owns, particularly if it expects a
decrease in the value of the currency in which the foreign security is denominated; or to gain exposure to the foreign currency in an attempt to realize gains.
Foreign currency transactions may involve, for example, the Portfolio's purchase of foreign currencies for U.S. dollars or the maintenance of short positions in foreign currencies. A short
position would involve the Portfolio agreeing to exchange an amount of a currency it did not currently own for another currency at a future date in anticipation of a decline in the value of the currency sold relative to the currency the Portfolio
contracted to receive. The Portfolio's success in these transactions will depend principally on the Investment Manager's ability to predict accurately the future exchange rates between foreign currencies and the U.S. dollar.
Short-Selling. (All Portfolios, except Small-Mid Cap, International Equity, International Small Cap and Emerging Markets Portfolios) Each of these
Portfolios may engage in short sales of securities, although the Fund has no current intention of engaging in short sales and will not do so without prior approval of the Fund's Board of Directors. In these transactions, the Portfolio sells a
security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, the Portfolio must borrow the security to make delivery to the buyer. The Portfolio is obligated to replace the security borrowed
by purchasing it subsequently at the market price at the time of replacement. The price
17
at such time may be more or less than the price at which the security was sold by the Portfolio, which would result in a loss or gain, respectively. The Portfolio also may make short sales "against the box," in which the
Portfolio enters into a short sale of a security it owns. Securities will not be sold short if, after effect is given to any such short sale, the total market value of all securities sold short would exceed 25% of the value of the Portfolio's net
assets. A Portfolio may not make a short-sale which results in the Portfolio having sold short in the aggregate more than 5% of the outstanding securities of any class of issuer.
Until the Portfolio closes its short position or replaces
the borrowed security, it will: (a) segregate
permissible liquid assets in an amount that, together with the amount deposited
as collateral, always equals the current value of the security sold short; or
(b) otherwise cover its short position.
Forward Commitments. A Portfolio may purchase or sell securities on a forward commitment, when-issued or delayed delivery basis, which means that
delivery and payment take place a number of days after the date of the commitment to purchase or sell. The payment obligation and the interest rate receivable on a forward commitment, when-issued or delayed-delivery security are fixed when the
Portfolio enters into the commitment, but the Portfolio does not make a payment until it receives delivery from the counterparty. The Portfolio will segregate permissible liquid assets at least equal to the full notional value of its forward
commitment contracts or, with respect to forward commitments that include a contractual cash settlement requirement, will segregate such assets at least equal at all times to the amount of the Portfolio's purchase commitment. The Portfolio intends
to engage in forward commitments to increase the Portfolio's financial exposure to the types of securities in which it invests, which will increase the Portfolio's exposure to changes in interest rates and will increase the volatility of its
returns. If the Portfolio is fully or almost fully invested when forward commitment purchases are outstanding, such purchases may result in a form of leverage. At no time will the Portfolio have more than 33
% of its total assets committed to purchase securities on a forward commitment basis.
Securities purchased on a forward commitment, when-issued or delayed-delivery basis are subject to changes in value (generally changing in the same way, i.e., appreciating when interest rates decline and depreciating when interest rates rise) based upon the public's perception of the creditworthiness of the issuer and changes, real or anticipated, in
the level of interest rates. Securities purchased on a forward commitment, when-issued or delayed-delivery basis may expose a Portfolio to risks because they may experience such fluctuations prior to their actual delivery. Purchasing securities on a
forward commitment, when-issued or delayed-delivery basis can involve the additional risk that the yield available in the market when the delivery takes place actually may be higher than that obtained in the transaction itself. Purchasing securities
on a forward commitment, when-issued or delayed-delivery basis when the Portfolio is fully or almost fully invested may result in greater potential fluctuation in the value of the Portfolio's net assets and its net asset value per share.
Certain Investment Considerations and Risks
Equity Securities. Equity securities, including common stock, preferred stock, convertible securities and warrants, fluctuate in value, often based on
factors unrelated to the value of the issuer of the securities, and such fluctuations can be pronounced. Changes in the value of a Portfolio's investments will result in changes in the value of its shares and thus the Portfolio's total return to
investors.
Initial Public Offerings. (All Portfolios, except High Yield Portfolio) Each of these Portfolios may purchase securities of companies in initial public
offerings ("IPOs") or shortly thereafter. An IPO is a corporation's first offering of stock to the public. Shares are given a market value reflecting expectations for the corporation's future growth. Special rules of the Financial Industry
Regulatory Authority ("FINRA") apply to the distribution of IPOs. Corporations offering stock in IPOs generally
18
have limited operating histories and may involve greater investment risk. The prices of these companies' securities may be very volatile, rising and falling rapidly, sometimes based solely on investor perceptions rather
than economic reasons. IPO securities will be sold when the Investment Manager believes the price has reached full value. IPO securities may be sold by a Portfolio on the same day the Portfolio receives an allocation.
Smaller Company Securities. Each Portfolio other than Mid Cap, International Equity, International Equity Select and High Yield Portfolios may purchase
securities of smaller capitalization companies, the prices of which may be subject to more abrupt or erratic market movements than securities of larger, more established companies, because securities of smaller companies typically are traded in
lower volume and the issuers typically are subject to greater changes in earnings and prospects. Smaller capitalization companies often have limited product lines, markets or financial resources. They may be dependent on management for one or a few
key persons, and can be more susceptible to losses and the risk of bankruptcy. In addition, securities of the small capitalization sector may be thinly traded (and therefore may have to be sold at a discount from current market prices or sold in
small lots over an extended period of time), may be followed by fewer investment research analysts and may pose a greater chance of loss than investments in securities of larger capitalization companies.
Fixed-Income Securities. Even though interest-bearing securities are investments which promise a stable stream of income, the prices of such securities
generally are inversely affected by changes in interest rates and, therefore, are subject to the risk of market price fluctuations. Certain portfolio securities, such as those with interest rates that fluctuate directly or indirectly based on
multiples of a stated index, are designed to be highly sensitive to changes in interest rates and can subject the holders thereof to extreme reductions of yield and possibly loss of principal.
The values of fixed-income securities also may be affected by changes in the credit rating or financial condition of the issuer. Certain securities, such as those rated below investment grade
by Standard & Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's" and together with S&P, the "Rating Agencies"), may be subject to such risk with respect to the issuing entity and to greater market fluctuations
than certain lower yielding, higher rated fixed-income securities. Once the rating of a portfolio security has been changed, the Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security.
Mortgage-Related Securities. (High Yield Portfolio and, to a limited extent, Equity Value, Strategic Equity, Mid Cap, Small-Mid Cap and Opportunistic
Strategies Portfolios only) Mortgage-related securities are complex derivative instruments, subject to both credit and prepayment risk, and may be more volatile and less liquid, and more difficult to price accurately, than more traditional debt
securities. Although certain mortgage-related securities are guaranteed by a third party (such as a U.S. Government agency or instrumentality with respect to government-related mortgage-backed securities) or otherwise similarly secured, the market
value of the security, which may fluctuate, is not secured. Mortgage-related securities generally are subject to credit risks associated with the performance of the underlying mortgage properties and to prepayment risk. In certain instances, the
credit risk associated with mortgage-related securities can be reduced by third party guarantees or other forms of credit support. Improved credit risk does not reduce prepayment risk which is unrelated to the rating assigned to the mortgage-related
security. Prepayment risk can lead to fluctuations in value of the mortgage-related security which may be pronounced. If a mortgage-related security is purchased at a premium, all or part of the premium may be lost if the market value of the
security declines, whether resulting from changes in interest rates or prepayments on the underlying mortgage collateral. Certain mortgage-related securities, such as inverse floating rate collateralized mortgage obligations, have coupons that move
inversely to a multiple of a specific index which may result in increased price volatility.
19
As with other interest-bearing securities, the prices of certain mortgage-related securities are inversely affected by changes in interest rates. However, although the value of a
mortgage-related security may decline when interest rates rise, the converse is not necessarily true, since during periods of declining interest rates the mortgages underlying the security are more likely to be prepaid. For this and other reasons, a
mortgage-related security's stated maturity may be shortened by unscheduled prepayments on the underlying mortgages, and, therefore, it is not possible to predict accurately the security's return to the Portfolio. Moreover, with respect to certain
stripped mortgage-backed securities, if the underlying mortgage securities experience greater than anticipated prepayments of principal, the Portfolio may fail to fully recoup its initial investment even if the securities are rated in the highest
rating category by a nationally recognized statistical rating organization. During periods of rapidly rising interest rates, prepayments of mortgage-related securities may occur at slower than expected rates. Slower prepayments effectively may
lengthen a mortgage-related security's expected maturity, which generally would cause the value of such security to fluctuate more widely in response to changes in interest rates. Were the prepayments on the Portfolio's mortgage-related securities
to decrease broadly, the Portfolio's effective duration, and thus sensitivity to interest rate fluctuations, would increase. Commercial real property loans, however, often contain provisions that substantially reduce the likelihood that such
securities will be prepaid. The provisions generally impose significant prepayment penalties on loans and in some cases there may be prohibitions on principal prepayments for several years following origination.
Foreign Securities. Foreign securities markets generally are not as developed or efficient as those in the United States. Securities of some foreign
issuers, including depositary receipts, foreign government obligations and securities of supranational entities, are less liquid and more volatile than securities of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities
markets are less than in the United States and, at times, volatility of price can be greater than in the United States.
Because evidences of ownership of such securities usually are held outside the United States, a Portfolio will be subject to additional risks which include possible adverse political and
economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions, which might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside
the country of the issuer, whether from currency blockage or otherwise. Moreover, foreign securities held by a Portfolio may trade on days when the Portfolio does not calculate its net asset value and thus affect the Portfolio's net asset value on
days when investors have no access to the Portfolio.
Developing countries have economic structures that generally are less diverse and mature, and political systems that are less stable, than those of developed countries. The markets of
developing countries may be more volatile than the markets of more mature economies; however, such markets may provide higher rates of return to investors. Many developing countries providing investment opportunities for these Portfolios have
experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have adverse effects on the economies and securities markets of certain
of these countries.
The Portfolios consider emerging market countries to include all countries represented by the Morgan Stanley Capital International ("MSCI®") Emerging Markets Index and other countries not considered developed countries by MSCI, and investments in emerging markets may include those companies included in the MSCI Emerging
Markets Index and companies with their principal business activities located in, or that have 50% or more of their assets in or revenue or net income from, emerging market countries. The MSCI Emerging Markets Index currently includes the following
countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand
20
and Turkey. For purposes of each of Emerging Markets Portfolio's and Developing Markets Portfolio's policy to invest at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of
companies whose principal business activities are located in emerging market countries, only countries included in the MSCI Emerging Markets Index are considered to be "emerging markets" (although the Portfolio may invest in other countries with its
remaining assets). Because foreign securities often are purchased with and payable in currencies of foreign countries, the value of these assets as measured in U.S. dollars may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations.
Foreign Currency Transactions. (All Portfolios, except Small-Mid Cap Portfolio) Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or perceived changes in interest rates and other complex factors, as seen
from an international perspective. Currency exchange rates also can be affected unpredictably by intervention of U.S. or foreign governments or central banks, or the failure to intervene, or by currency controls or political developments in the
United States or abroad.
Lower Rated Securities. (High Yield Portfolio only) High Yield Portfolio invests at least 80% of its assets in higher yielding (and, therefore, higher
risk) debt securities rated as low as the lowest rating assigned by a Rating Agency (commonly known as junk bonds).
Bond prices are inversely related to interest rate changes; however, bond price volatility also may be inversely related to coupon. Accordingly, below investment grade securities may be
relatively less sensitive to interest rate changes than higher quality securities of comparable maturity, because of their higher coupon. This higher coupon is what the investor receives in return for bearing greater credit risk. The higher credit
risk associated with below investment grade securities potentially can have a greater effect on the value of such securities than may be the case with higher quality issues of comparable maturity, and will be a substantial factor in the Portfolio's
relative share price volatility. The ratings of the Rating Agencies represent their opinions as to the quality of the obligations which they undertake to rate. Although ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of these securities. See "Appendix" for a general description of the Rating Agencies' ratings. The Portfolio will rely on the judgment, analysis and experience of the Investment Manager in
evaluating the creditworthiness of an issuer.
Companies that issue certain of these securities often are highly leveraged and may not have available to them more traditional methods of financing. Therefore, the risk associated with
acquiring the securities of such issuers generally is greater than is the case with higher rated securities and will fluctuate over time. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged
issuers of these securities may not have sufficient revenues to meet their interest payment obligations. The issuer's ability to service its debt obligations also may be affected adversely by specific corporate developments, forecasts, or the
unavailability of additional financing. The risk of loss because of default by the issuer is significantly greater for the holders of these securities because such securities generally are unsecured and often are subordinated to other creditors of
the issuer.
Because there is no established retail secondary market for many of these securities, the Portfolio anticipates that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market for these securities does exist, it generally is not as liquid as the secondary market for higher rated securities. The lack of a liquid secondary market may have an adverse impact on
market price and yield and the Portfolio's ability to dispose of particular issues when necessary to meet the Portfolio's liquidity needs or in response to a specific economic event such as a deterioration in the creditworthiness of the issuer. The
lack of a liquid secondary market for certain securities also may
21
make it more difficult for the Portfolio to obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value and could result in the Portfolio selling such securities at lower
prices than those used in calculating the Portfolio's net asset value. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of these securities. In such cases, judgment may
play a greater role in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic downturns. An economic recession could adversely affect the ability of the issuers of lower rated bonds to repay principal and pay
interest thereon and increase the incidence of default for such securities. It is likely that an economic recession could disrupt severely the market for such securities and may have an adverse impact on their value.
High Yield Portfolio may acquire these securities during an initial offering. Such securities may involve special risks because they are new issues. The Portfolio does not have an arrangement
with any persons concerning the acquisition of such securities, and the Investment Manager will review carefully the credit and other characteristics pertinent to such new issues.
The credit risk factors pertaining to lower rated securities also apply to lower rated zero coupon, pay-in-kind and step up securities. In addition to the risks associated with the credit
rating of the issuers, the market prices of these securities may be very volatile during the period no interest is paid.
Simultaneous Investments; Overlapping Positions. Investment decisions for each Portfolio are made independently from those of the other Portfolios and
other accounts managed by the Investment Manager. If, however, such other Portfolios or accounts desire to invest in, or dispose of, the same securities as a Portfolio, available investments or opportunities for sales will be allocated equitably to
each. In some cases, this procedure may adversely affect the size of the position obtained for or disposed of by a Portfolio or the price paid or received by a Portfolio. In some cases, the Investment Manager may seek to limit the number of
overlapping investments by similar Portfolios (securities of an issuer held in more than one Portfolio) so that shareholders invested in such Portfolios may achieve a more diverse investment experience. In such cases, a Portfolio may be
disadvantaged by the Investment Manager's decision to purchase or maintain an investment in one Portfolio to the exclusion of one or more other Portfolios (including a decision to sell the investment in one Portfolio so that it may be purchased by
another Portfolio).
Disclosure of Portfolio Holdings
It is the policy of the Fund to protect the confidentiality of the Portfolios' holdings and prevent the selective disclosure of non-public information about such holdings. The Fund will
publicly disclose the Portfolios' holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds.shtml, approximately 14 days after such quarter end. The information will remain accessible until
the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current.
