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Securities Act File No. 33-40682 |
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Investment Company Act File No. 811-06312 |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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FORM N-1A |
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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Post-Effective Amendment No. 65 |
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
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Amendment No. 65 |
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(Check appropriate box or boxes) |
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THE LAZARD FUNDS, INC. |
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(Exact Name of Registrant as Specified in Charter) |
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(212) 632-6000 |
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(Registrant’s Telephone Number, including Area Code) |
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30 Rockefeller Plaza, New York, New York 10112 |
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(Address of Principal Executive: Number, Street, City, State, Zip Code) |
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Nathan A. Paul, Esq. |
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30 Rockefeller Plaza |
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New York, New York 10112 |
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(Name and Address of Agent for Services) |
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Copy to: |
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Janna Manes, Esq. |
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Stroock & Stroock & Lavan LLP |
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180 Maiden Lane |
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New York, New York 10038-4982 |
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It is proposed that this filing will become effective (check appropriate box) |
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immediately upon filing pursuant to paragraph (b) |
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on (DATE) pursuant to paragraph (b) |
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60 days after filing pursuant to paragraph (a)(1) |
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on (DATE) pursuant to paragraph (a)(1) |
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75 days after filing pursuant to paragraph (a)(2) |
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on (DATE) pursuant to paragraph (a)(2) of Rule 485. |
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If appropriate, check the following box: |
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this post-effective amendment designates a new effective date for a previously filed post-effective amendment. |
Subject to Completion, dated November 17, 2011
January 31, 2012
Lazard Funds Prospectus
Institutional
Shares
Open
Shares
Global Fixed Income
Lazard Global Fixed Income Portfolio
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.
Lazard Funds
Lazard Funds Table of Contents
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information on the Portfolio’s investment |
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objective, fees and past performance and a |
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summary of the Portfolio’s principal investment |
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strategies and risks. |
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Additional Information About Principal Investment Strategies and |
Review this section for additional information |
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on the Portfolio’s principal investment |
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strategies and risks. |
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Review this section for details on the people and |
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Review this section for details on how shares |
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shares, related charges and payments of |
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dividends and distributions. |
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Where to learn more about the Portfolio. |
Prospectus1
Lazard Funds Summary Section p Lazard Global Fixed Income Portfolio Investment Objective The Portfolio seeks total return from current income and capital appreciation. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio, a series of The Lazard Funds, Inc. (the “Fund”).
Institutional
Open
Shareholder Transaction Fees (fees paid directly from your investment)
1.00%
1.00%
Annual Portfolio Operating Expenses (expenses that you pay each year as a percentage
Management Fees
.50%
.50%
Distribution and Service (12b-1) Fees
None
.25%
Other Expenses*
.34%
.39%
Total Annual Portfolio Operating Expenses*
.84%
1.14%
Fee Waiver and Expense Reimbursement**
.04%
.04%
Total Annual Portfolio Operating Expenses After Fee Waiver and Expense Reimbursement**
.80%
1.10%
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“Other Expenses” are based on estimated amounts for the current fiscal year. ** Reflects a contractual agreement by Lazard Asset Management LLC (the “Investment Manager”) to waive its fee and, if necessary, reimburse the Portfolio through January 31, 2013, to the extent Total Annual Portfolio Operating Expenses exceed .80% and 1.10% of the average daily net assets of the Portfolio’s 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 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. 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 Portfolio’s 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:
1 Year
3 Years Institutional Shares
$82
$264 Open Shares
$112
$358 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 Portfolio’s performance. 2Prospectus
Shares
Shares
Maximum Redemption Fee (as a % of amount redeemed,
on shares owned for 30 days or less)
of the value of your investment)
Principal Investment Strategies Under normal circumstances, the Portfolio invests at least 80% of its assets in Fixed Income Investments. “Fixed Income Investments” include all types of debt and income producing securities and other instruments, including bonds, notes (including structured notes), mortgage-related securities, asset-backed
securities, Eurodollar and Yankee dollar instruments, money market instruments and foreign currency forward contracts, including non-deliverable forward contracts. Fixed Income Investments may be issued by U.S. or foreign corporations or entities; U.S. or foreign banks; the U.S. government, its agencies,
authorities, instrumentalities or sponsored enterprises; U.S. state and municipal governments; foreign governments and their political subdivisions; and supranational organizations (such as the World Bank). Fixed Income Investments may have any type of interest rate payment terms, including fixed rate,
adjustable rate or zero coupon features. In managing the Portfolio’s assets, the Investment Manager employs a relative value approach that is driven by its macroeconomic view of global interest rates, yield curves, sector spreads, and currencies, combined with an opportunistic, but disciplined, security selection process. The Investment Manager seeks
to enhance the Portfolio’s total return by rotating investments through global bond and credit markets, maintaining or seeking exposure to foreign currencies in the discretion of the Investment Manager. The Investment Manager seeks to identify and exploit market inefficiencies (such as spread relationships
between sectors in different countries, and undervalued or overlooked markets and securities) in seeking to achieve attractive risk-adjusted returns. The Investment Manager also seeks to identify investment opportunities with asymmetric risk/reward characteristics in seeking to enhance portfolio performance and
mitigate risk. The Portfolio’s currency exposure generally is managed relative to that of the Barclays Capital Global Aggregate Bond Index—Unhedged in U.S. dollar terms, and tactical exposures to non-U.S. dollar currencies are based on the Investment Manager’s fundamental macroeconomic outlook, technical factors and the
Investment Manager’s desired market positioning. Under normal market conditions, the Portfolio invests 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 issuers organized or located outside the U.S. or doing a substantial amount of business outside
the U.S., securities denominated in a foreign currency or foreign currency forward contracts. The Portfolio allocates its assets among various regions, countries and currencies, including the United States and the U.S. dollar (but in no less than three different countries or currencies). The Portfolio may invest in
securities of issuers with business activities located in emerging market countries or denominated in an emerging market currency. The Portfolio may invest up to 15% of its assets in securities that are rated below investment grade (lower than Baa by Moody’s Investors Service, Inc. or lower than BBB by Standard & Poor’s Ratings Group) (“junk bonds”) or the unrated equivalent as determined by the Investment Manager. There are no
restrictions on the Portfolio’s average portfolio maturity or duration or on the maturities of the individual debt and incoming producing securities and other instruments in which it may invest. In addition to purchasing or selling foreign currency forward contracts, the Portfolio may, but is not required to, purchase and sell options on foreign currencies, for hedging purposes or to seek to increase returns. Principal Investment Risks While fixed-income securities are designed to produce a stable stream of income, their prices move inversely with changes in interest rates. Interest rate risk is usually greater for fixed-income securities with longer maturities or durations. The Portfolio’s investments in lower-rated, higher-yielding securities are
subject to greater credit risk than its higher rated investments. Credit risk is the risk that the issuer will not make interest or principal payments, or will not make payments on a timely basis. Non-investment grade securities tend to be more volatile, less liquid and are considered speculative. If there is a
decline, or perceived decline, in the credit quality of a debt security (or any guarantor of payment on such security), the security’s value could fall, potentially lowering the Portfolio’s share price. The value of your investment in the Portfolio will fluctuate, which means you could lose money. Non-U.S. securities carry special risks, such as exposure to less developed or less efficient trading markets, political instability, a lack of company information, differing auditing and legal standards, and, potentially, less liquidity. In addition, investments denominated in currencies other than U.S. dollars carry the
risk that such currencies will decline in value relative to the U.S. dollar Prospectus3
and affect the value of these investments held in the Portfolio. The Portfolio’s performance will be influenced by political, social and economic factors affecting the non-U.S. countries and companies in which the Portfolio invests. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than