In order to avoid conflicts of interest between the Fund, on the one hand, and the Investment Manager or any affiliated person of the Fund or the Investment Manager, on the other (1) disclosure
of portfolio holdings information is made only when such disclosure is in the best interest of Portfolio shareholders and the Fund has a legitimate business purpose for doing so and (2) none of the Fund or the Investment Manager or their affiliates
may receive any compensation in connection with an arrangement to make portfolio holdings information available.
22
In accordance with the foregoing, the Fund provides portfolio holdings information to ratings services or third party service providers who provide necessary or beneficial services when such
service providers need access to this information in the performance of their services and are subject to duties of confidentiality (1) imposed by law, including a duty not to trade on non-public information, and/or (2) pursuant to an agreement that
confidential information is not to be disclosed or used (including trading on such information) other than as required by law. From time to time, the Fund will communicate with these service providers to confirm that they understand the Fund's
policies and procedures regarding such disclosure. Such service providers currently include the Fund's investment manager, administrator, custodian, auditors and legal counsel and each of their respective affiliates and advisors, as well as
Institutional Shareholder Services, Inc., Lipper Inc., Morningstar, Inc., Bloomberg, BNY Mellon Analytical Services, LLC, Canterbury Consulting Incorporated and Thomson Vestek, Inc. The Fund also provides portfolio holdings information to Market
Street Trust Company pursuant to a confidentiality agreement. Service providers receive holdings information at a frequency appropriate to their services, which may be as frequently as daily.
Disclosure of portfolio holdings information may be authorized only by the Fund's Chief Compliance Officer or the General Counsel of the Investment Manager, each of whom evaluates such
disclosure in light of the best interests of Portfolio shareholders and any potential conflicts of interest. The service providers that receive portfolio holdings information from the Fund as described above, and any additions to this list of
service providers, are reported to the Fund's Board of Directors for its review. Any exceptions to the Fund's portfolio holdings disclosure policy are reported to the Board of Directors.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective is a fundamental policy, which cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Portfolio's outstanding
voting shares. In addition, each Portfolio (except as noted) has adopted investment restrictions numbered 1 through 9 as fundamental policies. However, the amendment of these restrictions to add an additional Portfolio, which amendment does not
substantively affect the restrictions with respect to an existing Portfolio, will not require approval as described in the first sentence. Investment restrictions numbered 10 through 15 are not fundamental policies and may be changed, as to a
Portfolio, by vote of a majority of the Fund's Board of Directors at any time.
Under normal circumstances, each of the following Portfolios will invest at least 80% of its net assets, plus any borrowings for investment purposes, as follows (or other investments with
similar economic characteristics): (i) Equity Value and Strategic Equityequity securities of U.S. companies; (ii) Mid Cap Portfolioequity securities of medium-size U.S. companies; (iii) Small-Mid Cap Portfolioequity securities of
small-mid cap U.S. companies; (iv) International Equity, International Equity Select and International Strategic Portfoliosequity securities; (v) International Small Cap Portfolioequity securities of small cap companies; (vi) Global
Listed Infrastructure Portfolioequity securities of infrastructure companies; (vii) Emerging Markets and Developing Markets Portfoliosequity securities of companies whose principal business activities are located in emerging market
countries as defined in the Prospectus; and (viii) High Yield Portfoliobonds and other fixed-income securities of U.S. companies rated, at the time of purchase, below investment grade by S&P or Moody's and as low as the lowest rating
assigned by S&P or Moody's, or the unrated equivalent as determined by the Investment Manager. Each of these Portfolios has adopted a policy to provide its shareholders with at least 60 days' prior notice of any change with respect to its 80%
policy.
23
|
None of the Portfolios may: |
|
1. |
issue senior securities, borrow money or pledge or mortgage its assets, except that (A) each Portfolio may borrow from banks for temporary purposes, including the meeting of redemption requests which might require the
untimely disposition of securities, as described in the Prospectus and (B) each of Equity Value, Strategic Equity, Mid Cap, International Equity Select, International Strategic, International Small Cap, Global Listed Infrastructure, Emerging
Markets, Developing Markets, High Yield and Opportunistic Strategies Portfolios also may borrow money to the extent permitted under the 1940 Act; provided, however, that the Portfolio will not make new investments to the extent borrowings exceed 5%
of its total assets, except for borrowings covered within the interpretations of Sections 18(f) of the 1940 Act. For purposes of this investment restriction, a Portfolio's entry into options, forward contracts, futures contracts, including those
related to indexes, shall not constitute borrowing; |
|
2. |
make loans, except loans of portfolio securities not having a value in excess of 33 % of a Portfolio's total assets and except that each Portfolio may
purchase debt obligations in accordance with its investment objectives and policies; |
|
3. |
for all Portfolios except Equity Value, Strategic Equity, Mid Cap, International Equity Select, International Strategic, Global Listed Infrastructure, Developing Markets, High Yield and Opportunistic Strategies Portfolios,
invest in illiquid securities as defined in "Certain Portfolio SecuritiesIlliquid Securities" if immediately after such investment more than 10% of the value of the Portfolio's net assets, taken at market value, would be invested in such
securities; |
|
4. |
for Small-Mid Cap and International Equity Portfolios, (A) purchase securities of other investment companies, except in connection with a merger, consolidation, acquisition or reorganization; and (B) Small-Mid Cap and
International Equity Portfolios may purchase securities in an amount up to 5% of the value of the Portfolio's total assets in any one closed-end fund and may purchase in the aggregate securities of closed-end funds in an amount of up to 10% of the
value of the Portfolio's total assets; |
|
5. |
purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Portfolio's investments in that industry
would exceed 25% of the current value of such Portfolio's total assets, provided that there is no limitation with respect to investments in obligations of the U.S. Government, its agencies or instrumentalities; |
|
6. |
(A) purchase or sell real estate or real estate limited partnerships, except that a Portfolio may purchase and sell securities of companies which deal in real estate or interests therein and Equity Value, Strategic Equity,
Mid Cap, International Equity Select, International Strategic, International Small Cap, Global Listed Infrastructure, Emerging Markets, Developing Markets, High Yield and Opportunistic Strategies Portfolios also may purchase and sell securities that
are secured by real estate; (B) purchase or sell commodities or commodity contracts (except that Equity Value, Strategic Equity, Mid Cap, International Equity Select, International Strategic, International Small Cap, Global Listed Infrastructure,
Emerging Markets, Developing Markets, High Yield and Opportunistic Strategies Portfolios may purchase and sell swaps, options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices,
and Equity Value, Strategic Equity, Mid Cap, International Equity, International Equity Select, International Strategic, High Yield and Opportunistic Strategies Portfolios may purchase or sell foreign currency forward exchange contracts); and (C)
for all Portfolios except Equity Value, Strategic Equity, Mid Cap, International Equity Select, International Strategic, Global |
|
24
|
Listed Infrastructure, Developing Markets, High Yield and Opportunistic Strategies Portfolios, invest in interests in or leases relating to oil, gas, or other mineral exploration or development programs; |
|
7. |
purchase securities on margin (except for short-term credits necessary for the clearance of transactions) or, except for Equity Value, Strategic Equity, Mid Cap, International Equity Select, International Strategic, Global
Listed Infrastructure, Developing Markets, High Yield and Opportunistic Strategies Portfolios, make short sales of securities; |
|
8. |
underwrite securities of other issuers, except to the extent that the purchase of municipal obligations or other permitted investments directly from the issuer thereof or from an underwriter for an issuer and the later
disposition of such securities in accordance with the Portfolio's investment program may be deemed to be an underwriting; |
|
9. |
for Small-Mid Cap and International Equity Portfolios, make investments for the purpose of exercising control or management; |
|
* * * |
|
10. |
for all Portfolios other than Small-Mid Cap and International Equity Portfolios, pledge, hypothecate, mortgage or otherwise encumber its assets other than to secure permitted borrowings; |
|
11. |
for all Portfolios other than Small-Mid Cap and International Equity Portfolios, invest in illiquid securities as defined in "Investment Objectives and Management PoliciesIlliquid Securities" if immediately after such
investment more than 15% of the value of the Portfolio's net assets would be invested in such securities; |
|
12. |
for all Portfolios other than Small-Mid Cap and International Equity Portfolios, purchase securities of other investment companies, except to the extent permitted under the 1940 Act; |
|
13. |
for International Equity Select Portfolio, make short sales of securities; or |
|
14. |
for International Small Cap and Emerging Markets Portfolios, make investments for the purpose of exercising control or management. |
* * *
If a percentage restriction is adhered to at the time of investment, a later change in percentage resulting from a change in values or assets will not constitute a violation of such
restriction. With respect to Investment Restriction No. 1, however, if borrowings exceed 331/3% of the value of a Portfolio's total assets as a result of a change in values or assets,
the Portfolio must take steps to reduce such borrowings at least to the extent of such excess within three business days.
MANAGEMENT
The Fund's Board of Directors is responsible for the management and supervision of each Portfolio and approves all significant agreements with those companies that furnish services to the
Portfolios. These companies are as follows:
Lazard Asset Management LLC |
Investment Manager |
Lazard Asset Management Securities LLC |
Distributor |
Boston Financial Data Services, Inc. |
Transfer Agent and Dividend Disbursing Agent |
State Street Bank and Trust
Company |
Custodian |
25
The Directors and officers of the Fund, together with information as to their principal occupations during at least the last five years, are shown below.
Name (Age) |
Position(s) with the Fund |
Principal Occupation(s) During Past 5 Years |
Address(1) |
(Since) and Term(2) |
and Other Directorships Held(2) |
|
Non-Interested Directors: |
|
|
|
Kenneth S. Davidson (64) |
Director
(August 1995) |
President, Davidson Capital Management Corporation;
President, Aquiline Advisors LLC; Trustee, The Juilliard School; Chairman of
the Board, Bridgehampton Chamber Music Festival; Trustee, American Friends of
the National Gallery, London |
|
Nancy A. Eckl (47) |
Director
(April 2007) |
Former Vice President, Trust Investments, American
Beacon Advisors, Inc. ("American Beacon") and Vice President of certain funds
advised by American Beacon; Trustee, College Retirement Equities Fund (eight
accounts); Trustee, TIAA-CREF Funds (47 funds) and TIAA-CREF Life Funds (10 funds)
and Member of the Management Committee of TIAA Separate Account VA-1 |
|
Lester Z. Lieberman (79) |
Director
(October 1991) |
Private Investor; Chairman, Healthcare Foundation of
New Jersey; Director, Cives Steel Co.; Director, Northside Power Transmission
Co.; Advisory Trustee, New Jersey Medical School; Director, Public Health Research
Institute; Trustee Emeritus, Clarkson University; Council of Trustees, New Jersey
Performing Arts Center |
|
Leon M. Pollack (68) |
Director
(August 2006) |
Former Managing Director, Donaldson, Lufkin & Jenrette;
Trustee, Adelphi University |
|
Richard Reiss, Jr. (65) |
Director
(May 1991) |
Chairman, Georgica Advisors LLC, an investment manager;
Director, O'Charley's, Inc., a restaurant chain |
|
Robert M. Solmson (62) |
Director
(September 2004) |
Director, Colonial Williamsburg Co.; Former Chief Executive
Officer and Chairman, RFS Hotel Investors, Inc.; Former Director, Morgan Keegan & Co.,
Inc.; Former Director, Independent Bank, Memphis |
|
Interested Directors(3) |
|
|
|
Charles Carroll (49) |
Chief Executive Officer,
President and Director
(June 2004) |
Deputy Chairman and Head of Global Marketing of the
Investment Manager |
26
Name (Age) |
Position(s) with the Fund |
Principal Occupation(s) During Past 5 Years |
Address(1) |
(Since) and Term(2) |
and Other Directorships Held(2) |
|
Ashish Bhutani (49) |
Director (July 2005) |
Chief Executive Officer of the Investment Manager |
|
|
Name (Age) |
Position(s) with the Fund |
|
Address(1) |
(Since) and Term(4) |
Principal Occupation(s) During Past 5 Years |
|
Officers(5): |
|
|
|
Nathan A. Paul (36) |
Vice President and
Secretary
(April 2002) |
Managing Director and General Counsel of the Investment Manager |
|
Stephen St. Clair (51) |
Treasurer
(May 2003) |
Vice President of the Investment Manager |
|
Brian D. Simon (47) |
Chief Compliance Officer
(January 2009) and
Assistant Secretary
(November 2002) |
Director (since January 2006) and Chief Compliance
Officer (since January 2009); and previously Senior Vice President (2002 to 2005)
of the Investment Manager |
|
Tamar Goldstein (34) |
Assistant Secretary
(February 2009) |
Vice President (since March 2009) and previously Counsel (October 2006 to February 2009) of the Investment Manager; Associate at Schulte Roth & Zabel LLP, a law firm, from May 2004 to October 2006 |
|
Cesar A. Trelles (34) |
Assistant Treasurer
(December 2004) |
Fund Administration Manager of the Investment Manager |
(1) |
The address of each Director and officer is Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112-6300. |
|
(2) |
Each Director also serves as a Director of Lazard Retirement Series, Inc. ("LRS"), an open-end registered management investment company, and Lazard Global Total Return and Income Fund, Inc. and Lazard World Dividend &
Income Fund, Inc., closed-end registered management investment companies (collectively with the Fund, the "Lazard Funds," in total comprised of 19 investment portfolios). Each Director serves an indefinite term, until his or her successor is
elected, and each Director serves in the same capacity for LRS. All of the Independent Directors, except Mr. Lieberman, are also board members of Lazard Alternative Strategies Fund, L.L.C., a privately-offered fund registered under the 1940 Act and
advised by an affiliate of the Investment Manager. |
|
(3) |
Messrs. Bhutani and Carroll are "interested persons" (as defined in the 1940 Act) of the Fund because of their positions with the Investment Manager. |
|
(4) |
Each officer serves for an indefinite term, until his or her successor is elected and qualified. Each officer serves in the same capacity for the other Lazard Funds. |
|
(5) |
In addition to Charles Carroll, President, whose information is included in the Interested Directors section. |
|
The Fund has standing audit and nominating committees, each comprised of its Directors who are not "interested persons" of the Fund, as defined in the 1940 Act ("Independent Directors").
27
The function of the audit committee is to (1) oversee the Fund's accounting and financial reporting processes and the audits of the Fund's financial statements, (2) assist in Board oversight of
the quality and integrity of the Fund's financial statements and the Fund's compliance with legal and regulatory requirements relating to accounting, financial reporting, internal control over financial reporting and independent audits, (3) approve
engagement of the independent registered public accounting firm and review and evaluate the qualifications, independence and performance of the independent registered public accounting firm and (4) act as a liaison between the Fund's independent
registered public accounting firm and the Board.
Nominations may be submitted only by a shareholder or group of shareholders that, individually or as a group, has beneficially owned the lesser of (a) 1% of the Fund's outstanding shares or (b)
$500,000 of the Fund's shares for at least one year prior to the date such shareholder or group submits a candidate for nomination. Not more than one nominee for Director may be submitted by such a shareholder or group each calendar year. In
evaluating potential nominees, including any nominees recommended by shareholders, the nominating committee takes into consideration the factors listed in the nominating committee charter, including character and integrity, business and professional
experience, and whether the committee believes that the person has the ability to apply sound and independent business judgment and would act in the interest of the Fund and its shareholders. A nomination submission must include all information
relating to the recommended nominee that is required to be disclosed in solicitations or proxy statements for the election of Directors, as well as information sufficient to evaluate the factors listed above. Nomination submissions must be
accompanied by a written consent of the individual to stand for election if nominated by the Board and to serve if elected by the shareholders, and such additional information must be provided regarding the recommended nominee as reasonably
requested by the nominating committee.