those of developed countries. The securities markets of emerging market countries have historically been extremely volatile. However, the capital markets in the U.S. and internationally have experienced unprecedented volatility in recent years, causing significant declines in the value and liquidity of many
securities. These market conditions may continue or worsen. Some debt securities may give the issuer the option to call, or redeem, the securities before their maturity. If securities held by the Portfolio are called during a time of declining interest rates (which is typically the case when issuers exercise options to call outstanding securities), the Portfolio may have to
reinvest the proceeds in an investment offering a lower yield (and the Portfolio may not fully benefit from any increase in the value of its portfolio holdings as a result of declining interest rates). The lack of a readily available market may limit the ability of the Portfolio to sell certain securities at the time and price it would like. The size of certain debt securities offerings of emerging markets issuers may be relatively smaller in size than debt offerings in more developed markets and, in some cases,
the Portfolio, by itself or together with other Portfolios or other accounts managed by the Investment Manager, may hold a position in a security that is large relative to the typical trading volume for that security; these factors can make it difficult for the Portfolio to dispose of the position at the desired time or
price. Foreign currencies, particularly currencies of emerging market countries, may experience significant declines against the U.S. dollar, and significant devaluation may occur subsequent to investments in these currencies by the Portfolio. The Investment Manager may not be able to accurately predict movements in
exchange rates and there may be imperfect correlations between movements in exchange rates that could cause the Portfolio to incur significant losses. Currency investments could be adversely affected by delays in, or a refusal to grant, repatriation of funds or conversion of emerging market currencies. Structured notes are privately negotiated debt instruments where the principal and/or interest is determined by reference to a specified asset, market or rate, or the differential performance of two assets or markets. Structured notes can have risks of both debt securities and derivatives transactions. Derivatives transactions, including those entered into for hedging purposes, may reduce returns or increase volatility, perhaps substantially. Forward currency contracts, over-the-counter options on currencies and structured notes are subject to the risk of default by the counterparty and can be illiquid. These
derivatives transactions, as well as the exchange-listed options and other derivatives transactions in which the Portfolio may invest, are subject to many of the risks of, and can be highly sensitive to changes in the value of, the related currency or other reference asset. As such, a small investment could have a
potentially large impact on the Portfolio’s performance. Whether or not the Portfolio engages in currency derivatives transactions, 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. Use of derivatives transactions,
even if entered into for hedging purposes, may cause the Portfolio to experience losses greater than if the Portfolio had not engaged in such transactions. 4Prospectus
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. 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 Portfolio’s average annual returns compare with those of a broad measure of market performance. After the Portfolio commences investment operations, performance information will be available at www.LazardNet.com or by calling (800) 823-6300. The
Portfolio’s past performance is not necessarily an indication of how the Portfolio will perform in the future. Management Investment Manager Lazard Asset Management LLC Portfolio Manager/Analysts Yvette Klevan, portfolio manager/analyst on the Investment Manager’s Global Fixed Income team, has been with the Portfolio since inception. Jared Daniels, portfolio manager/analyst on the Investment Manager’s Global Fixed Income team, has been with the Portfolio since inception. Purchase and Sale of Portfolio Shares The initial investment minimums are: Institutional Shares $
100,000 Open Shares $
2,500 IRA Rollover/Transfer (Open Shares only) $
2,500 The subsequent investment minimum is $50. Portfolio shares are redeemable through the Fund’s 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/or 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 intermediary’s website for more information. Prospectus5
Lazard Funds Additional Information About Principal Investment Strategies and Principal Overview The Fund consists of twenty-one separate Portfolios, one of which is described in this Prospectus. Each Portfolio offers Institutional Shares and Open Shares. Institutional Shares and Open Shares have different investment minimums and different expense ratios. Each Portfolio has its own investment objective,
strategies, and risk/return and expense profile. 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. Additional Information About Principal Investment Strategies The following information supplements, and should be read together with, the information about the Portfolio’s principal investment strategies contained in the “Summary Section.” The Investment Manager may invest in “proxy” trades whereby it believes that an investment in one market can be made as a “substitute” for another market and will generate a higher total return, on a relative basis. When utilizing this strategy, the Investment Manager conducts scenario and correlation
analysis to manage the resulting “basis” risk on either the currency or interest rate exposure. The Investment Manager may also invest in smaller, peripheral markets as a substitute for a core market. 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 allocation of the Portfolio’s assets among geographic sectors may shift from time to time
based on the Investment Manager’s judgment and its analysis of market conditions. The Portfolio may engage in derivatives transactions, including purchasing or selling foreign currency and interest rate futures contracts, for hedging purposes or to seek to increase returns. The Portfolio may engage, to a limited extent, in various other investment techniques, such as lending portfolio 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. Additional Information About Principal Investment Risks The following information supplements, and should be read together with, the information about the Portfolio’s principal investment risks contained in the “Summary Section.” When the Portfolio lends securities to brokers, dealers and other financial institutions, there is a risk that the loaned securities may not be returned during normal settlement periods if the borrower defaults. In pursuing a temporary defensive strategy, the Portfolio may forgo more profitable investment strategies and, as a result, may not achieve its stated investment objective. You should be aware that the Portfolio:
•
is not a bank deposit • is not guaranteed, endorsed or insured by any bank, financial institution or government entity, such as the Federal Deposit Insurance Corporation • is not guaranteed to achieve its stated goals 6Prospectus
Investment Risks
Lazard Funds Fund Management p 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 Portfolio’s investments and assists in the overall management of the Fund’s affairs. The Investment
Manager and its global affiliates provide investment management services to client discretionary accounts with assets totaling approximately $____ billion as of December 31, 2011. 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 .50% of the Portfolio’s average daily net assets. The investment management fee is 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 Fund’s annual report to shareholders for the year ended December 31, 2011. The Investment Manager manages 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 to benefit from the views of his or her peers. Each 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 each portfolio management team discuss the portfolio, including making investment recommendations, overall portfolio composition, and the like. Research analysts
perform fundamental research on issuers (based on, for example, sectors or geographic regions) in which the Portfolio may invest. Yvette Klevan and Jared Daniels have been primarily responsible for the day-to-day management of the Portfolio since inception. Biographical Information of Principal Portfolio Managers Yvette Klevan, a Director of the Investment Manager, is a portfolio manager/analyst on the Global Fixed Income team. She began working in the investment field in 1982. Prior to joining the Investment Manager in 2002, Ms. Klevan was a Senior Portfolio Manager at Offitbank and previously worked at Bank of
America, Chase Manhattan Bank and Aramco Services Company. Jared Daniels, a Senior Vice President of the Investment Manager, is a portfolio manager/analyst on the Global Fixed Income team. He began working in the investment field in 1997. Prior to joining the Investment Manager in 1998, Mr. Daniels was with CIBC Oppenheimer Corporation. He is a Chartered
Financial Analyst Charterholder. Additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of shares of the Portfolio is contained in the Fund’s Statement of Additional Information (“SAI”). State Street Bank and Trust Company (“State Street”), located at One Lincoln Street, Boston, Massachusetts 02111, serves as the Portfolio’s administrator. Lazard Asset Management Securities LLC (the “Distributor”) acts as distributor for the Fund’s shares. State Street acts as custodian of the Portfolio’s investments. State Street may enter into subcustodial arrangements on behalf of the Portfolio for the holding of non-U.S. securities. Prospectus7
Lazard Funds Shareholder Information p 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 determines the NAV of the Portfolio’s share classes as of the close of regular session trading on the New York Stock Exchange (the “NYSE”) (normally 4:00 p.m. Eastern time) on each day the NYSE is open for trading. The Fund values 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 (the “Board”). Calculation of 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 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. 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 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. Non-U.S. securities may trade on days when the 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. 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: Institutional Shares
$100,000 Open Shares
$ 2,500 IRA Rollover/Transfer (Open Shares only)
$ 2,500 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. 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
1.
Complete a Purchase Application. Indicate the services to be used. 2. 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: regular mail overnight delivery By Wire Your bank may charge you a fee for this service.