The audit committee met four times and the nominating committee did not meet during the fiscal year ended December 31, 2008.
The table below indicates the dollar range of each Director's ownership of Portfolio shares and aggregate holdings of all of the Lazard Funds, in each case as of December 31, 2008.
|
Ashish |
Charles |
Kenneth S. |
Nancy A. |
Lester Z. |
Leon M. |
Richard |
Robert M. |
Portfolio |
Bhutani |
Carroll |
Davidson |
Eckl |
Lieberman |
Pollack |
Reiss, Jr. |
Solmson |
|
|
Equity Value Portfolio |
None |
None |
None |
$1 - |
None |
None |
None |
None |
|
|
|
|
$10,000 |
|
|
|
|
|
Strategic Equity Portfolio |
None |
None |
None |
$1 - |
None |
None |
None |
None |
|
|
|
|
$10,000 |
|
|
|
|
|
Mid Cap Portfolio |
None |
None |
None |
$1 - |
None |
None |
None |
None |
|
|
|
|
$10,000 |
|
|
|
|
|
Small-Mid Cap Portfolio |
None |
None |
None |
None |
None |
None |
None |
None |
|
International Equity Portfolio |
None |
None |
None |
$10,001- |
None |
None |
None |
None |
|
|
|
|
$50,000 |
|
|
|
|
|
International Equity Select |
None |
None |
None |
None |
None |
None |
None |
None |
Portfolio |
|
|
|
|
|
|
|
|
|
International Strategic |
None |
None |
None |
None |
None |
None |
None |
None |
Portfolio |
|
|
|
|
|
|
|
|
|
International Small Cap |
None |
$10,001- |
None |
None |
None |
None |
None |
None |
Portfolio |
|
$50,000 |
|
|
|
|
|
|
|
Emerging Markets Portfolio |
None |
Over |
None |
$10,001- |
None |
None |
None |
None |
|
|
$100,000 |
|
$50,000 |
|
|
|
|
28
|
Ashish |
Charles |
Kenneth S. |
Nancy A. |
Lester Z. |
Leon M. |
Richard |
Robert M. |
Portfolio |
Bhutani |
Carroll |
Davidson |
Eckl |
Lieberman |
Pollack |
Reiss, Jr. |
Solmson |
Developing Markets Portfolio |
None |
$10,001- |
None |
None |
None |
None |
None |
None |
|
|
$50,000 |
|
|
|
|
|
|
|
High Yield Portfolio |
None |
Over |
None |
None |
None |
None |
None |
None |
|
|
$100,000 |
|
|
|
|
|
|
|
Opportunistic Strategies |
None |
Over |
None |
None |
None |
None |
None |
None |
Portfolio |
|
$100,000 |
|
|
|
|
|
|
|
Aggregate Holdings of all |
None |
Over |
None |
$10,001- |
None |
None |
None |
None |
Lazard Funds |
|
$100,000 |
|
$50,000 |
|
|
|
|
Global Listed Infrastructure Portfolio commenced operations in 2009, so no holdings information is provided for this Portfolio.
As of December 31, 2008, none of the Directors or his or her immediate family members owned securities of the Investment Manager or the Distributor or any person (other than a registered investment company) directly or
indirectly controlling, controlled by or under common control with the Investment Manager or the Distributor.
Each Director who is not an employee or an affiliated person of the Investment Manager is paid an annual aggregate fee of $60,000, plus $4,000 per meeting attended in person ($1,500
per meeting attended by telephone) for the Fund and the other Lazard Funds, and is reimbursed for travel and other out-of-pocket expenses for attending Board and committee meetings. The Independent Directors also are paid $1,000 for each
committee, subcommittee or other special meetings not held in conjunction with a Board meeting, as specifically authorized by the Board and held in connection with delegated Fund business. No additional compensation is provided in respect of
committee meetings held in conjunction with a meeting of the Board of Directors. Compensation is divided among the Lazard Funds based on relative net assets. The Directors do not receive benefits from the Fund pursuant to any pension, retirement or
similar arrangement. In addition, the Chairman of the Audit Committees for the Lazard Funds, Lester Z. Lieberman, also receives an annual fee of $5,000. The aggregate amount of compensation paid to each Director for the year ended December 31,
2008, was as follows:
|
Aggregate Compensation from the |
Total Compensation from |
Director |
Fund |
the Lazard Funds |
|
Ashish Bhutani |
None |
None |
Charles Carroll |
None |
None |
Kenneth S. Davidson |
$74,203 |
$84,000 |
Nancy A. Eckl |
$75,097 |
$85,000 |
Lester Z. Lieberman |
$76,415 |
$86,500 |
Leon M. Pollack |
$73,334 |
$83,000 |
Richard Reiss, Jr. |
$73,334 |
$83,000 |
Robert M. Solmson |
$73,334 |
$83,000 |
The Fund does not compensate officers or Directors who are employees or affiliated persons of the Investment Manager. As of the date of this Statement of Additional Information, the Fund's
officers and Directors, as a group, owned less than 1% of the shares of each Portfolio.
Portfolio Managers
Team Management. Portfolio managers at the Investment Manager manage multiple accounts for a diverse client base,
including private clients, institutions and investment funds. The Investment Manager manages all portfolios on a team basis. The team is involved at all levels of the investment
29
process. This team approach allows for every portfolio manager to benefit from his/her peers, and for clients to receive the firm's best thinking, not that of a single portfolio manager. The Investment Manager manages all
like investment mandates against a model portfolio. Specific client objectives, guidelines or limitations then are applied against the model, and any necessary adjustments are made.
Material Conflicts Related to Management of Similar Accounts. Although the potential for conflicts of interest
exist when an investment adviser and portfolio managers manage other accounts that invest in securities in which a Portfolio may invest or that may pursue a strategy similar to one of the Portfolio's component strategies (collectively, "Similar
Accounts"), the Investment Manager has procedures in place that are designed to ensure that all accounts are treated fairly and that the Portfolio is not disadvantaged, including procedures regarding trade allocations and "conflicting trades"
(e.g., long and short positions in the same security, as described below). In addition, each Portfolio, as a series of a registered investment company, is subject to different
regulations than certain of the Similar Accounts, and, consequently, may not be permitted to engage in all the investment techniques or transactions, or to engage in such techniques or transactions to the same degree, as the Similar Accounts.
Potential conflicts of interest may arise because of the Investment Manager's management of a Portfolio and Similar Accounts, including the following:
1. Conflicts of interest may arise with both the aggregation and allocation of securities transactions and allocation of limited investment opportunities, as the Investment Manager may be
perceived as causing accounts it manages to participate in an offering to increase the Investment Manager's overall allocation of securities in that offering, or to increase the Investment Manager's ability to participate in future offerings by the
same underwriter or issuer. Allocations of bunched trades, particularly trade orders that were only partially filled due to limited availability, and allocation of investment opportunities generally, could raise a potential conflict of interest, as
the Investment Manager may have an incentive to allocate securities that are expected to increase in value to preferred accounts. Initial public offerings, in particular, are frequently of very limited availability. A potential conflict of interest
may be perceived to arise if transactions in one account closely follow related transactions in a different account, such as when a purchase increases the value of securities previously purchased by the other account, or when a sale in one account
lowers the sale price received in a sale by a second account. These potential allocation and trading conflicts are relevant primarily for all portfolio managers of the Portfolios focusing on small capitalization companies, whose shares tend to have
more limited and volatile trading than those of companies with larger market capitalizations (Small-Mid Cap and International Small Cap Portfolios).
2. Portfolio managers may be perceived to have a conflict of interest because of the large number of Similar Accounts, in addition to the Portfolios, that they are managing on behalf of the
Investment Manager. Although the Investment Manager does not track each individual portfolio manager's time dedicated to each account, the Investment Manager periodically reviews each portfolio manager's overall responsibilities to ensure that he or
she is able to allocate the necessary time and resources to effectively manage a Portfolio. As illustrated in the table below, all of the portfolio managers of the Portfolios except Messrs. Charlton, Dzwil, Gillespie and O'Hare manage a significant
number of Similar Accounts (10 or more) in addition to the Portfolio(s) managed by them.
3. Generally, the Investment Manager and/or some or all of a Portfolio's portfolio managers have investments in Similar Accounts. This could be viewed as creating a potential conflict of
interest, since certain of the portfolio managers do not invest in the Portfolios.
4. The portfolio managers noted in footnote (#) to the table below manage Similar Accounts with respect to which the advisory fee is based on the performance of the account, which could give
the
30
portfolio managers and the Investment Manger an incentive to favor such Similar Accounts over the corresponding Portfolios. In addition, certain hedge funds managed by the Investment Manager (but not the Portfolios'
portfolio managers) may also be permitted to sell securities short. When the Investment Manager engages in short sales of securities of the type in which a Portfolio invests, the Investment Manager could be seen as harming the performance of the
Portfolio for the benefit of the account engaging in short sales if the short sales cause the market value of the securities to fall. As described above, the Investment Manager has procedures in place to address these conflicts.
Other Accounts Managed by the Portfolio Managers. The chart below includes information regarding the members of
the portfolio management teams responsible for managing the Portfolios. Specifically, it shows the number of other portfolios and assets managed by management teams of which each Portfolio's portfolio manager is a member. Regardless of the number of
accounts, the portfolio management team still manages each account based on a model portfolio as described above.
|
Registered Investment |
Other Pooled Investment |
Other Accounts |
Portfolio Manager |
Companies ($*) |
Vehicles ($*) |
($*) |
|
Michael A. Bennett |
5 (688.9 million) |
none |
375 (9.0 billion) |
Christopher H. Blake# |
6 (8.6 billion) |
13 (69.7 million) |
82 (1.0 billion) |
Gabrielle M. Boyle |
2 (14.9 million) |
none |
380 (7.2 billion) |
Daniel Breslin |
1 (107.3 million) |
2 (104.8 million) |
18 (96.7 million) |
J. William Charlton and |
|
|
|
Thomas M. Dzwil |
none |
1 (2.8 million) |
4 (124.5 million) |
Rohit Chopra# |
5 (524.7 million) |
12 (1.9 billion) |
136 (4.2 billion) |
David R. Cleary |
1 (1.7 million) |
none |
337 (416.2 million) |
and Christopher Komosa |
|
|
|
Adam Cohen |
2 (141.9 million) |
none |
380 (17.2 billion) |
James M. Donald# |
7 (731.5 million) |
12 (1.8 billion) |
190 (4.8 billion) |
Robert A. Failla# |
6 (8.6 billion) |
35 (1.7 billion) |
97 (2.8 billion) |
Michael G. Fry |
4 (686.9 million) |
3 (83 million) |
40 (4.2 billion) |
Peter Gillespie |
none |
none |
1 (550,000) |
Robin O. Jones** |
none |
none |
35 (1 billion) |
Andrew D. Lacey |
8 (8.8 billion) |
7 (125.9 million) |
306 (3.6 billion) |
Mark Little |
none |
none |
34 (1.1 billion) |
Erik McKee# |
6 (524.7 million) |
12 (1.8 billion) |
136 (4.2 billion) |
John Mulquiney**** |
none |
7 (539.7 million) |
8 (1.4 billion) |
Kevin O'Hare |
none |
none |
1 (550,000) |
Brian Pessin |
2 (8.2 million) |
6 (461.8 million) |
51 (1.6 billion) |
Michael Powers |
6 (828.7 million) |
none |
405 (9.7 billion) |
John R. Reinsberg |
3 (686.9 million) |
5 (123.6 million) |
60 (3.6 billion) |
Warryn Robertson**** |
none |
9 (707.4 million) |
24 (6.7 billion) |
Edward Rosenfeld# |
2 (8.2 million) |
6 (461.8 million) |
17 (508.9 million) |
Nicholas Sordoni |
none |
1 (3.6 million) |
15 (527 million) |
Ronald Temple*** |
2 (454.4 million) |
4 (68 million) |
215 (1.4 billion) |
J. Richard Tutino |
none |
1 (3.6 million) |
185 (905.5 million) |
* |
Total assets in accounts as of December 31, 2008, unless otherwise indicated. |
** |
As of March 31, 2009. |
31
*** |
As of January 31, 2009. |
**** |
As of September 30, 2009. |
# |
None of the portfolio managers,
except as follows, manage any accounts with respect to which the advisory
fee is based on the performance of the account: |
|
(1) |
Messrs. Blake, Failla and Lacey
manage one registered investment company with assets under management
of approximately $4.9 billion. |
|
(2) |
Messrs. Chopra, Donald and McKee
manage three other accounts with assets under management of approximately $796.5
million. |
|
(3) |
Mr. Pessin manages one pooled investment
vehicle and one other account with assets under management of approximately $2.5
million and $140.6 million, respectively. |
|
(4) |
Mr. Reinsberg manages five other
pooled investment vehicles with assets under management of approximately $123.6
million, respectively. |
|
(5) |
Mr. Rosenfeld manages one pooled
investment vehicle and one other account with assets under management
of approximately $2.5 million and $140 million, respectively. |
|
(6) |
Mr. Temple manages one registered
investment company with assets under management of approximately $4.6
billion. |
|
Includes an aggregation of any
Similar Accounts within managed account programs where the third party
program sponsor is responsible for applying specific client objectives,
guidelines and limitations against the model portfolio managed by the
portfolio management team. |
Compensation for Portfolio Managers. The
Investment Manager's portfolio managers are generally responsible for managing
multiple types of accounts that may, or may not, invest in securities in
which the Fund may invest or pursue a strategy similar to a Portfolio's strategies.
Portfolio managers responsible for managing the Portfolios may also manage
sub-advised registered investment companies, collective investment trusts,
unregistered funds and/or other pooled investment vehicles, separate accounts,
separately managed account programs (often referred to as "wrap accounts")
and model portfolios.
The Investment Manager compensates portfolio managers by a competitive salary and bonus structure, which is determined both quantitatively and qualitatively. Salary and bonus are paid in cash
and stock. Portfolio managers are compensated on the performance of the aggregate group of portfolios managed by the teams of which they are a member rather than for a specific fund or account. Various factors are considered in the determination of
a portfolio manager's compensation. All of the portfolios managed by a portfolio manager are comprehensively evaluated to determine his or her positive and consistent performance contribution over time. Further factors include the amount of assets
in the portfolios as well as qualitative aspects that reinforce the Investment Manager's investment philosophy.
Total compensation is generally not fixed, but rather is based on the following factors: (i) leadership, teamwork and commitment, (ii) maintenance of current knowledge and opinions on companies
owned in the portfolio; (iii) generation and development of new investment ideas, including the quality of security analysis and identification of appreciation catalysts; (iv) ability and willingness to develop and share ideas on a team basis; and
(v) the performance results of the portfolios managed by the investment teams of which the portfolio manager is a member.
Variable bonus is based on the portfolio manager's quantitative performance as measured by his or her ability to make investment decisions that contribute to the pre-tax absolute and relative
returns of the accounts managed by the teams of which the portfolio manager is a member, by comparison of each account to a predetermined benchmark (as set forth in the prospectus or other governing document) over the current fiscal year and the
longer-term performance (3-, 5- or 10-year, if applicable) of such account, as well as performance of the account relative to peers. The variable bonus for each Portfolio's portfolio management team in respect of its management of the Portfolio is
determined by reference to the corresponding indices listed below. The portfolio manager's bonus also can be influenced by subjective measurement of the manager's ability to help others make investment decisions.
32
In addition, effective May 4, 2005, the Lazard Ltd 2005 Equity Incentive Plan was adopted and approved by the Board of Directors of Lazard Ltd. The purpose of this plan is to give the company a
competitive advantage in attracting, retaining and motivating officers, employees, directors, advisors and/or consultants and to provide the company and its subsidiaries and affiliates with a stock plan providing incentives directly linked to
shareholder value.
Portfolio |
Index |
Equity Value Portfolio |
Russell 1000® Value Index |
Strategic Equity Portfolio |
S&P 500® Index |
Mid Cap Portfolio |
Russell Midcap® Index |
Small-Mid Cap Portfolio |
Russell 2500® Index |
International Equity Portfolio |
MSCI Europe, Australasia and Far East (EAFE®) Index |
International Equity Select Portfolio |
MSCI EAFE Index |
International Strategic Portfolio |
MSCI EAFE Index |
International Small Cap Portfolio |
MSCI EAFE Small Cap Index |
Global Listed Infrastructure Portfolio |
UBS Global 50/50 Infrastructure & Utilities Index |
Emerging Markets Portfolio |
MSCI Emerging Markets Index |
Developing Markets Portfolio |
MSCI Emerging Markets Index |
High Yield Portfolio |
Merrill Lynch High Yield Master II® Index |
Opportunistic Strategies Portfolio |
MSCI World Index |
Ownership of Securities. As of December 31, 2008, except as noted, the portfolio managers owned the following
shares of the Portfolios:
Portfolio/Portfolio Manager |
|
Market Value of Shares |
|
Equity Value Portfolio |
|
|
Andrew D. Lacey |
|
$100,001-$500,000 |
Nicholas Sordoni |
|
$10,001-$50,000 |
J. Richard Tutino |
|
$10,001-$50,000 |
Ronald Temple* |
|
$10,001-$50,000 |
|
Strategic Equity Portfolio |
|
|
Christopher H. Blake |
|
$10,001-$50,000 |
Robert A. Failla |
|
$10,001-$50,000 |
Andrew D. Lacey |
|
$10,001-$50,000 |
Ronald Temple* |
|
$1-$10,000 |
|
Mid Cap Portfolio |
|
|
Christopher H. Blake |
|
$10,001-$50,000 |
Robert A. Failla |
|
None |
Andrew D. Lacey |
|
$50,001-$100,000 |
|
Small-Mid Cap Portfolio |
|
|
Daniel Breslin |
|
None |
Andrew D. Lacey |
|
$1-$10,000 |
|
International Equity Portfolio |
|
|
Michael A. Bennett |
|
$100,001-$500,000 |
Michael G. Fry |
|
None |
Michael Powers |
|
$10,001-$50,000 |
John R. Reinsberg |
|
$50,001-$100,000 |
33
Portfolio/Portfolio Manager |
|
Market Value of Shares |
|
International Equity Select Portfolio |
|
|
Michael A. Bennett |
|
$100,001-$500,000 |
Gabrielle M. Boyle |
|
None |
Adam Cohen |
|
None |
Michael Powers |
|
$10,001-$50,000 |
John R. Reinsberg |
|
None |
|
International Strategic Portfolio |
|
|
Michael A. Bennett |
|
$10,001-$50,000 |
Robin O. Jones |
|
None |
Mark Little |
|
None |
Brian Pessin |
|
None |
John R. Reinsberg |
|
None |
|
International Small Cap Portfolio |
|
|
Brian Pessin |
|
None |
John R. Reinsberg |
|
$100,001-$500,000 |
Edward Rosenfeld |
|
$1-$10,000 |
|
Emerging Markets Portfolio |
|
|
Rohit Chopra |
|
$10,001-$50,000 |
James M. Donald |
|
$100,001-$500,000 |
Erik McKee |
|
$100,001-$500,000 |
John R. Reinsberg |
|
$100,001-$500,000 |
|
Developing Markets Portfolio |
|
|
James M. Donald |
|
$100,001-$500,000 |
Peter Gillespie |
|
$1-$10,000 |
Kevin O'Hare |
|
$50,001-$100,000 |
John R. Reinsberg |
|
$100,001-$500,000 |
|
High Yield Portfolio |
|
|
J. William Charlton |
|
$100,001-$500,000 |
Thomas M. Dzwil |
|
None |
|
Opportunistic Strategies Portfolio |
|
|
David R. Cleary |
|
$100,001-$500,000 |
|
Christopher Komosa |
|
$10,001-$50,000 |
______________________________
* As of January 31, 2009. |
|
|
Global Listed Infrastructure Portfolio commenced operations in 2009, so no ownership information is provided for this Portfolio.
Investment Manager and Investment Management Agreements
The Investment Manager, located at 30 Rockefeller Plaza, New York, NY 10112-6300, has entered into an investment management agreement (the "Management Agreement") with the Fund on behalf of the
Portfolios. Pursuant to the Management Agreement, the Investment Manager regularly provides each Portfolio with investment research, advice and supervision and furnishes continuously an investment program for each Portfolio consistent with its
investment objective and policies, including the purchase, retention and disposition of securities.
34
The Investment Manager, a wholly-owned subsidiary of Lazard, is registered as an investment adviser with the SEC. The Investment Manager provides day-to-day management of the Portfolios'
investments and assists in the overall management of the Fund's affairs. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of several of the Portfolios.
The Fund, the Investment Manager and the Distributor each have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act that permits its personnel, subject to such Code of Ethics, to
invest in securities, including securities that may be purchased or held by a Portfolio. The Codes of Ethics restrict the personal securities transactions of employees and require portfolio managers and other investment personnel to comply with the
preclearance and disclosure procedures. The primary purpose of the Codes of Ethics is to ensure that personal trading by employees does not disadvantage any Portfolio.
Under the terms of the Management Agreement, the Investment Manager will pay the compensation of all personnel of the Fund, except the fees of Directors of the Fund who are not employees or
affiliated persons of the Investment Manager. The Investment Manager will make available to the Portfolios such of the Investment Manager's members, officers and employees as are reasonably necessary for the operations of each Portfolio, or as may
be duly elected officers or directors of the Fund. Under the Management Agreement, the Investment Manager also pays each Portfolio's office rent and provides investment advisory research and statistical facilities and all clerical services relating
to research, statistical and investment work. The Investment Manager, including its employees who serve the Portfolios, may render investment advice, management and other services to other clients.
As compensation for its services, the Fund has agreed to pay the Investment Manager an investment management fee, accrued daily and payable monthly, at the annual rates set forth below as a
percentage of the average daily net asset value of the relevant Portfolio:
Portfolio |
|
Management Fee Rate |
Equity Value Portfolio |
|
.75 |
% |
Strategic Equity Portfolio |
|
.75 |
|
Mid Cap Portfolio |
|
.75 |
|
Small-Mid Cap Portfolio |
|
.75 |
|
International Equity Portfolio |
|
.75 |
|
International Equity Select Portfolio |
|
.85 |
|
International Strategic Portfolio |
|
.75 |
|
International Small Cap Portfolio |
|
.75 |
|
Global Listed Infrastructure Portfolio |
|
.90 |
|
Emerging Markets Portfolio |
|
1.00 |
|
Developing Markets Portfolio |
|
1.00 |
|
High Yield Portfolio |
|
.55 |
|
Opportunistic Strategies Portfolio |
|
1.00 |
|
Through April 30, 2010, the Investment Manager has agreed to waive its management fees or otherwise bear the expenses of the following Portfolios to the extent the aggregate direct expenses of
a Portfolio exceed the percentage of the value of the Portfolio's average daily net assets set forth opposite the Portfolio's name:
|
|
Maximum Total Portfolio Operating Expenses |
|
Portfolio |
|
Institutional Shares |
|
Open Shares |
Equity Value Portfolio* |
|
1.00 |
% |
|
1.30 |
% |
Strategic Equity Portfolio |
|
1.05 |
|
|
1.35 |
|
35
|
|
Maximum Total Portfolio Operating Expenses |
|
Portfolio |
|
Institutional Shares |
|
Open Shares |
Mid Cap Portfolio |
|
1.05 |
|
1.35 |
Small-Mid Cap Portfolio** |
|
1.15 |
|
1.45 |
International Equity Portfolio** |
|
1.05 |
|
1.35 |
International Equity Select Portfolio |
|
1.15 |
|
1.45 |
International Strategic Portfolio |
|
1.15 |
|
1.45 |
International Small Cap Portfolio |
|
1.13 |
|
1.43 |
Global Listed Infrastructure Portfolio** |
|
1.30 |
|
1.60 |
Emerging Markets Portfolio |
|
1.30 |
|
1.60 |
Developing Markets Portfolio |
|
1.30 |
|
1.60 |
High Yield Portfolio |
|
.55 |
|
.85 |
Opportunistic Strategies Portfolio*** |
|
1.02 |
|
1.32 |
______________________
* From May 1, 2010 through April 30, 2019 the Investment
Manager has agreed to 1.10% and 1.40% of the average daily net assets of the
Institutional Shares and Open Shares, respectively.
** Effective September 1, 2009.
*** Through April
30, 2011.
**** Excludes Acquired Fund Fees and Expenses.
For the fiscal years ended December 31, 2006, 2007 and 2008, the management fees payable by each Portfolio, the amounts waived (and reimbursed), by the Investment Manager and the net fees paid
to the Investment Manager were as follows:
|
|
Fee Payable For Fiscal |
|
Fee Payable For Fiscal |
|
Fee Payable For Fiscal |
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
Portfolio |
|
December 31, 2006 |
|
December 31, 2007 |
|
December 31, 2008 |
|
Equity Value Portfolio |
|
$ 1,687 |
|
$ 60,517 |
|
$ 64,432 |
Strategic Equity Portfolio |
|
415,011 |
|
920,426 |
|
611,937 |
Mid Cap Portfolio |
|
1,853,194 |
|
3,175,248 |
|
2,137,519 |
Small-Mid Cap Portfolio |
|
1,926,089 |
|
1,470,195 |
|
637,288 |
International Equity Portfolio |
|
6,861,646 |
|
3,802,457 |
|
1,679,042 |
International Equity Select |
|
|
|
|
|
|
Portfolio |
|
207,287 |
|
256,934 |
|
154,613 |
International Strategic Portfolio |
|
1,987,339 |
|
3,202,170 |
|
2,682,287 |
International Small Cap Portfolio |
|
5,008,777 |
|
4,519,629 |
|
1,275,372 |
Emerging Markets Portfolio |
|
22,588,480 |
|
48,169,061 |
|
64,375,771 |
Developing Markets Portfolio |
|
|
|
|
|
13,948 |
High Yield Portfolio |
|
401,712 |
|
378,909 |
|
278,680 |
Opportunistic Strategies Portfolio |
|
|
|
|
|
1,156,510 |
|
|
|
Reduction in |
|
Reduction in |
|
Reduction in |
|
|
Fee For Fiscal |
|
Fee For Fiscal |
|
Fee For Fiscal |
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
Portfolio |
|
December 31, 2006 |
|
December 31, 2007 |
|
December 31, 2008 |
|
Equity Value Portfolio |
|
$ 241,989 |
|
$ 219,250 |
|
$ 191,470 |
Strategic Equity Portfolio |
|
184,021 |
|
6,531 |
|
18,725 |
Mid Cap Portfolio |
|
|
|
|
|
|
Small-Mid Cap Portfolio |
|
|
|
|
|
|
International Equity Portfolio |
|
|
|
|
|
|
36
|
|
Reduction in |
|
Reduction in |
|
Reduction in |
|
|
Fee For Fiscal |
|
Fee For Fiscal |
|
Fee For Fiscal |
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
Portfolio |
|
December 31, 2006 |
|
December 31, 2007 |
|
December 31, 2008 |
International Equity |
|
|
|
|
|
|
Select Portfolio |
|
168,730 |
|
153,167 |
|
191,531 |
International Strategic Portfolio |
|
8,011 |
|
|
|
|
International Small Cap Portfolio |
|
|
|
|
|
|
Emerging Markets Portfolio |
|
|
|
|
|
|
Developing Markets Portfolio |
|
|
|
|
|
150,953 |
High Yield Portfolio |
|
275,666 |
|
262,885 |
|
247,532 |
Opportunistic Strategies Portfolio |
|
|
|
|
|
254,999 |
|
|
|
Net Fee Paid For |
|
Net Fee Paid For |
|
Net Fee Paid For |
|
|
Fiscal Year Ended |
|
Fiscal Year Ended |
|
Fiscal Year Ended |
Portfolio |
|
December 31, 2006 |
|
December 31, 2007 |
|
December 31, 2008 |
|
Equity Value Portfolio |
|
$ (240,302) |
|
$ (158,733) |
|
$ (127,038) |
Strategic Equity Portfolio |
|
230,990 |
|
913,895 |
|
593,212 |
Mid Cap Portfolio |
|
1,853,194 |
|
3,175,248 |
|
2,137,519 |
Small-Mid Cap Portfolio |
|
1,926,089 |
|
1,470,195 |
|
637,288 |
International Equity Portfolio |
|
6,861,646 |
|
3,802,457 |
|
1,679,042 |
International Equity Select |
|
|
|
|
|
|
Portfolio |
|
38,557 |
|
103,767 |
|
(36,918) |
International Strategic Portfolio |
|
1,979,328 |
|
3,202,170 |
|
2,682,287 |
International Small Cap Portfolio |
|
5,008,777 |
|
4,519,629 |
|
1,275,372 |
Emerging Markets Portfolio |
|
22,588,480 |
|
48,169,061 |
|
64,375,771 |
Developing Markets Portfolio |
|
|
|
|
|
(137,005) |
High Yield Portfolio |
|
126,046 |
|
116,024 |
|
31,148 |
Opportunistic Strategies Portfolio |
|
|
|
|
|
901,511 |
Global Listed Infrastructure Portfolio commenced operations in 2009, so no fee information is provided for this Portfolio.
The Management Agreement provides that each Portfolio pays all of its expenses that are not specifically assumed by the Investment Manager. Expenses attributable to each Portfolio will be
charged against the assets of that Portfolio. Other expenses of the Fund will be allocated among the Portfolios in a manner which may, but need not, be proportionate in relation to the net assets of each Portfolio. Expenses payable by each of the
Portfolios include, but are not limited to, brokerage and other expenses of executing portfolio transactions; legal, auditing or accounting expenses; trade association dues; taxes or governmental fees; the fees and expenses of any person providing
administrative services to the Fund; the fees and expenses of the custodian and transfer agent of the Fund; clerical expenses of issue, redemption or repurchase of shares of the Portfolio; the expenses and fees for registering and qualifying
securities for sale; the fees of Directors of the Fund who are not employees or affiliated persons of the Investment Manager or its affiliates; travel expenses of all Directors, officers and employees; insurance premiums; and the cost of preparing
and distributing reports and notices to shareholders. In addition, Open Shares of each Portfolio are subject to an annual distribution and servicing fee. See "Distribution and Servicing Arrangements."