1.
Call (800) 986-3455 toll-free from any state and provide the following:
8Prospectus
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
the Portfolio(s) and Class of shares to be invested in • name(s) in which shares are to be registered • address • social security or tax identification number • dividend payment election • amount to be wired • name of the wiring bank, and • name and telephone number of the person to be contacted in connection with the order. An account number will then be assigned.
2.
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 3. Complete a Purchase Application. Indicate the services to be used. Mail the Purchase Application to the address set forth in Item 2 under “Initial Purchase–By Mail” above. Additional Purchases By Mail
Make a check payable to “The Lazard Funds, Inc.” Write the shareholder’s account number on the check. 2. 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 Purchase–By Mail” above. By Wire Instruct the wiring bank to transmit the specified amount in federal funds to State Street, as instructed in Item 2 under “Initial Purchase–By 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 Information—Investor Services—Automatic 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 Information—Investor Services—Exchange 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 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. 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 Fund’s Board has approved policies and Prospectus9
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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.
Shareholder’s Name and Account Number
1.
(Minimum $50)
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 Fund’s view, is likely to engage in excessive trading, market timing or other abusive trading practices, and 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
investor’s 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 shareholder’s account. For instance, the Fund may determine that the shareholder’s 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 Portfolio’s shares followed by purchasing or exchanging into shares of that Portfolio) as a violation of the Fund’s policy against abusive trading practices. The Fund’s 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 Information—How to Sell Shares—Redemption 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 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 Portfolio’s NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board. See “Shareholder Information—General.” 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 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 Fund’s 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 10Prospectus
Portfolio may be at greater risk for market timing than funds that invest 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 Portfolio’s Open Shares, for distribution and services provided to holders of Open Shares. Because these fees are
paid out of the Portfolio’s assets on an on-going basis, over time these recurring fees will increase the cost of your investment and may cost you 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 marketing, shareholder servicing, account administration or 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 parties 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. 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 also may 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; (2) in connection with the Fund’s 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 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 Portfolio’s 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 Prospectus11
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 the telephone redemption
privilege added to your account, please call the Transfer Agent’s 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:
1.
Write a letter of instruction to the Fund. Indicate the dollar amount or number of shares to be sold, the Portfolio and Class, the shareholder’s account number, and social security or taxpayer identification number. 2. 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. 3. 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. 4. Send the letter to the Transfer Agent at the following address: regular mail overnight delivery 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. Automatic Reinvestment Plan allows your dividends and capital gain distributions to be reinvested in additional shares of your 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 one 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 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, 12Prospectus
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
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 Agent’s 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 Information—How to Buy Shares—Market Timing/ Excessive Trading” for more information about restrictions on exchanges. In addition to the policies described above, the Fund reserves the right to:
•
redeem an account, with notice, if the value of the account falls below $1,000 due to redemptions • convert Institutional Shares held by a shareholder whose account is less than $100,000 to Open Shares, upon written notice to the shareholder • 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 and Exchange Commission (the “SEC”) • change or waive the required minimum investment amounts • 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) • 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 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 Fund’s management:
•
the Portfolio would be unable to invest the money effectively in accordance with its investment objective and policies or could otherwise be adversely affected • the Portfolio receives or anticipates receiving simultaneous orders that may significantly affect the Portfolio (e.g., amounts equal to 1% or more of the Portfolio’s total assets) 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 (800) 542-1061 if you need additional copies of annual or semi-annual reports. Call the Transfer Agent at the
telephone number listed on the back cover if you need account information. Dividends and Distributions Income dividends are normally declared each business day and paid monthly. Net 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 19, 2012 at www.LazardNet.com or by
calling (800) 823-6300. Estimates for any “spillback” distributions (income and/or net capital gains from the 2011 fiscal year that were not distributed by December 31, 2011) are expected to be available on or about August 6, 2012 at www.LazardNet.com or by calling (800) 823-6300. Prospectus13
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 shareholder’s account on the payment date or, at the shareholder’s 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 Portfolio’s shares for shares of another Portfolio will
be treated as a sale of the Portfolio’s 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:
•
fail to provide a social security number or taxpayer identification number • fail to certify that their social security number or taxpayer identification number is correct • fail to certify that they are exempt from withholding 14Prospectus
Lazard Funds Other Performance of the Investment Manager p Lazard Global Fixed Income Composite (Prior Performance of Similar Accounts) This is not the Portfolio’s Performance Lazard Global Fixed Income Portfolio’s 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
Fixed Income Composite”) of the Other Accounts (consisting of all similarly managed, fully discretionary and fee paying accounts) and for the Portfolio’s benchmark index. The Global Fixed Income Composite should not be interpreted as indicative of the Portfolio’s future performance.
Annual Total Returns
2002
2003
2004
2005
2006
2007
2008
2009
2010
Global Fixed Income Composite
____%
____%
____%
____%
____%
____%
____%
____%
____%
_________________ Index*
____%
____%
____%
____%
____%
____%
____%
____%
____%
Average Annual Total Returns
Inception
One Year
Three Years
Five Years
Since
Global Fixed Income Composite
____%
____%
____%
____%
_________________ Index*
N/A
____%
____%
____%
____%
* 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 Fixed Income Composite.
The performance results of the Global Fixed Income 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 Fixed Income 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 Fixed Income 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. Prospectus15
for the Year Ended December 31,
(for the periods ended December 31, 2011)
Date
Inception
The _________________ Index measures [____________________________________________________________________]. The index is unmanaged, has no fees or costs and is not available for investment.
[This Page Intentionally Left Blank]
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Wherever there’s opportunity, there’s Lazard.SM
For more information about the Portfolio, the following documents are available, free of charge, upon request:
Annual and Semi-Annual Reports (Reports):
The Fund’s annual and semi-annual reports to shareholders will contain additional
information on the Portfolio’s investments. In the annual report, you will find a broad
discussion of the market conditions and investment strategies that significantly affected
the Portfolio’s performance during its last fiscal year.
Statement of Additional Information (SAI):
The SAI provides more detailed information about the Portfolio, including their 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 Fund’s policies and procedures with respect to the disclosure of the Portfolio’s portfolio holdings is available
in the Fund’s SAI.
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.
You also 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 SEC’s website at http://www.sec.gov.
Investment Company Act file no. 811-06312
Investment Manager
Lazard Asset Management LLC
Distributor
Lazard Asset Management Securities LLC
Custodian
State Street Bank and Trust Company
Transfer Agent and Dividend Disbursing Agent
Boston Financial Data Services,
Inc.
Independent Registered Public Accounting Firm
Legal Counsel
Stroock & Stroock & Lavan LLP
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.
Lazard Asset Management LLC • 30
Rockefeller Plaza • New York, NY 10112-6300 • 800-823-6300 • www.LazardNet.com
© 2012 The Lazard Funds, Inc. and Lazard Asset Management Securities LLC
Lazard Funds The
information in this Statement of Additional Information (“SAI”) is not
complete and may be changed. We may not sell these securities until the
registration statement amendment filed with the Securities and Exchange
Commission is effective. This SAI 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. This SAI is not a prospectus. Subject
to Completion, dated November 17, 2011 THE
LAZARD FUNDS, INC. 30
Rockefeller Plaza New York,
New York 10112-6300 (800)
823-6300 STATEMENT
OF ADDITIONAL INFORMATION Institutional
Shares Open
Shares U.S.
Equity Lazard U.S. Equity Value Portfolio LEVIX LEVOX Lazard U.S. Strategic Equity Portfolio LZUSX LZUOX Lazard U.S. Mid Cap Equity Portfolio LZMIX LZMOX Lazard U.S. Small-Mid Cap Equity Portfolio LZSCX LZCOX Global
Equity Lazard Global Listed Infrastructure Portfolio GLIFX GLFOX International
Equity Lazard International Equity Portfolio LZIEX LZIOX Lazard International Equity Select Portfolio LZSIX LZESX Lazard International Strategic Equity Portfolio LISIX LISOX Lazard International Small Cap Equity Portfolio LZISX LZSMX Emerging
Markets Lazard Emerging Markets Equity Portfolio LZEMX LZOEX Lazard Developing Markets Equity Portfolio LDMIX LDMOX Lazard Emerging Markets Equity Blend Portfolio EMBIX EMBOX Lazard Emerging Markets Multi-Strategy Portfolio EMMIX EMMOX Lazard Emerging Markets Debt Portfolio LEDIX LEDOX Real
Estate1 Lazard U.S. Realty Income Portfolio LRIIX LRIOX 1 Realty
Income Portfolio, U.S. Realty Portfolio and International Realty Portfolio
are referred to collectively as the “Realty Portfolios.” Institutional
Shares Open
Shares Lazard U.S. Realty Equity Portfolio LREIX LREOX Lazard International Realty Equity Portfolio LITIX LITOX U.S.
Fixed Income Lazard U.S. High Yield Portfolio LZHYX LZHOX Lazard U.S. Municipal Portfolio UMNIX UMNOX Global
Fixed Income Lazard Global Fixed Income Portfolio Tactical
Asset Allocation Lazard Capital Allocator Opportunistic Strategies Portfolio LCAIX LCAOX The
Emerging Markets Multi-Strategy, Emerging Markets Debt, Realty Income, U.S.
Realty, International Realty, Municipal and Global Fixed Income Portfolios
had not yet commenced operations as Portfolios of the Fund in 2010, so
certain information in this SAI is not provided for these Portfolios. Each
Portfolio currently offers two classes of shares—Institutional 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. The fiscal year end of each Portfolio is December 31st. To
obtain a copy of the Fund’s Prospectus, please write or call the Fund at the
address and telephone number above or go to
www.LazardNet.com/lam/us/lazardfunds.shtml. For
the Portfolios other than the Realty Portfolios, the Fund’s most recent Annual
Report and Semi-Annual Report to Shareholders are separate documents supplied
with this SAI, 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 SAI. Prior to the commencement of
operations of the Realty Portfolios, the Realty Income Portfolio, the U.S.
Realty Portfolio and the International Realty Portfolio participated in a
tax-free reorganization with Grubb & Ellis AGA Realty Income Fund, Grubb
& Ellis AGA U.S. Realty Fund and Grubb & Ellis AGA International Realty
Fund (the “Predecessor Funds”), respectively, on September 23, 2011. The most
recent Annual Report to Shareholders for the Predecessor Funds is a separate
document supplied with this SAI, 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 SAI. (ii) TABLE OF CONTENTS Page 1 29 33 51 52 56 57 58 60 60 71 83 84 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, other than the Emerging Markets Debt
Portfolio, the U.S. Realty Portfolio and the International Realty 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. INVESTMENTS, INVESTMENT TECHNIQUES AND RISKS The
following information supplements and should be read in conjunction with the
Fund’s Prospectus. Equity Securities Common
and preferred stocks and other equity securities, such as common limited
partnership units, represent ownership interests in a company. Generally,
preferred stock has a specified dividend and ranks after bonds and before
common stocks in its claim on income for dividend payments and on assets should
the company be liquidated. After other claims are satisfied, common
stockholders and other common equity owners participate in company profits on a
pro-rata basis; profits may be paid out in dividends or reinvested in the
company to help it grow. 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. Increases and decreases in earnings are usually
reflected in the price of a company’s common equity securities, so common
equity securities generally have the greatest appreciation and depreciation
potential of all corporate securities. While common stockholders usually have
voting rights on a number of significant matters, other types of equity
securities, such as preferred stock and common limited partnership units, may
not ordinarily have voting rights. Preferred
Stocks. There are two basic types of preferred securities, traditional and
hybrid-preferred securities. Traditional preferred securities consist of
preferred stock issued by an entity taxable as a corporation. Preferred stocks,
which may offer fixed or floating rate dividends, are perpetual instruments and
considered equity securities. Preferred securities are subordinated to senior
debt instruments in a company’s capital structure, in terms of priority to
corporate income and claim to corporate assets, and therefore will be subject
to greater credit risk than debt instruments. Alternatively, hybrid-preferred
securities may be issued by corporations, generally in the form of
interest-bearing notes with preferred securities characteristics, or by an
affiliated trust or partnership of the corporation, generally in the form of
preferred interests in subordinated debentures or similarly structured
securities. The hybrid-preferred securities market consists of both fixed and
adjustable coupon rate securities that are either perpetual in nature or have
stated maturity dates. Hybrid-preferred securities are considered debt
securities. Due to their similar attributes, the Investment Manager also
considers senior debt perpetual issues, certain securities with convertible
features as well as exchange-listed senior debt issues that trade with
attributes of exchange-listed perpetual and hybrid-preferred securities to be
part of the broader preferred securities market. Traditional
Preferred Securities. Traditional preferred securities
pay fixed or floating dividends to investors and have “preference” over common
stock in the payment of dividends and the liquidation of a company’s assets.
This means that a company must pay dividends on preferred stock before paying
any dividends on its common stock. In order to be payable, distributions on
such preferred securities must be declared by the issuer’s board of directors.
Income payments on preferred securities may be cumulative, causing dividends
and distributions to accumulate even if not declared by the board of directors
or otherwise made payable. In such a case, all accumulated dividends must be
paid before any dividend on the common stock can be paid. However, many
traditional preferred stocks are non-cumulative, in which case dividends do not
accumulate and need not ever be paid. A Portfolio may invest in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make up
any missed payments to its stockholders. There is no assurance that dividends or
distributions on the traditional preferred securities in which a
Portfolio may invest will be declared or otherwise made payable. Preferred
securities may also contain provisions under which payments must be stopped (i.e.,
stoppage is compulsory, not discretionary). The conditions under which this
occurs may relate to, for instance, capitalization levels. Hence, if a company
incurs significant losses that deplete retained earnings automatic payment
stoppage could occur. In some cases the terms of the preferred securities
provide that the issuer would be obligated to attempt to issue common shares to
raise funds for the purpose of making the preferred payments. However, there is
no guarantee that the issuer would be successful in placing common shares. Preferred
stockholders usually have no right to vote for corporate directors or on other
matters. Shares of traditional preferred securities have a liquidation
preference that generally equals the original purchase price at the date of issuance.
The market value of preferred securities may be affected by, among other
factors, favorable and unfavorable changes impacting the issuer or industries
in which they operate, movements in interest rates and inflation, and the
broader economic and credit environments, and by actual and anticipated changes
in tax laws, such as changes in corporate and individual income tax rates.
Because the claim on an issuer’s earnings represented by traditional preferred
securities may become onerous when interest rates fall below the rate payable
on such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, a Portfolio’s holdings of higher
rate-paying fixed rate preferred securities may be reduced, and the Portfolio
may be unable to acquire securities of comparable credit quality paying
comparable rates with the redemption proceeds. Pursuant
to the dividends received deduction, corporations may generally deduct 70% of
the income they receive from dividends on traditional preferred securities
issued by domestic corporations that are paid out of earnings and profits of
the issuer. However, not all traditional preferred securities pay dividends
that are eligible for the dividends received deduction, including preferred
securities issued by real estate investment trusts (“REITs”). Under current
law, individuals will generally be taxed at long-term capital gain rates on
qualified dividend income for taxable years beginning before January 1, 2013.