As to each Portfolio, the Management Agreement is subject to annual approval by (i) the Fund's Board of Directors or (ii) vote of a majority (as defined in the 1940 Act) of the outstanding
voting securities of the relevant Portfolio, provided that in either event the continuance also is approved by a majority of the Independent Directors of the Fund or the Investment Manager, by vote cast in person at a
37
meeting called for the purpose of voting on such approval. As to each Portfolio, the Management Agreement is terminable without penalty, on 60 days' notice, by the Fund's Board of Directors or by vote of the holders of a
majority of the shares of such Portfolio, or, upon not less than 90 days' notice, by the Investment Manager. The Management Agreement will terminate automatically, as to the relevant Portfolio, in the event of its assignment (as defined in the 1940
Act). The Management Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the part of the Investment Manager, or of reckless disregard of its obligations thereunder, the Investment Manager shall not be
liable for any action or failure to act in accordance with its duties thereunder.
Proxy Voting
The Fund has delegated voting of proxies in respect of portfolio holdings to the Investment Manager, to vote the Fund's proxies in accordance with the Investment Manager's proxy voting policy
and guidelines (the "Voting Guidelines") that provide as follows:
-
The Investment Manager votes proxies in the best interests of its clients.
-
Unless the Investment Manager's Proxy Committee otherwise determines, the Investment Manager votes proxies in a manner consistent with the Voting Guidelines.
-
To avoid conflicts of interest, the Investment Manager votes proxies where a material conflict has been deemed to exist in accordance with specific proxy voting guidelines regarding various standard proxy proposals ("Approved Guidelines") or, if the Approved Guideline is to vote case-by-case, in accordance with the recommendation of an independent source.
-
The Investment Manager also may determine not to vote proxies in respect of securities of any issuer if it determines that it would be in the client's overall best interests not to
vote.
The Voting Guidelines address how it will vote proxies on particular types of matters such as the election for directors, adoption of option plans and anti-takeover proposals. For example, the
Investment Manager generally will:
-
vote as recommended by management in routine election or re-election of directors;
-
favor programs intended to reward management and employees for positive, long-term performance, evaluating whether the Investment Manager believes, under the circumstances, that the level of compensation is appropriate or excessive; and
-
vote against anti-takeover measures, such as adopting supermajority voting requirements, shareholder rights plans and fair price provisions.
The Fund's proxy voting record for the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 823-6300 or (2) on the SEC's website at
http://www.sec.gov. Information as of June 30 each year will generally be available by the following August 31.
38
Administrator, Custodian and Transfer Agent
The Fund has entered into an administrative agreement with State Street Bank and Trust Company ("State Street"), One Lincoln Street, Boston, Massachusetts 02111, to provide certain
administrative services to the Portfolios. Each Portfolio bears the cost of such services at a fixed annual rate of $42,500, plus $7,500 per additional class, and 0.02% of average daily net assets up to $1 billion and 0.01% of average
daily net assets over $1 billion.
State Street also acts as the Fund's custodian. As the Fund's custodian, State Street, among other things, maintains a custody account or accounts in the name of each Portfolio; receives and
delivers all assets for each Portfolio upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of each Portfolio and disburses the Portfolio's assets in payment of its
expenses. The custodian does not determine the investment policies of any Portfolio or decide which securities any Portfolio will buy or sell.
Boston Financial Data Services, Inc. ("BFDS"), P.O. Box 8154, Boston, Massachusetts 02266-8154, is the Fund's transfer and dividend disbursing agent. Under a transfer agency agreement with the
Fund, BFDS arranges for the maintenance of shareholder account records for each Portfolio, the handling of certain communications between shareholders and the Fund and the payment of dividends and distributions payable by the Fund. For these
services, BFDS receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the Fund during the month, subject to a minimum fee amount per share class in each Portfolio, and is reimbursed for certain
out-of-pocket expenses.
Distributor
Lazard Asset Management Securities LLC, 30 Rockefeller Plaza, New York, New York 10112-6300, serves as the distributor of each Portfolio's shares and conducts a continuous offering pursuant to
a "best efforts" arrangement. As the distributor, it accepts purchase and redemption orders for Portfolio shares. In addition, the distribution agreement obligates the Distributor to pay certain expenses in connection with the offering of Portfolio
shares. After the Prospectus and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor also will pay for any printing and distribution of copies thereof used in connection with the offering to prospective
investors.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each Class of each Portfolio is determined by State Street for the Fund on each day the New York Stock Exchange (the "NYSE") is open for business. The NYSE is
ordinarily closed on the following national holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value per share is determined by
dividing the value of the total assets of the Portfolio represented by such Class, less all liabilities, by the total number of Portfolio shares of such Class outstanding.
Market values for securities listed on the NYSE, NASDAQ national market or other U.S. exchanges or markets are generally based on the last reported sales price on the principal exchange or
market on which the security is traded, generally as of the close of regular trading on the NYSE (normally 4:00 p.m. Eastern time) on each valuation date; securities not traded on the valuation date are valued at the closing bid price. The Fund
values NASDAQ-traded securities at the NASDAQ Official Closing Price, which may not be the last reported sales price in certain instances. Options on stock and stock indices traded on national securities exchanges are valued as of the close of
options trading on such
39
exchanges (which is normally 4:10 p.m., Eastern time). Any securities not listed, for which current over-the-counter market quotations or bids are readily available, are valued at the last quoted bid price or, if available,
the mean of two such prices. Securities listed on foreign exchanges are valued at the last reported sales price except as described below; securities not traded on the valuation date are valued at the last quoted bid price.
Bonds and other fixed-income securities that are not exchange-traded are valued on the basis of prices provided by pricing services which are based primarily on institutional trading in similar
groups of securities, or by using brokers' quotations. Mortgage-backed securities issued by certain government-related organizations are valued using pricing services or brokers' quotations based on a matrix system which considers such factors as
other security prices, yields and maturities. Debt securities maturing in 60 days or less are valued at amortized cost, except where to do so would not accurately reflect their fair value, in which case such securities are valued at fair value as
determined under the supervision of the Board of Directors.
Calculation of a Portfolio's net asset value may not take place contemporaneously with the determination of the prices of portfolio assets used in such calculation. Trading on Europe, Latin and
South America and Far East securities exchanges and in over-the-counter markets ordinarily is completed well before the close of business on each business day in New York (i.e., a day on which the NYSE is open). In addition, European or Far Eastern securities trading generally or in a particular country or countries may not take place on all business days in New York and on which the net asset value of a
Portfolio is calculated. If a significant event materially affecting the value of securities occurs between the close of the exchange or market on which the security is principally traded and the time when a Portfolio's net asset value is
calculated, or when current market quotations otherwise are determined not to be readily available or reliable, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board of
Directors. The Valuation Committee of the Investment Manager may evaluate a variety of factors to determine the fair value of securities for which market quotations are determined not to be readily available or reliable. These factors include, but
are not limited to, the type of security, the value of comparable securities, observations from financial institutions and relevant news events. Input from the Investment Manager's analysts also will be considered. Fair valuing of foreign securities
may be determined with the assistance of a pricing service using correlations between the movement of prices of such securities and indices of domestic securities and other appropriate indicators, such as closing market prices of relevant ADRs or
futures contracts. The effect of using fair value pricing is that the net asset value of a Portfolio will reflect the affected securities' values as determined in the judgment of the Board of Directors or its designee instead of being determined by
the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used by other investment companies to calculate their portfolios' net
asset values. Foreign securities may trade on days when a Portfolio is not open for business, thus affecting the value of the Portfolio's assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares.
PORTFOLIO TRANSACTIONS
General
Subject to the supervision of the Board of Directors, the Investment Manager is primarily responsible for the investment decisions and the placing of portfolio transactions for each Portfolio.
In arranging for the Portfolios' securities transactions, the Investment Manager is primarily concerned with seeking best execution, which is considered to be the most favorable combination of price and quantity that can be traded at a point in time
given, among other factors, the liquidity, market conditions, and required urgency of execution. In choosing broker-dealers, the Investment Manager considers all relevant
40
factors, including but not limited to: the ability of a broker-dealer to provide a prompt and efficient agency execution; the ability and willingness of a broker-dealer to facilitate the transactions by acting as principal
and going at risk for its own accounts; the ability of a broker-dealer to provide accurate and timely settlement of the transaction; the Investment Manager's knowledge of the negotiated commission rates currently available and other current
transactions costs; the clearance and settlement capabilities of the broker; the Investment Manager's knowledge of the financial condition of the broker or dealer selected; and any other matter relevant to the selection of a broker-dealer.
In the over-the-counter market, securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price that includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount.
To the extent consistent with applicable provisions of the 1940 Act and the rules adopted by the SEC thereunder, the Fund's Board of Directors has determined that securities transactions for a
Portfolio may be executed through the Distributor if, in the judgment of the Investment Manager, the use of the Distributor is likely to result in price and execution at least as favorable as those of other qualified brokers or dealers, and if, in
the transaction, the Distributor charges the Portfolio a rate consistent with that charged to comparable unaffiliated customers in similar transactions.
Purchase and sale orders for securities held by a Portfolio may be combined with those for other Portfolios in the interest of the most favorable net results for all. In some cases, this policy
may adversely affect the price paid or received by an account, or the size of the position obtained or liquidated. When the Investment Manager determines that a particular security should be bought for or sold by more than one Portfolio, the
Investment Manager undertakes to allocate those transactions between the participants equitably.
The portfolio turnover rates for Small-Mid Cap Portfolio, which increased from 98% in 2007 to 138% in 2008, were impacted by the Portfolio's strategy change to focus on small-mid capitalization
companies in August 2008 (previously the Portfolio focused on small capitalization companies).
IPO Allocations. (All Portfolios, except High Yield Portfolio) Under the Investment Manager's trade allocation procedures applicable to domestic and
foreign initial and secondary public offerings and Rule 144A transactions (collectively herein "IPO"), the Investment Manager will generally allocate IPO shares among client accounts, including the Portfolios, pro rata based upon the aggregate asset
size (excluding leverage) of the account. The Investment Manager may also allocate IPO shares on a random basis, as selected electronically, or other basis. It is often difficult for the Investment Manager to obtain a sufficient number of IPO shares
to provide a full allocation to each account. The Investment Manager's allocation procedures are designed to allocate IPO securities in a fair and equitable manner.
The Portfolios listed below held securities of their regular brokers or dealers during the fiscal year ended December 31, 2008:
|
|
|
|
Value on December 31, 2008 |
Portfolio |
|
Broker/Dealer |
|
(in $000s) |
|
Equity Value Portfolio |
|
State Street Bank & Trust Company |
|
$ 28 |
|
|
|
Bank of America Corp. |
|
154 |
|
|
|
JPMorgan Chase & Co. |
|
163 |
|
41
|
|
|
|
Value on December 31, 2008 |
Portfolio |
|
Broker/Dealer |
|
(in $000s) |
Strategic Equity Portfolio |
|
State Street Bank & Trust Company |
|
1,647 |
|
|
|
Bank of America Corp. |
|
670 |
|
|
|
JP Morgan Chase & Co. |
|
763 |
|
Mid Cap Portfolio |
|
State Street Bank & Trust Company |
|
3,028 |
|
Small-Mid Cap Portfolio |
|
State Street Bank & Trust Company |
|
1,849 |
|
International Equity Portfolio |
|
State Street Bank & Trust Company |
|
4,534 |
|
|
|
UBS AG |
|
1,888 |
|
International Strategic Portfolio |
|
State Street Bank & Trust Company |
|
8,299 |
|
|
|
UBS AG |
|
6,057 |
|
International Small Cap Portfolio |
|
State Street Bank & Trust Company |
|
3,149 |
|
Emerging Markets Portfolio |
|
State Street Bank & Trust Company |
|
203,927 |
|
Developing Markets Portfolio |
|
State Street Bank & Trust Company |
|
552 |
|
High Yield Portfolio |
|
State Street Bank & Trust Company |
|
1,999 |
|
Opportunistic Strategies Portfolio |
|
State Street Bank & Trust Company |
|
2,685 |
|
Global Listed Infrastructure Portfolio commenced operations in 2009, so no holdings information is provided for this Portfolio.
Research and Statistical Information
Consistent with the requirements of best execution, brokerage commissions on a Portfolio's transactions may be paid to brokers in recognition of investment research and information furnished as
well as for brokerage and execution services provided by such brokers. The Investment Manager may in its discretion cause accounts to pay such broker-dealers a commission for effecting a portfolio transaction in excess of the amount of commission
another broker or dealer adequately qualified to effect such transaction would have charged for effecting that transaction. This may be done where the Investment Manager has determined in good faith that such commission is reasonable in relation to
the value of the brokerage and/or research to that particular transaction or to the Investment Manager's overall responsibilities with respect to the accounts as to which it exercises investment discretion.
The Investment Manager receives a wide range of research (including proprietary research) and brokerage services from brokers. These services include information on the economy, industries,
groups of securities, and individual companies; statistical information; technical market action, pricing and appraisal services; portfolio management computer services (including trading and settlement systems); risk management analysis; and
performance analysis. Broker-dealers may also supply market quotations to the Fund's custodian for valuation purposes.
Any research received in respect of a Portfolio's brokerage commission may be useful to the Portfolio, but also may be useful in the management of the account of another client of the
Investment Manager. Similarly, the research received for the commissions of such other client may be useful for the Portfolio.
42
Brokerage Commissions
In connection with its portfolio securities transactions for the fiscal years ended December 31, 2006, 2007 and 2008, each Portfolio indicated below paid brokerage commissions as follows:
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
Total |
|
Amount of |
|
Percentage of |
|
Total Brokerage |
|
|
Brokerage |
|
Brokerage |
|
Total Brokerage |
|
Transactions |
|
|
Commissions |
|
Commissions |
|
Commissions |
|
Effected Through |
Portfolio |
|
Paid |
|
Paid to Lazard |
|
Paid to Lazard |
|
Lazard |
|
Equity Value Portfolio |
|
$ 666 |
|
|
|
|
|
|
Strategic Equity Portfolio |
|
115,582 |
|
|
|
|
|
|
Mid Cap Portfolio |
|
480,424 |
|
|
|
|
|
|
Small-Mid Cap Portfolio |
|
800,880 |
|
|
|
|
|
|
International Equity Portfolio |
|
1,818,405 |
|
|
|
|
|
|
International Equity |
|
|
|
|
|
|
|
|
Select Portfolio |
|
4,641 |
|
|
|
|
|
|
International Strategic Portfolio |
|
632,312 |
|
|
|
|
|
|
International Small Cap Portfolio |
|
803,532 |
|
|
|
|
|
|
Emerging Markets Portfolio |
|
5,898,824 |
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
Total |
|
Amount of |
|
Percentage of |
|
Total Brokerage |
|
|
Brokerage |
|
Brokerage |
|
Total Brokerage |
|
Transactions |
|
|
Commissions |
|
Commissions |
|
Commissions |
|
Effected Through |
Portfolio |
|
Paid |
|
Paid to Lazard |
|
Paid to Lazard |
|
Lazard |
|
Equity Value Portfolio |
|
$ 16,233 |
|
|
|
|
|
|
Strategic Equity Portfolio |
|
152,966 |
|
|
|
|
|
|
Mid Cap Portfolio |
|
838,492 |
|
|
|
|
|
|
Small-Mid Cap Portfolio |
|
636,510 |
|
|
|
|
|
|
International Equity Portfolio |
|
879,383 |
|
|
|
|
|
|
International Equity |
|
|
|
|
|
|
|
|
Select Portfolio |
|
20,138 |
|
|
|
|
|
|
International Strategic Portfolio |
|
1,112,304 |
|
|
|
|
|
|
International Small Cap Portfolio |
|
1,205,870 |
|
|
|
|
|
|
Emerging Markets Portfolio |
|
13,820,592 |
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
Total |
|
Amount of |
|
Percentage of |
|
Total Brokerage |
|
|
Brokerage |
|
Brokerage |
|
Total Brokerage |
|
Transactions |
|
|
Commissions |
|
Commissions |
|
Commissions |
|
Effected Through |
Portfolio |
|
Paid |
|
Paid to Lazard |
|
Paid to Lazard |
|
Lazard |
|
Equity Value Portfolio |
|
$ 17,596 |
|
|
|
|
|
|
Strategic Equity Portfolio |
|
159,107 |
|
|
|
|
|
|
Mid Cap Portfolio |
|
666,151 |
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
Percentage of |
|
|
Total |
|
Amount of |
|
Percentage of |
|
Total Brokerage |
|
|
Brokerage |
|
Brokerage |
|
Total Brokerage |
|
Transactions |
|
|
Commissions |
|
Commissions |
|
Commissions |
|
Effected Through |
Portfolio |
|
Paid |
|
Paid to Lazard |
|
Paid to Lazard |
|
Lazard |
Small-Mid Cap Portfolio |
|
386,200 |
|
|
|
|
|
|
International Equity Portfolio |
|
307,710 |
|
|
|
|
|
|
International Equity |
|
|
|
|
|
|
|
|
Select Portfolio |
|
16,980 |
|
|
|
|
|
|
International Strategic Portfolio |
|
752,798 |
|
|
|
|
|
|
International Small Cap Portfolio |
|
218,042 |
|
|
|
|
|
|
Emerging Markets Portfolio |
|
15,501,407 |
|
|
|
|
|
|
Developing Markets Portfolio |
|
11,593 |
|
|
|
|
|
|
Opportunistic Strategies Portfolio |
|
225,699 |
|
|
|
|
|
|
The aggregate amount of transactions during the fiscal year ended December 31, 2008 in securities effected on an agency basis through a broker for, among other things, research services, and
the commissions and concessions related to such transactions were as follows:
Portfolio |
|
Transaction Amount |
|
Commissions and Concessions |
Equity Value Portfolio |
|
$ 17,869,686 |
|
$ 17,596 |
Strategic Equity Portfolio |
|
132,378,954 |
|
159,107 |
Mid Cap Portfolio |
|
588,985,510 |
|
666,151 |
Small-Mid Cap Portfolio |
|
284,826,631 |
|
386,200 |
International Equity Portfolio |
|
286,042,596 |
|
307,710 |
International Equity Select Portfolio |
|
17,389,782 |
|
16,980 |
International Strategic Portfolio |
|
503,363,283 |
|
752,798 |
International Small Cap Portfolio |
|
206,867,919 |
|
218,042 |
Emerging Markets Portfolio |
|
7,092,925,302 |
|
15,501,407 |
Developing Markets Portfolio |
|
9,640,495 |
|
11,593 |
Opportunistic Strategies Portfolio |
|
336,537,722 |
|
225,699 |
Global Listed Infrastructure Portfolio commenced operations in 2009, so no transactional information is provided for this Portfolio.
HOW TO BUY AND HOW TO SELL SHARES
General. The minimum initial investment for each Portfolio is $2,500 for Open Shares, unless the investor is a client of a securities dealer or other
institution which has made an aggregate minimum initial purchase for its clients of at least $2,500 for Open Shares, and $100,000 for Institutional Shares. The minimum investment requirements may be waived or lowered for investments effected
through banks and other institutions that have entered into special arrangements with the Fund or the Distributor and for investments effected on a group basis by certain other entities and their employees, such as pursuant to a payroll deduction
plan. The Fund reserves the right to change or waive the minimum initial, and subsequent, investment requirements at any time.
Securities dealers and other institutions effecting transactions in Portfolio shares for the accounts of their clients may charge their clients direct fees in connection with such transactions.
The Fund and the Distributor reserve the right to reject any purchase order. All funds will be invested in full and fractional shares. Stock certificates will not be issued.
Each Portfolio may, in its discretion, accept securities in payment for shares of the Portfolio. Securities may be accepted in payment for shares only if the securities are, in the judgment of
the
44
Investment Manager, appropriate investments for the Portfolio. In addition, securities accepted in payment for Portfolio shares must: (i) meet the Portfolio's investment objective and policies; (ii) be acquired by the
Portfolio for investment and not for resale; and (iii) be liquid securities with readily available market prices on the American Stock Exchange, the NYSE, The NASDAQ Stock Market, a recognized non-U.S. exchange or non-NASDAQ listing with at least
two market makers. These securities are valued by the same method used to value the Portfolio's portfolio holdings. The contribution of securities to the Portfolio may be a taxable transaction to the shareholder.
Purchases through the Transfer Agent. Orders for Portfolio shares will become effective at the net asset value per share next determined after receipt by
the Transfer Agent or other agent of a check drawn on any member of the Federal Reserve System or after receipt by the Custodian or other agent of a bank wire or Federal Reserve Wire. Checks must be payable in United States dollars and will be
accepted subject to collection at full face value.
By investing in a Portfolio, a shareholder appoints the Transfer Agent, as agent, to establish an account to which all shares purchased will be credited, together with any dividends and capital
gain distributions that are paid in additional shares.
Purchases through a Lazard Brokerage Account. Shares of all of the Portfolios are sold by the Distributor only to customers of the Distributor without a
sales charge, on a continuous basis at the net asset value of the Portfolio next determined after receipt of a purchase order by the Distributor. Payments must be made to Lazard by the settlement date. Because the Distributor does not forward
investors' funds until the business day on which the order is settled, it may benefit from temporary use of these funds. Please contact your Lazard account representative for specific instructions on how to purchase Portfolio shares through your
Lazard brokerage account.
Service Agents. The Fund has authorized one or more brokers and other financial intermediaries ("Service Agents") to accept on its behalf purchase and
redemption orders. Service Agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Fund's behalf. The Fund will be deemed to have received a purchase or redemption order when a Service Agent or, if
applicable, a Service Agent's authorized designee, accepts the order. Customer orders will be priced at the respective Portfolio's net asset value next computed after such orders are accepted by a Service Agent or its authorized designee. Service
Agents may charge their clients fees which would not apply to shares purchased through the Distributor.
The Fund, may, in its discretion, approve a request to exchange Open Shares in a Portfolio for Institutional Shares of the same Portfolio, or to exchange Institutional Shares in a Portfolio for
Open Shares of the same Portfolio, when a shareholder is no longer a client of a Service Agent that is authorized (or whose designee is so authorized) to accept on the Fund's behalf purchase and redemption orders in the relevant class of shares of
the Portfolio. For federal income tax purposes, no gain or loss will be recognized upon any such exchange within the same Portfolio (although the Fund does not give tax advice and you should consult your own tax advisor).
Redemption Fee. Each Portfolio will impose a redemption fee equal to 1.00% of the net asset value of shares acquired by purchase or exchange and redeemed
or exchanged within 30 days after such shares were acquired, calculated as described in the Prospectus. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and
its remaining shareholders. The redemption fee may be waived, modified or terminated at any time, or from time to time.
45
Redemption Commitment. The Fund has committed to pay in cash all redemption requests by any shareholder of record, limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the value of a Portfolio's net assets at the beginning of such period. Such commitment is irrevocable without the prior approval of the SEC. In the case of requests for redemption in excess of such
amount, the Fund's Board of Directors reserves the right to make payments, in whole or in part in portfolio securities or other assets of the Portfolio in cases of emergency or at any time that the Investment Manager believes a cash distribution
would impair the liquidity of the Portfolio to the detriment of the existing shareholders. In such event, the securities would be valued in the same manner as the Portfolio's investments are valued. If the recipient sold such securities, brokerage
charges might be incurred.
Suspension of Redemptions. The right of redemption may be suspended, or the date of payment postponed: (a) during any period when the NYSE is closed
(other than customary weekend and holiday closings); (b) when trading in the markets the Portfolio ordinarily utilizes is restricted, or when an emergency exists as determined by the SEC so that disposal of the Portfolio's investments or
determination of its net asset value is not reasonably practicable; or (c) for such other periods as the SEC by order may permit to protect the Portfolio's shareholders.
DISTRIBUTION AND SERVICING ARRANGEMENTS
Distribution and Servicing Plan for Open Shares
Open Shares are subject to a Distribution and Servicing Plan adopted by the Fund's Board of Directors pursuant to Rule 12b-1 (the "Rule") adopted by the SEC under the 1940 Act which provides,
among other things, that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. Pursuant to the Distribution and Servicing Plan, the Fund pays the Distributor for advertising,
marketing and distributing each Portfolio's Open Shares, and for the provision of certain services to the holders of Open Shares, a fee at the annual rate of .25% of the average daily net assets of the Portfolio's Open Shares. The Distributor may
make payments to Service Agents for providing these services. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts. The fee payable for such services is intended to be a "service fee" as defined in Conduct Rules of FINRA. From time to time, the Distributor may defer or waive receipt of
fees under the Distribution and Servicing Plan while retaining the ability to be paid by the Fund under the Distribution and Servicing Plan thereafter. The fees payable under the Distribution and Servicing Plan are payable without regard to actual
expenses incurred. The Fund's Board of Directors believes there is a reasonable likelihood that the Distribution and Servicing Plan will benefit each Portfolio and holders of its Open Shares.
A quarterly report of the amounts expended under the Distribution and Servicing Plan, and the purposes for which such expenditures were incurred, must be made to the Board of Directors for its
review. The Distribution and Servicing Plan provides that it may not be amended to increase materially the costs which holders of Open Shares of a Portfolio may bear without such shareholders' approval and that other material amendments of the
Distribution and Servicing Plan must be approved by the Board of Directors and by the Independent Directors of the Fund who have no direct or indirect financial interest in the operation of the Distribution and Servicing Plan or in any agreements
entered into in connection with the Distribution and Servicing Plan, by vote cast in person at a meeting called for the purpose of considering such amendments. The Distribution and Servicing Plan is subject to annual approval by such vote cast in
person at a meeting called for the purpose of voting on the Distribution and Servicing Plan. As to each Portfolio, the Distribution and Servicing Plan may be terminated at any time by vote of a majority of the Independent Directors who have no
direct or indirect financial interest in the operation of
46
the Distribution and Servicing Plan or in any agreements entered into in connection with the Distribution and Servicing Plan, or by vote of the holders of a majority of such Portfolio's Open Shares.
For the fiscal year ended December 31, 2008, the Portfolios paid the Distributor the amounts set forth below with respect to their Open Shares under the Distribution and Servicing
Plan:
|
|
Amount Paid Under |
|
|
Distribution and Servicing |
|
|
Plan For Fiscal Year |
Portfolio |
|
Ended December 31, 2008 |
|
Equity Value Portfolio |
|
$ 597 |
Strategic Equity Portfolio |
|
23,879 |
Mid Cap Portfolio |
|
272,734 |
Small-Mid Cap Portfolio |
|
44,141 |
International Equity Portfolio |
|
55,152 |
International Equity Select Portfolio |
|
25,269 |
International Strategic Portfolio |
|
56,832 |
International Small Cap Portfolio |
|
147,125 |
Emerging Markets Portfolio |
|
3,909,936 |
Developing Markets Portfolio |
|
103 |
High Yield Portfolio |
|
10,570 |
Opportunistic Strategies Portfolio |
|
10,430 |
Global Listed Infrastructure Portfolio commenced operations in 2009, so no distribution fee information is provided for this Portfolio.
Payments by the Investment Manager or Distributor
The Investment Manager or the Distributor may provide additional cash payments out of its own resources to financial intermediaries that sell shares and/or provide other services. Such payments
are in addition to any fees paid by the Fund under Rule 12b-1. These additional payments may be paid to intermediaries that provide shareholder servicing and administration and/or marketing and related administrative support; opportunities to
participate in conferences and educational workshops, meetings and events; and/or access to and information about sales meetings and conferences and sales representatives, financial advisors or management personnel of the intermediary. Cash
compensation also may be paid to financial intermediaries in connection with consideration or inclusion of the Fund for or on a "recommended" or similar list, including a preferred or select sales list, or in other programs. In some cases, these
payments may create an incentive for a financial intermediary or its representatives to recommend or sell Fund shares. Shareholders or potential shareholders should contact their financial intermediary representative for details about any payments
the representative or the financial intermediary may receive in connection with the sale of Fund shares or the provision of services to the Fund.
From time to time, the Investment Manager or the Distributor also may provide cash or non-cash compensation to financial intermediaries or their representatives in the form of occasional gifts
or meals, event tickets or other entertainment; support for due diligence trips; educational conference sponsorship; support for recognition programs; and other forms of cash or non-cash compensation permissible under applicable broker-dealer
regulations.
47
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare as a dividend on the outstanding shares of High Yield Portfolio substantially all of the Portfolio's net investment income at the close of each business day to
shareholders of record as of the close of regular trading on the NYSE. Net investment income for a Saturday, Sunday or holiday will be included in the dividend declared on the previous business day. Dividends declared on the shares of High Yield
Portfolio ordinarily will be paid on the last business day of each month. Shareholders who redeem all their shares of the Portfolio prior to a dividend payment date will receive, in addition to the redemption proceeds, any dividends that are
declared but unpaid through the date of their redemption. Shareholders who redeem only a portion of their shares will receive all dividends declared but unpaid on those shares on the next dividend payment date.
Dividends from net investment income, if any, on all Portfolios except High Yield Portfolio generally will be declared and paid at least annually, and may be declared and paid more frequently.
Dividends for each Class of a Portfolio will be calculated at the same time and in the same manner and will be of the same amount, except that certain expenses will be borne exclusively by one
Class and not by the other, such as fees payable under the Distribution and Servicing Plan. Open Shares will receive lower per share dividends than Institutional Shares because of the higher expenses borne by Open Shares.
Investment income for a Portfolio includes, among other things, dividends and interest income, accretion of market and original issue discount and amortization of premium and, in the case of
each Portfolio except High Yield Portfolio, would include dividends.
With respect to all of the Portfolios, net realized capital gains, if any, will be distributed at least annually, and may be declared and paid more frequently. If a dividend check mailed to a
shareholder who elected to receive dividends and/or capital gain distributions in cash is returned as undeliverable by the postal or other delivery service, such shareholder's distribution option automatically will be converted to all dividends and
other distributions reinvested in additional shares. No interest will accrue on amounts represented by uncashed distribution or redemption checks.