There can be no assurance that favorable tax treatment of qualified dividend
income will continue following December 31, 2012. However, not all traditional
preferred securities will provide significant benefits under the rules relating
to qualified dividend income, including preferred securities issued by REITs. Hybrid-preferred
securities are typically issued with a final maturity date. In certain
instances, a final maturity date may be extended and/or the final payment of
principal may be deferred at the issuer’s option for a specified time without
default. No redemption can typically take place unless all cumulative payment
obligations have been met, although issuers may be able to engage in
open-market repurchases without regard to whether all payments have been paid. 2 TOPrS is a
registered service mark of Merrill Lynch & Co., Inc. MIPS and QUIDS are
registered services marks, and QUIPS is a service mark, owned by Goldman,
Sachs & Co. QUIBS is a registered service mark owned by Morgan Stanley
& Co. Incorporated. CorTS and PINES are registered service marks owned by
Citigroup Global Markets Inc. 2 Many
hybrid-preferred securities are issued by trusts or other special purpose
entities established by operating companies and are not a direct obligation of
an operating company. At the time the trust or special purpose entity sells
such preferred securities to investors, it purchases debt of the operating
company (with terms comparable to those of the trust or special purpose entity
securities), which enables the operating company to deduct for tax purposes the
interest paid on the debt held by the trust or special purpose entity. The
trust or special purpose entity is generally required to be treated as
transparent for U.S. federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the
hybrid-preferred securities are generally treated as interest rather than
dividends for U.S. federal income tax purposes and, as such, are not eligible
for the dividends received deduction or the reduced rates of tax that apply to
qualified dividend income. The trust or special purpose entity in turn would be
a holder of the operating company’s debt and would have priority with respect
to the operating company’s earnings and profits over the operating company’s
common stockholders, but would typically be subordinated to other classes of
the operating company’s debt. Typically a preferred security has a credit
rating that is lower than that of its corresponding operating company’s senior
debt securities. Within
the category of hybrid-preferred securities are senior debt instruments that
trade in the broader preferred securities market. These debt instruments, which
are sources of long-term capital for the issuers, have structural features
similar to other preferred securities such as maturities ranging from 30 years
to perpetuity, call features, quarterly payments, exchange listings and the
inclusion of accrued interest in the trading price. In
some cases traditional and hybrid securities may include loss absorption
provisions that make the securities more equity like. Events in global
financial markets in recent periods have caused regulators to review the
function and structure of preferred securities more closely. While loss
absorption language is relatively rare in the preferred market today, it may
become much more prevalent. In
one version of a preferred security with loss absorption characteristics, the
liquidation value of the security may be adjusted downward to below the
original par value under certain circumstances. This may occur, for instance,
in the event that business losses have eroded capital to a substantial extent.
The write down of the par value would occur automatically and would not entitle
the holders to seek bankruptcy of the company. Such securities may provide for
circumstances under which the liquidation value may be adjusted back up to par,
such as an improvement in capitalization and/or earnings. Another
preferred structure with loss absorption characteristics is the contingent
capital security (sometimes referred to as “CoCo’s”). These securities provide
for mandatory conversion into common shares of the issuer under certain
circumstances. The mandatory conversion might relate, for instance, to
maintenance of a capital minimum, whereby falling below the minimum would
trigger automatic conversion. Since the common stock of the issuer may not pay
a dividend, investors in these instruments could experience a reduced income
rate, potentially to zero; and conversion would deepen the subordination of the
investor, hence worsening standing in a bankruptcy. In addition, some such
instruments have a set stock conversion rate that would cause an automatic
write-down of capital if the price of the stock is below the conversion price
on the conversion date. Preferred
securities may be subject to changes in regulations and there can be no
assurance that the current regulatory treatment of preferred securities will
continue. 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 3 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. Each Portfolio, other than the Realty
Portfolios, 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. The Realty Portfolios may
invest in warrants as described in the Prospectus. Fixed-Income Securities Fixed-income
securities include interest-bearing securities, such as corporate debt
securities. Interest-bearing securities are investments which promise a stable
stream of income, although the prices of such securities are inversely affected
by changes in interest rates and, therefore, are subject to interest rate risk,
as well as the risk of unrelated market price fluctuations. Fixed-income
securities may have various interest rate payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent, deferred, payment in kind
and auction rate features. Certain 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. Certain fixed income securities may be issued at a discount from
their face value or purchased at a price less than their stated face amount or
at a price less than their issue price plus the portion of “original issue
discount” previously accrued thereon, i.e., purchased at a “market discount.”
The amount of original issue discount and/or market discount on certain
obligations may be significant, and accretion of market discount together with
original issue discount, will cause a Portfolio to realize income prior to the
receipt of cash payments with respect to these securities. To maintain its
qualification as a regulated investment company and avoid liability for federal
income taxes, a Portfolios 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. The
values of fixed-income securities also may be affected by changes in the credit
rating or financial condition of the issuer. Once the rating of a portfolio
security has been changed, a Portfolio will consider all circumstances deemed
relevant in determining whether to continue to hold the security. Fixed-income
securities rated below investment grade by Moody’s Investors Service, Inc.
(“Moody’s”) or Standard & Poor’s Ratings Services (“S&P” and together
with Moody’s, the “Rating Agencies”) may be subject to greater risks with
respect to the issuing entity and 4 As
a measure of a fixed-income security’s cash flow, duration is an alternative to
the concept of “term to maturity” in assessing the price volatility associated
with changes in interest rates (interest rate risk). Generally, the longer the
duration, the more volatility an investor should expect. For example, the
market price of a bond with a duration of three years would be expected to
decline 3% if interest rates rose 1%. Conversely, the market price of the same
bond would be expected to increase 3% if interest rates fell 1%. The market price
of a bond with a duration of six years would be expected to increase or decline
twice as much as the market price of a bond with a three-year duration.
Duration is a way of measuring a security’s maturity in terms of the average
time required to receive the present value of all interest and principal
payments as opposed to its term to maturity. The maturity of a security
measures only the time until final payment is due; it does not take account of
the pattern of a security’s cash flows over time, which would include how cash
flow is affected by prepayments and by changes in interest rates. Incorporating
a security’s yield, coupon interest payments, final maturity and option
features into one measure, duration is computed by determining the weighted average
maturity of a bond’s cash flows, where the present values of the cash flows
serve as weights. In computing the duration of a Portfolio, the Investment
Manager will estimate the duration of obligations that are subject to features
such as prepayment or redemption by the issuer, put options retained by the
investor or other embedded options, taking into account the influence of
interest rates on prepayments and coupon flows. Average
weighted maturity is the length of time, in days or years, until the securities
held by a Portfolio, on average, will mature or be redeemed by their issuers.
The average maturity is weighted according to the dollar amounts invested in
the various securities by the Portfolio. In general, the longer a Portfolio’s
average weighted maturity, the more its share price will fluctuate in response
to changing interest rates. For
purposes of calculating average effective portfolio maturity, a security that
is subject to redemption at the option of the issuer on a particular date (the
“call date”) which is prior to the security’s stated maturity may be deemed to
mature on the call date rather than on its stated maturity date. The call date
of a security will be used to calculate average effective portfolio maturity when
the Investment Manager reasonably anticipates, based upon information available
to it, that the issuer will exercise its right to redeem the security. The
Investment Manager may base its conclusion on such factors as the interest rate
paid on the security compared to prevailing market rates, the amount of cash
available to the issuer of the security, events affecting the issuer of the
security, and other factors that may compel or make it advantageous for the
issuer to redeem a security prior to its stated maturity. U.S.
Government Securities. U.S. Government securities are issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. U.S. Government
securities include Treasury bills, Treasury notes and Treasury bonds, which differ
in their interest rates, maturities and times of issuance. Treasury bills have
initial maturities of one year or less; Treasury notes have initial maturities
of one to ten years; and Treasury bonds generally have initial maturities of
greater than ten years. Some obligations issued or guaranteed by U.S.