TAXATION
The Investment Manager believes that each Portfolio has qualified for the most recent fiscal year as a "regulated investment company" under Subchapter M of the Code. It is intended that each
such Portfolio will continue to so qualify as a regulated investment company if such qualification is in the best interests of its shareholders. Each Portfolio will be treated as a separate entity for tax purposes and thus the provisions of the Code
applicable to regulated investment companies generally will be applied to each Portfolio separately, rather than to the Fund as a whole. As a regulated investment company, a Portfolio will pay no federal income tax on net investment income and net
realized securities gains to the extent that such income and gains are distributed to shareholders in accordance with applicable provisions of the Code. To qualify as a regulated investment company, the Portfolio must distribute at least 90% of its
net income (consisting of net investment income and net short-term capital gain) to its shareholders and meet certain asset diversification and other requirements. If the Portfolio did not qualify as a regulated investment company, it would be
treated, for tax purposes, as an ordinary corporation subject to federal income tax. The term "regulated investment company" does not imply the supervision of management of investment practices or policies by any government agency.
Each Portfolio may in certain years use "equalization accounting" in determining the portion of its net investment income and capital gain net income that has been distributed. A Portfolio that
elects to
48
use equalization accounting in a year will allocate a portion of its realized investment income and capital gain to redemptions of Portfolio shares and will reduce the amount of such income and/or gain that it distributes
in cash. The Internal Revenue Service (the "IRS") has not published any guidance concerning the methods to be used in allocating investment company income and capital gain to redemptions of shares. In the event that the IRS determines that a
Portfolio is using an improper method of allocation and has under-distributed its net investment income or capital gain net income for any taxable year, such Portfolio may be liable for additional federal income tax.
Any dividend or distribution paid shortly after an investor's purchase may have the effect of reducing the net asset value of the shares below the investor's cost of those shares. Such a
dividend or distribution would be a return of investment in an economic sense, although taxable as stated in the Prospectus. In addition, the Code provides that if a shareholder holds shares of a Portfolio for six months or less and has received a
capital gain distribution with respect to such shares, any loss incurred on the sale of such shares will be treated as long-term capital loss to the extent of the capital gain distribution received.
Corporate shareholders of Equity Value, Strategic Equity, Mid Cap, Small-Mid Cap, Global Listed Infrastructure and Opportunistic Strategies Portfolios will be eligible for the
dividends-received deduction on the dividends (excluding the net capital gain dividends) paid by the Portfolio, to the extent that the Portfolio's income is derived from certain dividends received from domestic corporations. A corporation's
dividends-received deduction will be disallowed unless the corporation holds shares in the Portfolio for 46 days or more during the 90-day period commencing 45 days before the shares become ex-dividend. Furthermore, a corporation's
dividends-received deduction will be disallowed to the extent a corporation's investment in shares of the Portfolio is financed with indebtedness. It is anticipated that distributions from the other Portfolios will not qualify for the
dividends-received distribution. Each year the Fund will notify shareholders of the federal income tax status of distributions.
High Yield Portfolio may invest in REMICs. Interests in REMICs are classified as either "regular" interests or "residual" interests. Under the Code, special rules apply with respect to the
treatment of a portion of the Portfolio's income from REMIC residual interests. (Such portion is referred to herein as "Excess Inclusion Income.") Excess Inclusion Income generally cannot be offset by net operating losses and, in addition,
constitutes unrelated business taxable income to entities which are subject to the unrelated business income tax. The Code provides that a portion of Excess Inclusion Income attributable to REMIC residual interests held by regulated investment
companies such as the Portfolios shall, pursuant to regulations, be allocated to the shareholders of such regulated investment company in proportion to the dividends received by such shareholders. Accordingly, shareholders of High Yield Portfolio
generally will not be able to use net operating losses to offset such Excess Inclusion Income. In addition, if a shareholder of one of the Portfolios is an entity subject to the unrelated business income tax (including a qualified pension plan, an
IRA, a 401(k) plan, a Keogh plan, or another tax-exempt entity) and is allocated any amount of Excess Inclusion Income, such a shareholder may be required to file a return and pay a tax on such Excess Inclusion Income even though a shareholder might
not have been required to pay such tax or file such return absent the receipt of such Excess Inclusion Income. The Investment Manager anticipates that only a small portion, if any, of the assets of High Yield Portfolio will be invested in REMIC
residual interests. Accordingly, the amount of Excess Inclusion Income, if any, received by the Portfolio and allocated to its shareholders should be quite small. Shareholders that are subject to the unrelated business income tax should consult
their own tax adviser regarding the treatment of their income derived from the Portfolio.
Except as discussed above with respect to Excess Inclusion Income, a dividend or capital gains distribution with respect to shares held by a tax-deferred or qualified plan, such as an IRA,
403(b)(7) retirement plan or corporate pension or profit sharing plan, will not be taxable to the plan. Distributions
49
from such plans will be taxable to individual participants under applicable tax rules without regard to the income earned by the qualified plan.
Ordinarily, gains and losses realized from portfolio transactions will be treated as capital gains and losses. However, a portion of the gain or loss realized from the disposition of foreign
currencies and non-U.S. dollar denominated securities (including debt instruments and certain futures or forward contracts and options) may be treated as ordinary income or loss. In addition, all or a portion of any gains realized from the sale or
other disposition of certain market discount bonds will be treated as ordinary income. Finally, all or a portion of the gain realized from engaging in "conversion transactions" (generally including certain transactions designed to convert ordinary
income into capital gain) may be treated as ordinary income.
Gain or loss, if any, realized by a Portfolio from certain financial futures or forward contracts and options transactions ("Section 1256 contracts") will be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. Gain or loss will arise upon exercise or lapse of such Section 1256 contract as well as from closing transactions. In addition, any Section 1256 contracts remaining unexercised at the end of the
Portfolio's taxable year will be treated as sold for its then fair market value, resulting in additional gain or loss to such Portfolio.
Offsetting positions held by a Portfolio involving certain financial futures or forward contracts or options transactions with respect to actively traded personal property may be considered,
for tax purposes, to constitute "straddles." To the extent the straddle rules apply to positions established by the Portfolio, losses realized by the Portfolio may be deferred to the extent of unrealized gain in the offsetting position. In addition,
short-term capital loss on straddle positions may be recharacterized as long-term capital loss, and long-term capital gains on straddle positions may be treated as short-term capital gains or ordinary income. Certain of the straddle positions held
by the Portfolio may constitute "mixed straddles." The Portfolio may make one or more elections with respect to the treatment of "mixed straddles," resulting in different tax consequences. In certain circumstances, the provisions governing the tax
treatment of straddles override or modify certain of the provisions discussed above.
If a Portfolio either (1) holds an appreciated financial position with respect to stock, certain debt obligations, or partnership interests ("appreciated financial position") and then enters
into a short sale, futures or forward contract, or offsetting notional principal contract (collectively, a "Contract") with respect to the same or substantially identical property or (2) holds an appreciated financial position that is a Contract and
then acquires property that is the same as, or substantially identical to, the underlying property, the Portfolio generally will be taxed as if the appreciated financial position were sold at its fair market value on the date the Portfolio enters
into the financial position or acquires the property, respectively.
If a Portfolio enters into certain derivatives (including forward contracts, long positions under notional principal contracts, and related puts and calls) with respect to equity interests in
certain pass-thru entities (including other regulated investment companies, real estate investment trusts, partnerships, real estate mortgage investment conduits and certain trusts and foreign corporations), long-term capital gain with respect to
the derivative may be recharacterized as ordinary income to the extent it exceeds the long-term capital gain that would have been realized had the interest in the pass-thru entity been held directly by the Portfolio during the term of the derivative
contract. Any gain recharacterized as ordinary income will be treated as accruing at a constant rate over the term of the derivative contract and may be subject to an interest charge. The Treasury has authority to issue regulations expanding the
application of these rules to derivatives with respect to debt instruments and/or stock in corporations that are not pass-through entities.
50
Investment by a Portfolio in securities issued or acquired at a discount, or providing for deferred interest or for payment of interest in the form of additional obligations, could under
special tax rules affect the amount, timing and character of distributions to shareholders by causing the Portfolio to recognize income prior to the receipt of cash payments. For example, the Portfolio could be required each year to accrue a portion
of the discount (or deemed discount) at which the securities were issued and to distribute such income in order to maintain its qualification as a regulated investment company. In such case, the Portfolio may have to dispose of securities which it
might otherwise have continued to hold in order to generate cash to satisfy the distribution requirements.
Certain Portfolios may invest in an entity that is classified as a "passive foreign investment company" ("PFIC") for federal income tax purposes, the operation of certain provisions of the Code
applying to PFICs could result in the imposition of certain federal income taxes on the Portfolios. In addition, gain realized from the sale or other disposition of PFIC securities held beyond the end of the Portfolio's taxable year may be treated
as ordinary income.
Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to determine the effective rate of foreign tax in advance, since the amount of each Portfolio's assets to be invested in various countries is not known.
If you are neither a resident nor a citizen of the United States, or if you are a foreign entity, the Portfolio's ordinary income dividends (which include distributions of net short-term
capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
If more than 50% of the value of a Portfolio's total assets at the close of its taxable year consists of the stock or securities of foreign corporations, the Portfolio may elect to "pass
through" to its shareholders the amount of foreign income taxes paid by the Portfolio. Pursuant to such election, shareholders would be required: (i) to include in gross income, even though not actually received, their respective pro rata shares of
the foreign taxes paid by the Portfolio; (ii) treat their income from the Portfolio as being from foreign sources to the extent that the Portfolio's income is from foreign sources; and (iii) either to deduct their pro rata share of foreign taxes in
computing their taxable income, or to use it as a foreign tax credit against federal income (but not both). No deduction for foreign taxes could be claimed by a shareholder who does not itemize deductions.
It is anticipated that each of International Equity, International Equity Select, International Strategic, International Small Cap, Global Listed Infrastructure, Emerging Markets and Developing
Markets Portfolios, will be operated so as to meet the requirements of the Code to "pass through" to shareholders credits for foreign taxes paid, although there can be no assurance that these requirements will be met. Each shareholder will be
notified within 45 days after the close of each taxable year of the Portfolio whether the foreign taxes paid by the Portfolio will "pass through" for that year, and, if so, the amount of each shareholder's pro rata share of (i) the foreign taxes
paid, and (ii) the Portfolio's gross income from foreign sources. Of course, shareholders who are not liable for federal income taxes, such as retirement plans qualified under Section 401 of the Code, will not be affected by any such "pass through"
of foreign tax credits.
The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Portfolios and their shareholders. No attempt is made to present a
complete explanation of the federal tax treatment of the Portfolios' activities or to discuss state and local tax matters affecting the Portfolios. Shareholders are urged to consult their own tax advisers for more detailed information concerning tax
implications of investments in the Portfolios.
51
ADDITIONAL INFORMATION ABOUT THE FUND AND PORTFOLIOS
As of March 31, 2009, no person owned of record or was known by the Fund to own beneficially 5% or more of a Class of the indicated Portfolio's outstanding voting securities except the
following:
|
Percentage of Total |
Name and Address |
Institutional Shares Outstanding |
Equity Value Portfolio |
|
|
Lazard Capital Markets LLC |
|
Lazard Frères & Co. LLC |
|
30 Rockefeller Plaza |
|
New York, NY 10112 |
91% |
|
Strategic Equity Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
31% |
|
Lazard Capital Markets LLC |
|
Iron Workers Local 40361 |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
13% |
|
National Financial Services Corp. |
|
FBO Its Customers |
|
One World Financial Center |
|
200 Liberty Street |
|
New York, NY 10281 |
11% |
|
Lazard Capital Markets LLC |
|
Lazard Frères & Co. LLC |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
10% |
|
Mid Cap Portfolio |
|
|
Merrill Lynch |
|
FBO Its Customers |
|
4800 Deer Lake Drive East, 2nd Floor |
|
Jacksonville, FL 32246 |
26% |
|
Northern Trust Company, Trustee |
|
FBO Advocate-DV |
|
P.O. Box 92994 |
|
Chicago, IL 60675 |
21% |
52
City of Los Angeles |
|
8515 E. Orchard Road |
|
Greenwood Village, CO 80111 |
10% |
|
Citistreet Core Market |
|
State Street Bank as Trustee |
|
1 Heritage Drive |
|
North Quincy, MA 02171 |
8% |
|
Small-Mid Cap Portfolio |
|
|
Wendel & Company |
|
P.O. Box 1066 |
|
Wall Street Station |
|
New York, NY 10268 |
17% |
|
National Financial Services Corp. |
|
FBO Its Customers |
|
One World Financial Center |
|
200 Liberty Street |
|
New York, NY 10281 |
11% |
|
Lazard Capital Markets LLC |
|
International Union of Operating Engineers |
|
Local 57 Pension Fund |
|
141 Gano Street |
|
Providence, RI 02906 |
10% |
|
Lazard Capital Markets LLC |
|
Milbank Winthrop & Co. |
|
654 Madison Avenue, Suite 1550 |
|
New York, NY 10065 |
7% |
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
7% |
|
SEI Private Trust Company |
|
1 Freedom Valley Drive |
|
Oaks, PA 19456 |
6% |
|
International Equity Portfolio |
|
|
Lazard Capital Markets LLC |
|
The McConnell Foundation |
|
Redding, CA |
22% |
53
Oprah Winfrey, Trustee |
|
Phoenix Investment Trust |
|
C/O Harpo Inc.- Sophie Lee |
|
P.O. Box 617666 |
|
Chicago, IL 60661 |
18% |
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
8% |
|
Citigroup Global Markets Inc. |
|
388 Greenwich Street |
|
New York, NY 10013 |
7% |
|
Agnes Neill Williams |
|
Potomac, MD |
5% |
|
Lazard Capital Markets LLC |
|
Somerville Retirement System |
|
50 Evergreen Avenue |
|
Somerville, MA 02145 |
5% |
|
International Equity Select Portfolio |
|
|
Merrill Lynch |
|
FBO Its Customers |
|
4800 Deer Lake Drive East, 2nd Floor |
|
Jacksonville, FL 32246 |
23% |
|
National Financial Services LLC |
|
One World Financial Center |
|
200 Liberty Street |
|
New York, NY 10281 |
16% |
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
9% |
|
Lazard Capital Markets LLC |
|
Kenneth Blackman, Esq. |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
6% |
|
First Clearing, LLC |
|
FBO Its Customers |
|
10750 Wheat First Drive |
|
Glen Allen, VA 23060-9243 |
5% |
54
International Strategic Portfolio |
|
|
Lazard Capital Markets LLC |
|
Market Street International |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
21% |
|
First Union National Bank |
|
Omnibus Reinvest |
|
1525 West Wt. Harris Blvd. |
|
Charlotte, NC 28288 |
13% |
|
Wendel & Company |
|
c/o The Bank of New York Mutual Funds |
|
P.O. Box 1066 |
|
Wall Street Station |
|
New York, NY 10268 |
9% |
|
Lazard Capital Markets LLC |
|
The Steamfitters Industry |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
7% |
|
Lazard Capital Markets LLC |
|
The Board of Public Utilities |
|
30 Rockefeller Plaza |
|
New York, NY 10112 |
6% |
|
Wendel & Company |
|
c/o The Bank of New York Mutual Funds |
|
P.O. Box 1066 |
|