Government agencies and instrumentalities are supported by the full faith and
credit of the U.S. Treasury; others by the right of the issuer to borrow from
the Treasury; others by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; and others only
by the credit of the agency or instrumentality. These securities bear fixed,
floating or variable rates of interest. While the U.S. Government currently
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since
it is not so obligated by law. A security backed by the U.S. Treasury or the
full faith and credit of the United States is guaranteed only as to timely
payment of interest and principal when held to maturity. Neither the market
value nor a Portfolio’s share price is guaranteed. On
August 5, 2011, S&P lowered its long-term sovereign credit rating for the
United States of America to “AA+” from “AAA.” The value of shares of a
Portfolio that invests in U.S. government obligations may be adversely affected
by S&P’s downgrade or any future downgrades of the U.S. government’s credit
rating. While the long-term impact of the downgrade is uncertain, it could, for
example, lead to increased volatility in the short-term. Corporate
Debt Securities. Corporate debt securities include corporate bonds,
debentures, notes and other similar instruments, including certain convertible
securities. Debt securities may be acquired with warrants attached to purchase
additional fixed-income securities at the same coupon rate. A decline in
interest rates would permit a 5 Ratings
of Securities. Subsequent to its purchase by a Portfolio, an issue of rated
securities may cease to be rated or its rating may be reduced below any minimum
that may be required for purchase by the Portfolio. Neither event will require
the sale of such securities by the Portfolio, but the Investment Manager will
consider such event in determining whether the Portfolio should continue to
hold the securities. To the extent the ratings given by a Rating Agency for any
securities change as a result of changes in such organizations or their rating
systems, a Portfolio will attempt to use comparable ratings as standards for
its investments in accordance with any investment policies described in such
Portfolio’s prospectus and this SAI. The ratings of the Rating Agencies
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality. Although these
ratings may be an initial criterion for selection of portfolio investments, the
Investment Manager also will evaluate these securities and the creditworthiness
of the issuers of such securities based upon financial and other available
information. Lower-Rated
Securities (Emerging Markets Multi-Strategy, Emerging Markets Debt, Realty
Income, U.S. Realty, International Realty, High Yield, Municipal and Global
Fixed Income Portfolios only). 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 a 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. Each of
the Realty Portfolios is limited to investing 20% of its assets in
non-investment grade fixed income obligations. The Global Fixed Income
Portfolio is limited to investing 15% of its assets in securities that are
rated below investment grade or the unrated equivalent as determined by the
Investment Manager. 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 Portfolios anticipate 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 a 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 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 6 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. A
Portfolio may acquire these securities during an initial offering. Such
securities may involve special risks because they are new issues. The
Portfolios do 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 preferred, convertible, 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. Variable
and floating rate securities frequently include a demand feature entitling the
holder to sell the securities to the issuer at par. In many cases, the demand
feature can be exercised at any time on seven days notice. In other cases, the
demand feature is exercisable at any time on 30 days notice or on similar
notice at intervals of not more than one year. Some securities that do not have
variable or floating interest rates may be accompanied by puts producing
similar results and price characteristics. Each
Portfolio may purchase 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 purchase 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. 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
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.” 7 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. Mortgage-related
securities are complex 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. 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 8 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
known 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. In
September 2008, due to the value of FNMA’s and FHLMC’s securities falling
sharply and concerns that the firms did not have sufficient capital to offset
losses resulting from the mortgage crisis, the Federal Housing Finance Agency
(“FHFA”) placed FNMA and FHLMC into conservatorship. The effect of this
conservatorship will have on the Fund’s securities is unclear. In addition to
placing the companies in conservatorship, the U.S. Treasury announced three
additional steps that it intended to take with respect to FNMA and FHLMC.
First, the U.S. Treasury agreed to provide up to $200 billion of capital as
needed to ensure that FNMA and FHLMC each maintains a positive net worth and is
able to fulfill their financial obligations. Second, the U.S. Treasury established
a new secured lending facility available to FNMA and FHLMC. Third, the U.S.
Treasury initiated a temporary program to purchase FNMA and FHLMC
mortgage-backed securities. The secured lending facility and the temporary
purchase program terminated on December 31, 2009. However, the U.S. Treasury
announced in December 2009 that it would permit its funding commitment to
increase as necessary to prevent any cumulative reduction in net worth of FNMA
and FHLMC for the next three years. No assurance can be given that the U.S.
Treasury initiatives will be successful. 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 9 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 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 mortgages.
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 multi-class 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 10 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 (“CMO Residuals”). 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. 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. Asset-Backed
Securities (Emerging Markets Multi-Strategy, Emerging Markets Debt, Realty
Income, U.S. Realty, International Realty, High Yield, Municipal and Global
Fixed Income Portfolios only). 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 11 Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities may provide a 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 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. Municipal Securities (Realty Income, U.S. Realty, International Realty,
High Yield, Municipal and Global Fixed Income Portfolios only). Under
normal circumstances, the Municipal Portfolio invests at least 80% of the value
of its net assets, plus any borrowings for investment purposes, in U.S.
municipal securities, the interest on which is, in the opinion of the issuer’s
counsel at the time of issuance, exempt from regular federal income tax
(“Municipal Securities”). Each of Realty Income, U.S. Realty, International
Realty, High Yield and Global Fixed Income Portfolios also may invest in
Municipal Securities. Municipal Securities 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
behalf of public authorities. Municipal Securities 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 Securities include municipal lease/purchase agreements which are
similar to installment purchase contracts for property or equipment issued by
municipalities. Municipal Securities bear fixed, floating or variable rates of
interest which are determined in some instances by formulas under which the
Municipal Securities’ 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. For
the purpose of diversification under the Investment Company Act of 1940, as
amended (the “1940 Act”), the identification of the issuer of Municipal
Securities depends on the terms and conditions of the security. When the assets
and revenues of an agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the subdivision
and the security is backed only by the assets and revenues of the subdivision,
such subdivision would be deemed to be the sole issuer. Similarly, in the case
of an industrial development bond, if that bond is backed only by the assets
and revenues of the non-governmental user, then such 12 non-governmental
user would be deemed to be the sole issuer. If, however, in either case, the
creating government or some other entity guarantees a security, such a guaranty
would be considered a separate security and will be treated as an issue of such
government or other entity. The
yields on Municipal Securities are dependent on a variety of factors, including
general economic and monetary conditions, conditions in the Municipal
Securities market, size of a particular offering, maturity of the obligation
and rating of the issue and certain other factors. While, in general, Municipal
Securities are tax exempt securities having relatively low yields as compared
to taxable, non-Municipal Securities of similar quality, certain Municipal
Securities 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 of Portfolios other than the
Municipal Portfolio which are attributable to interest income received by the
Portfolios from Municipal Securities generally will be subject to federal
income tax. Each Portfolio other than the Municipal Portfolio may invest in
Municipal Securities, the ratings of which correspond with the ratings of other
permissible investments for the Portfolio. The High Yield Portfolio currently
intends to invest no more than 25% of its assets in Municipal Securities.
However, this percentage may be varied from time to time without shareholder
approval. The
Municipal Portfolio may invest more than 25% of the value of its total assets
in Municipal Securities which are related in such a way that an economic,
business or political development or change affecting one such security also
would affect the other securities, such as securities whose issuers are located
in the same state and securities the interest upon which is paid from revenues
of similar types of projects. These investments may make the Portfolio more
susceptible than another fund that does not follow this practice to: funding
issues of the relevant state or states; federal or state legislation, or
proposed legislation, involving the financing of such projects; pending court
decisions relating to the validity of the projects or their financing;
predicted or foreseeable shortages or price increases of materials needed or
the projects; and declining markets or needs for the projects. As the similarity
in issuers increases, the potential for fluctuations in the Portfolio’s net
asset value also may increase. Municipal
Securities include certain private activity bonds (a type of revenue bond), the
income from which is subject to the federal alternative minimum tax. The
Municipal Portfolio may invest without limitation in such Municipal Securities. Certain
provisions in the Internal Revenue Code of 1986, as amended (the “Code”),
relating to the issuance of Municipal Securities may reduce the volume of
Municipal Securities qualifying for federal tax exemption. One effect of these
provisions could be to increase the cost of the Municipal Securities available
for purchase by the Municipal Portfolio and thus reduce available yield. Shareholders
should consult their tax advisers concerning the effect of these provisions on
an investment in the Portfolio. Proposals that may restrict or eliminate the
income tax exemption for interest on Municipal Securities may be introduced in
the future. If any such proposal were enacted that would reduce the
availability of Municipal Securities for investment by the Municipal Portfolio
so as to adversely affect Portfolio shareholders, the Portfolio would
reevaluate its investment objective and policies and submit possible changes in
the Portfolio’s structure to shareholders for their consideration. Municipal
Lease Obligations (Realty Income, U.S. Realty,
International Realty, Municipal and Global Fixed Income Portfolios only).
Municipal lease obligations or installment purchase contract obligations
(collectively, “lease obligations”) may take the form of a lease, installment
purchase or a conditional sale contract and are issued by state and local
governments and authorities to acquire land or a wide variety of equipment and
facilities. Lease obligations have special risks not ordinarily associated with
Municipal Securities. Although lease obligations do not constitute general
obligations of the municipality for which the municipality’s taxing power is
pledged, a lease obligation ordinarily is backed by the municipality’s covenant
to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations in which the Portfolio may
invest may contain “non-appropriation” clauses, which provide that the
municipality has no obligation to make lease or installment purchase 13 payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although “non-appropriation” lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. Certain lease obligations may be illiquid. Determination as to the
liquidity of such securities is made in accordance with guidelines established
by the Fund’s Board of Directors (the “Board”). Zero Coupon, Pay-In-Kind and Step Up Securities (Emerging Markets
Multi-Strategy, Emerging Markets Debt, Realty Income, U.S. Realty,
International Realty, High Yield, Municipal and Global Fixed Income Portfolios only). Each
of the Portfolios may invest in zero coupon securities, which are securities
issued or sold at a discount from their face value that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified
redemption date or cash payment date; pay-in-kind bonds, which are bonds that
generally pay interest through the issuance of additional bonds; and step-up
coupon bonds, which are debt securities that 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, a 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, a
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. Foreign Securities Foreign
investments involve risks unique to the local political, economic, and
regulatory structures in place, as well as the potential for social
instability, military unrest, or diplomatic developments that could prove
adverse to the interests of U.S. investors. Individual foreign economies can
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. In addition,
significant external political and economic risks currently affect some foreign
countries. For example, both Taiwan and China still claim sovereignty over one
another and there is a demilitarized border and hostile relations between North
and South Korea. War and terrorism affect many countries, especially those in
Africa and the Middle East. Many countries throughout the world are dependent
on a healthy U.S. economy and are adversely affected when the U.S. economy
weakens or its markets decline. For example, in 2007 and 2008, the meltdown in
the U.S. subprime mortgage market quickly spread throughout global credit
markets, triggering a liquidity crisis that affected fixed-income and equity
markets around the world. European countries can be significantly affected by
the tight fiscal and monetary controls that the European Economic and Monetary
Union (“EMU”) imposes for membership. Europe’s economies are diverse, its
governments are decentralized, and its cultures vary widely. In 2010, several
EMU countries, including Greece, Ireland, Italy, Spain and Portugal, began to
face budget issues, which have adversely affected the sovereign debt 14 issued by
these countries and may have negative long-term effects for the economies of
those countries and other EMU countries. There is continued concern about
national-level support for the euro and the accompanying coordination of fiscal
and wage policy among EMU member countries. Member countries are required to
maintain tight control over inflation, public debt and budget deficit to
qualify for membership in the EMU. These requirements can severely limit EMU
member countries’ ability to implement monetary policy to address regional
economic conditions. 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. 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. Emerging
Markets. Each Portfolio may invest in emerging markets as described in the
Prospectus. Investments in, or economically tied to, emerging market countries
may be subject to potentially higher risks than investments in companies in
developed countries. Risks of investing in emerging markets and emerging market
securities include (in addition to those described above): less social,
political and economic stability; less diverse and mature economic structures;
the lack of publicly available information, including reports of payments of
dividends or interest on outstanding securities; certain national policies that
may restrict a Portfolio’s investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
local taxation; the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; the absence until recently, in certain countries, of a capital
structure or market-oriented economy; the possibility that recent favorable
economic developments in certain countries may be slowed or reversed by
unanticipated political or social events in these countries; restrictions that
may make it difficult or impossible for a Portfolio to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts; the risk of uninsured loss due to lost, stolen, or counterfeit stock
certificates; possible losses through the holding of securities in domestic and
foreign custodial banks and depositories; heightened opportunities for
governmental corruption; large amounts of foreign debt to finance basic
governmental duties that could lead to restructuring or default; and heavy
reliance on exports that may be severely affected by global economic downturns. In
addition, some countries in which a Portfolio may invest 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 negative effects on the economies and securities markets of
certain countries. Further, the economies of emerging market countries
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by trade barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade. Other
than for the purpose of a Portfolio’s policy with respect to the investment of
80% of its assets, 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: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia,
Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan,
Thailand and Turkey. For purposes of each of Emerging Markets Portfolio’s,
Developing Markets Portfolio’s and Emerging Markets Blend 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 a
Portfolio may invest in other countries with its remaining assets). For
purposes of Emerging Markets Multi-Strategy Portfolio’s policy to invest at
least 80% of its net assets in securities and other investments that are
economically tied to 15 emerging
market countries and Emerging Markets Debt Portfolio’s policy to invest at
least 80% of its net assets in debt securities that are economically tied to
emerging market countries, emerging market countries include all countries not
represented by the MSCI World Index. Depositary
Receipts. Each Portfolio, to the extent it may invest in foreign
securities, 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. The Realty Portfolios also may invest in
European Depositary Receipts (“EDRs”). EDRs, in bearer form, are designed for
use in the European securities markets. 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, to the extent it may invest in foreign securities, 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. Real Estate Investment Trusts and Other Realty Companies A
REIT is a corporation, or a business trust that would otherwise be taxed as a
corporation, which meets the definitional requirements of 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. 16 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 1940 Act. A
Portfolio’s investments in REITs may be adversely affected by deteriorations of
the real estate rental market, in the case of REITs that primarily own real
estate, or by deteriorations in the creditworthiness of property owners and
changes in interest rates in the case of REITs that primarily hold mortgages.