Wall Street Station |
|
New York, NY 10268 |
6% |
|
Wendel & Company |
|
c/o The Bank of New York Mutual Funds |
|
P.O. Box 1066 |
|
Wall Street Station |
|
New York, NY 10268 |
6% |
|
International Small Cap Portfolio |
|
|
National Financial Services Corp. |
|
FBO Its Customers |
|
One World Financial Center |
|
200 Liberty Street |
|
New York, NY 10281 |
22% |
55
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
21% |
|
Dingle & Co. |
|
P.O. Box 75000 |
|
Detroit, MI 48275 |
10% |
|
Emerging Markets Portfolio |
|
|
National Financial Services Corp. |
|
FBO Its Customers |
|
One World Financial Center |
|
200 Liberty Street |
|
New York, NY 10281 |
17% |
|
Citigroup Global Markets Inc. |
|
388 Greenwich Street |
|
New York, NY 10013 |
17% |
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
6% |
|
Developing Markets Portfolio |
|
|
Lazard Capital Markets, LLC |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
63% |
|
National Financial Services, LLC |
|
FBO Its Customers |
|
One World Financial Center |
|
200 Liberty Street, 5th Floor |
|
New York, NY 10281 |
9% |
|
Strafe & Co. |
|
P.O. Box 160 |
|
Westerville, OH 43086 |
7% |
|
Lazard Capital Markets, LLC |
|
James M. Donald |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
6% |
|
Lazard Capital Markets, LLC |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
5% |
56
High Yield Portfolio |
|
|
Mac & Co. |
|
Mutual Funds Operations |
|
P.O. Box 3198 |
|
Pittsburgh, PA 15230 |
15% |
|
Merrill Lynch |
|
FBO Its Customers |
|
4800 Deer Lake Drive East |
|
Jacksonville, FL 32246 |
13% |
|
The Bernard Heller Foundation |
|
Westlake Village, CA |
9% |
|
First Clearing, LLC |
|
FBO Its Customers |
|
10750 Wheat First Drive |
|
Glen Allen, VA 23060-9243 |
6% |
|
Opportunistic Strategies Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
11% |
|
Lazard Capital Markets, LLC |
|
Bireleys Orange Japan |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
5% |
|
|
|
Percentage of Total |
Name and Address |
Open Shares Outstanding |
Equity Value Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
31% |
|
Ameritrade Inc. |
|
FBO Its Customers |
|
P.O. Box 2226 |
|
Omaha, NE 68103 |
12% |
57
Pershing LLC |
|
P.O. Box 2052 |
|
Jersey City, NJ 07303 |
9% |
|
National Financial Services LLC |
|
FEBO Sue Mathis |
|
Newport Beach, CA |
8% |
|
Pershing LLC |
|
P.O. Box 2052 |
|
Jersey City, NJ 07303 |
6% |
|
National Financial Services LLC |
|
FEBO Helene P. Cohen |
|
Manalapan, NJ |
6% |
|
Lazard Capital Markets, LLC |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
5% |
|
Strategic Equity Portfolio |
|
|
Priac as Trustee/Custodian |
|
FBO Various Retirement Plans |
|
280 Trumbull Street |
|
One Commercial Plaza |
|
Hartford, CT 06103 |
70% |
|
Merrill Lynch |
|
FBO Its Customers |
|
4800 Deer Lake Drive East, 2nd Floor |
|
Jacksonville, FL 32246 |
8% |
|
Mid Cap Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO 24000996 |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
28% |
|
ING Group Trust |
|
Trustee: Reliance Trust Company |
|
400 Atrium Drive |
|
Somerset, NJ 08873 |
13% |
|
National Financial Services LLC |
|
FEBO Various Retirement Plans |
|
4 Manhattanville Road |
|
Purchase, NY 10577 |
12% |
58
Nationwide Trust Company, Custodian |
|
FBO IPO Portfolio Accounting |
|
P.O. Box 182029 |
|
Columbus, OH 43218 |
7% |
|
Citistreet Core Market |
|
State Street Bank as Trustee |
|
1 Heritage Drive |
|
North Quincy, MA 02171 |
6% |
|
Merrill Lynch |
|
FBO Its Customers |
|
4800 Deer Lake Drive East, 2nd Floor |
|
Jacksonville, FL 32246 |
5% |
|
Small-Mid Cap Portfolio |
|
|
Prudential Retirement Insurance & Annuity Co. |
|
FBO Various Retirement Plans |
|
280 Trumbull Street |
|
One Commercial Plaza |
|
Hartford, CT 06103 |
17% |
|
Nationwide Life Insurance, QVPA |
|
C/O IPO Portfolio Accounting |
|
P.O. Box 182029 |
|
Columbus, OH 43218 |
13% |
|
Mercer Trust FBO Savings Plan |
|
For Employees of Furniture Brands Intl. |
|
1 Investors Way #2 |
|
Norwood, MA 02062 |
13% |
|
Nationwide Life Insurance, NWVA |
|
C/O IPO Portfolio Accounting |
|
P.O. Box 182029 |
|
Columbus, OH 43218 |
13% |
|
Nationwide Trust Co. |
|
FBO IPO Portfolio Accounting |
|
P.O. Box 182029 |
|
Columbus, OH 43218 |
7% |
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
6% |
59
Mercer Trust Co. |
|
FBO Thermsys Corp. |
|
Investors Way |
|
Norwood, MA 02062 |
5% |
|
International Equity Portfolio |
|
|
Prudential Retirement Insurance & Annuity Co. |
|
FBO Various Retirement Plans |
|
280 Trumbull Street |
|
One Commercial Plaza |
|
Hartford, CT 06103 |
22% |
|
Charles Atwood Company |
|
136 E. Michigan Avenue, Suite 1201 |
|
Kalamazoo, MI 49007 |
17% |
|
Charles Schwab & Co., Inc. |
|
Special Custody Account |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
11% |
|
Mercer Trust Company |
|
FBO Agency Services 401k Plan |
|
Investors Way |
|
Norwood, MA 02062 |
5% |
|
International Equity Select Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
25% |
|
First Clearing, LLC |
|
FBO Its Customers |
|
10750 Wheat First Drive |
|
Glen Allen, VA 23060 |
11% |
|
Nationwide Trust Co. |
|
FBO IPO Portfolio Accounting |
|
P.O. Box 182029 |
|
Columbus, OH 43218 |
9% |
|
National Financial Services LLC |
|
FBO Bernhardt Reese Unit Trust |
|
60 Macbain Avenue |
|
Atherton, CA 94027 |
7% |
60
Trusty |
|
P.O. Box 938 |
|
Dubuque, IA 52004 |
6% |
|
Ameritrade Inc. |
|
FBO Its Customers |
|
P.O. Box 2226 |
|
Omaha, NE 68103 |
5% |
|
International Strategic Portfolio |
|
|
Ameritrade Inc. |
|
FBO Its Customers |
|
P.O. Box 2226 |
|
Omaha, NE 68103 |
63% |
|
Charles Schwab & Co., Inc. |
|
Special Custody Account |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
13% |
|
Genworth Financial Trust Co. |
|
3200 North Central Avenue |
|
Phoenix, AZ 85012 |
10% |
|
International Small Cap Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
Special Custody Account |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
55% |
|
Emerging Markets Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
Special Custody Account |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
29% |
|
Developing Markets Portfolio |
|
|
NFS LLC |
|
FBO James Michael Sanner |
|
3701 Stonehurst |
|
Jones, OK 73049 |
65% |
61
Brown Brothers Harriman and Company |
|
525 Washington Boulevard |
|
Jersey City, NJ 07310 |
13% |
|
Lazard Capital Markets, LLC |
|
30 Rockefeller Plaza, 60th Floor |
|
New York, NY 10112 |
10% |
|
High Yield Portfolio |
|
|
SEI Private Trust Company |
|
1 Freedom Valley Drive |
|
Oaks, PA 19456 |
45% |
|
Opportunistic Strategies Portfolio |
|
|
Charles Schwab & Co., Inc. |
|
FBO Its Customers |
|
101 Montgomery Street |
|
San Francisco, CA 94104 |
13% |
Under the 1940 Act, a shareholder that beneficially owns, directly or indirectly, more than 25% of a Portfolio's total outstanding shares may be deemed a "control person" (as defined in the
1940 Act) of the Portfolio.
Certain of the shareholders are investment management clients of the Investment Manager that have entered into agreements with the Investment Manager pursuant to which the Investment Manager
has investment discretion and voting power over any assets held in the clients' accounts, including shares of the Portfolios. For purposes of the list above, the Fund considers the Investment Manager to be a beneficial owner of Portfolio shares held
in management accounts on behalf of its investment management clients.
Generally, all shares have equal voting rights and will be voted in the aggregate, and not by class, except where voting by Class is required by law or where the matter involved affects only
one Class. As used in this Statement of Additional Information, the vote of a majority of the outstanding voting securities means, with respect to the Fund or a Portfolio, the vote of the lesser of (i) 67% of the shares represented at a meeting if
the holders of more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be, are present in person or by proxy, or (ii) more than 50% of the outstanding shares of the Fund or Portfolio, as the case may be. Shareholders are
entitled to one vote for each full share held, and fractional votes for fractional shares held.
Shareholders are not entitled to any preemptive, subscription or conversion rights and are freely transferable. All shares, when issued and paid for in accordance with the terms of the
offering, will be fully paid and non-assessable by the Fund. Each share of the applicable Class of a Portfolio is entitled to such dividends and distributions out of the income earned on the assets belonging to that Portfolio as are declared in the
discretion of the Fund's Board of Directors. In the event of the liquidation of a Portfolio, shares of each Class of the Portfolio are entitled to receive the assets attributable to such Class of that Portfolio that are available for distribution
based on the relative net assets of the applicable Class.
Unless otherwise required by the 1940 Act, ordinarily it will not be necessary for the Fund to hold annual meetings of shareholders. As a result, shareholders may not consider each year the
election of
62
Directors or the appointment of independent auditors. However, the holders of at least 10% of the shares outstanding and entitled to vote may require the Fund to hold a special meeting of shareholders for purposes of
removing a Director from office. Shareholders may remove a Director by the affirmative vote of two-thirds of the Fund's outstanding voting shares. In addition, the Board of Directors will call a meeting of shareholders for the purpose of electing
Directors if, at any time, less than a majority of the Directors then holding office have been elected by shareholders.
The Fund is a "series fund," which is a mutual fund divided into separate portfolios, each of which is treated as a separate entity for certain matters under the 1940 Act and for other
purposes. A shareholder of one portfolio is not deemed to be a shareholder of any other portfolio. For certain matters shareholders vote together as a group; as to others they vote separately by portfolio.
To date, the Board of Directors has authorized thirteen Portfolios. All consideration received by the Fund for shares of one of the Portfolios, and all assets in which such consideration is
invested, will belong to that Portfolio (subject only to the rights of creditors of the Fund) and will be subject to the liabilities related thereto. The income attributable to, and the expenses of, one Portfolio would be treated separately from
those of the other Portfolios. The Fund has the ability to create, from time to time, new series without shareholder approval. Prior to August 25, 2008, Lazard U.S. Small-Mid Cap Equity Portfolio was known as "Lazard U.S. Small Cap Equity
Portfolio."
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or applicable state law or otherwise to the holders of the outstanding
voting securities of an investment company, such as the Fund, will not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each portfolio affected by such matter. Rule 18f-2 further
provides that a portfolio shall be deemed to be affected by a matter unless it is clear that the interests of each portfolio in the matter are identical or that the matter does not affect any interest of such portfolio. The Rule exempts the
selection of independent auditors and the election of Directors from the separate voting requirements of the rule.
Each Portfolio will send annual and semi-annual financial statements to its shareholders.
The Fund's Registration Statement, including the Prospectus, the Statement of Additional Information and the exhibits filed therewith, may be examined at the office of the SEC in Washington,
D.C. Statements contained in the Prospectus or this Statement of Additional Information as to the content of any contract or other document referred to herein or in the Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference.
A special service is available to banks, brokers, investment advisers, trust companies and others who have a number of accounts in the Fund. In addition to the regular Statement of Account
furnished to the registered holder after each transaction, a monthly summary of accounts can be provided. The monthly summary will show for each account the account number, the month-end share balance and the dividends and distributions paid during
the month. For information on the special monthly summary of accounts, contact the Fund.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Legal matters in connection with the issuance of the shares of the Fund offered hereby have been passed upon by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038-4982.
63
Anchin, Block & Anchin LLP, 1375 Broadway, New York, New York 10018, is the independent registered public accounting firm for the Fund.
64
APPENDIX
Rating Categories
Description
of certain ratings assigned by S&P and Moody's:
S&P
Long-term
AAA
An obligation
rated "AAA" has the highest rating assigned by S&P. The obligor's capacity
to meet its financial commitment on the obligation is extremely strong.
AA
An obligation
rated "AA" differs from the highest rated obligations only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
A
An obligation
rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rated categories. However,
the obligor's capacity to meet its financial commitment on the obligation is
still strong.
BBB
An obligation
rated "BBB" exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity
of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations
rated "BB", "B", "CCC", "CC", and "C" are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the
highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major exposures
to adverse conditions.
BB
An obligation
rated "BB" is less vulnerable to nonpayment than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial,
or economic conditions which could lead to the obligor's inadequate capacity
to meet its financial commitment on the obligation.
B
An obligation
rated "B" is more vulnerable to nonpayment than obligations rated "BB", but the
obligor currently has the capacity to meet its financial commitment on the obligation.
Adverse business, financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation
rated "CCC" is currently vulnerable to nonpayment, and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its financial
commitment on the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to meet its
financial commitment on the obligation.
65
CC
An obligation
rated "CC" is currently highly vulnerable to nonpayment.
C
A subordinated
debt or preferred stock obligation rated "C" is currently highly vulnerable to nonpayment. The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A "C" also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments,
but that is currently paying.
D
An obligation
rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
r
The symbol "r" is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities; obligations exposed to severe prepayment risksuch
as interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
N.R.
The designation "N.R." indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that S&P
does not rate a particular obligation as a matter of policy.
Note: The ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or minus (-) sign designation to show relative standing within the major rating categories.
Short-term
A-1
A short-term
obligation rated "A-1" is rated in the highest category by S&P. The obligor's
capacity to meet its financial commitment on the obligation is strong. Within
this category, certain obligations are given a plus sign (+) designation. This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2
A short-term
obligation rated "A-2" is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
A-3
A short-term
obligation rated "A-3" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B
A short-term
obligation rated "B" is regarded as having significant speculative characteristics.
The obligor currently has the capacity to meet its financial commitment on the
obligation; however, it faces
66
major ongoing uncertainties which could lead to the obligor's inadequate capacity to meet is financial commitment on the obligation.
C
A short-term
obligation rated "C" is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation.
D
A short-term
obligation rated "D" is in payment default. The "D" rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The "D" rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Moody's
Long-term
Aaa
Bonds rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest
payments are protected by a large or by an exceptionally stable margin and principal
is secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa
Bonds rated "Aa" are judged to be of high quality by all standards. Together with the "Aaa" group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the "Aaa" securities.
A
Bonds rated "A" possess
many favorable investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa
Bonds rated "Baa" are
considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba
Bonds rated "Ba" are
judged to have speculative elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be very moderate,
and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
67
B
Bonds rated "B" generally
lack characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa
Bonds rated "Caa" are
of poor standing. Such issues may be in default or there may be present elements
of danger with respect to principal or interest.
Ca
Bonds rated "Ca" represent
obligations which are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C
Bonds rated "C" are
the lowest rated class of bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification from "Aa" through "Caa." The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Prime rating system (short-term)
Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
-
Leading market positions in well-established industries.
-
High rates of return on funds employed.
-
Conservative capitalization structure with moderate reliance on debt and ample asset protection.
-
Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
-
Well-established access to a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
68
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
69
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