Equity and mortgage REITs also are dependent upon specialized management
skills, may not be diversified in their holdings and are subject to the risks
of financing projects. REITs also may be subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. The
Realty Portfolios focus their investments in, and the other Portfolios may
invest in, (to the extent consistent with their investment objectives,
strategies and policies), securities of Realty Companies (as defined in the
Prospectus). Risks of Realty Companies include: declines in the value of real
estate; adverse general, regional or local economic conditions; overbuilding
and increased competition; increases in property taxes and operating expenses;
changes in zoning laws; casualty or condemnation losses; variations in rental
income, neighborhood values or the appeal of properties to tenants; and changes
in interest rates. Real estate-related companies also may be subject to
liabilities under environmental and hazardous waste laws, which could
negatively affect their value. Property values may fall due to increasing
vacancies or declining rents resulting from economic, legal, cultural or
technological developments. The price of Realty Companies’ investments also may
drop because of the failure of borrowers to pay their loans and poor
management. Real estate-related companies may be affected by a high level of
continuing capital expenditures, competition or increases in operating costs,
which may not be offset by increases in revenues. The value and successful
operation of certain types of commercial properties may be affected by a number
of factors, such as the location of the property, the knowledge and experience
of the management team, the level of mortgage rates, presence of competing
properties and adverse economic conditions in the locale. Many real
estate-related companies use leverage, which increases investment risk and
could adversely affect a company’s operations and market value in periods of
rising interest rates as well as risks normally associated with debt financing. A
Portfolio’s investments in REITs can be adversely affected by deteriorations of
the real estate rental market, in the case of REITs that primarily own real
estate, or by deteriorations in the creditworthiness of property owners and
changes in interest rates and the availability of credit, in the case of REITs
that primarily hold mortgages. Equity and mortgage REITs also are dependent
upon specialized management skills, may not be diversified in their holdings
and are subject to the risks of financing projects. REITs also may be subject
to heavy cash flow dependency, defaults by borrowers and self-liquidation. In
addition, there are risks associated with particular types of Realty Companies
investments: Retail
Properties. Retail properties are affected by the overall health of the
applicable sector of the economy and may be adversely affected by the growth of
alternative forms of retailing, bankruptcy, departure or cessation of
operations of a tenant, a shift in consumer demand due to demographic changes,
spending patterns and lease terminations. Office
Properties. Office properties are affected by the overall health of the
economy and other factors such as a downturn in the businesses operated by
their tenants, obsolescence and noncompetitiveness. Lodging
and Hotel Properties. The risks of lodging and hotel properties include,
among other things, the necessity of a high level of continuing capital
expenditures, competition, increases in operating costs, which may not be
offset by increases in revenues, dependence on business and commercial
travelers and tourism, increases in fuel costs and 17 other expenses
of travel and adverse effects of general and local economic conditions. Lodging
and hotel properties tend to be more sensitive to adverse economic conditions
and competition than many other commercial properties. Healthcare
Properties. Healthcare properties and healthcare providers are affected by
several significant factors, including: federal, state and local laws governing
licenses, certification, adequacy of care, pharmaceutical distribution, rates,
equipment, personnel and other factors regarding operations; continued
availability of revenue from government reimbursement programs (primarily
Medicaid and Medicare); and competition on a local and regional basis. The
failure of any healthcare operator to comply with governmental laws and
regulations may affect its ability to operate its facility or receive
government reimbursements. Multifamily
Properties. The value and successful operation of a multifamily property
may be affected by a number of factors such as the location of the property,
the ability of the management team, the level of mortgage rates, presence of
competing properties, adverse economic conditions in the locale, oversupply and
rent control laws or other laws affecting such properties. Homebuilding.
Homebuilding businesses are affected by several significant factors, including:
rising costs and decreased availability of suitable land; costs of construction
labor and materials; overbuilding and price competition; consumer demand and
confidence; labor availability, including strikes; availability of construction
financing and residential mortgages; and related interest rates and
availability of credit. Gaming.
The risks of gaming businesses include, among other things, state and local
laws governing gaming licenses, risks similar to those of lodging and hotel
properties, general and local economic conditions and consumer confidence. Restaurants.
The risks of restaurant businesses are that they are more sensitive to adverse
economic conditions and competition than many other businesses, changing consumer
tastes, and commodity and labor costs and, in some instances, risks similar to
those of the lodging and hotel properties. Natural
Resources. Natural resources business are affected by several significant
factors, including: demand and price fluctuations for the natural resource
products; the time and expenses of exploration, acquisition and development;
the necessity of a high level of continuing capital expenditures, competition
and increases in operating costs which may not be offset by increases in
revenues; national, regional, state and local laws governing licenses and
permits; political and community opposition; energy costs and other required
commodities; and environmental and hazardous waste issues, including costs of
regulatory compliance and remediation. Utility
Companies. Utility companies are subject to a variety of risk factors that
may adversely affect their business or operations, including: high interest
costs in connection with capital construction and improvement programs;
difficulty in raising capital in adequate amounts on reasonable terms in
periods of high inflation and unsettled capital markets; governmental
regulation of rates charged to customers; costs associated with the reduced
availability of certain types of fuel, occasionally reduced availability and
high costs of natural gas for resale, and the effects of energy conservation
policies; and inexperience with and potential losses resulting from a
developing deregulatory environment. Insurance
Issues. Certain companies may carry comprehensive liability, fire, flood,
earthquake, extended coverage and rental loss insurance with various policy
specifications, limits and deductibles, but uninsured losses would affect
profits, cash flows and performance. Financing
and Credit. Real estate-related companies may be adversely affected by a
lack of available financing or tightening of credit. Financial
Leverage. Real estate-related companies may be highly leveraged, and
financial covenants may affect the ability of such companies to operate
effectively. Environmental
Issues. In connection with the ownership (direct or indirect), operation,
management and development of real properties that may contain hazardous or
toxic substances, a real estate-related company may be 18 considered an
owner, operator or responsible party of such properties and, therefore, may be
potentially liable for removal or remediation costs, as well as certain other
costs, including governmental fines and liabilities for injuries to persons and
property. The existence of any such material environmental liability could have
a material adverse effect on the results of operations and cash flow of any
such company. REIT
Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. A Portfolio might invest in a real estate company that
purports to be a REIT and then the company unexpectedly could fail to qualify
as a REIT. In the event of any such unexpected failure to qualify as a REIT,
the company would be subject to corporate-level taxation, significantly
reducing the return to a Portfolio on the Portfolio’s investment in such
company. REITs could possibly fail to qualify for tax-free pass-through of
income under the Code, or to maintain their exemptions from registration under
the 1940 Act. The above enumerated risks may also adversely affect a borrower’s
or a lessee’s ability to meet its obligations to the REIT. If a REIT’s
borrowers or lessees default, the REIT may experience delays in enforcing its
rights as a mortgagee or lessor and may incur substantial costs associated with
protecting its investments. Investment Companies, Exchange-Traded Funds and Exchange-Traded Notes 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 (such limits do not apply to investments in money market funds).
However, Section 12(d)(1)(F) of the 1940 Act provides that these provisions
shall not apply to securities purchased or otherwise acquired by a Portfolio if
(a) immediately after such purchase or acquisition not more than 3% of the
total outstanding shares of such investment company is owned by the Portfolio
and all affiliated persons of the Portfolio; and (b) the Portfolio has not
offered or sold, and is not proposing to offer or sell, its shares through a
principal underwriter or otherwise at a public or offering price that includes
a sales load of more than 1½%. Rule 12d1-3 under the 1940 Act provides,
however, that a Portfolio may rely on the Section 12(d)(1)(F) exemption and
charge a sales load in excess of 1½% provided that the sales load and any
service fee charged does not exceed limits set forth in applicable rules of the
Financial Industry Regulatory Authority, Inc. (“FINRA”). In addition, if a
Portfolio invests in investment companies, including any exchange-traded funds
(“ETFs”) which are investment companies, pursuant to Section 12(d)(1)(F), it
must comply with the following voting restrictions: when the Portfolio
exercises voting rights, by proxy or otherwise, with respect to investment
companies owned by the Portfolio, the Portfolio will either seek instruction
from the Portfolio’s shareholders with regard to the voting of all proxies and
vote in accordance with such instructions, or vote the shares held by the
Portfolio in the same proportion as the vote of all other holders of the
securities of the investment company. In addition, an investment company
purchased by a Portfolio pursuant to Section 12(d)(1)(F) shall not be required
to redeem its shares in an amount exceeding 1% of such investment company’s
total outstanding shares in any period of less than thirty days. The
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. In
addition to the management and operational fees the Portfolios bear directly in
connection with their own operation, each Portfolio will also bear its pro rata
portion of the advisory and operational expenses incurred indirectly through
its investments in other investment companies. 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 Capital Allocator 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 Capital Allocator Portfolio does not intend to limit its 19 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 Capital Allocator Portfolio will investment in approximately 10 to 30
Underlying Funds. With
respect to the Capital Allocator Portfolio’s investments in ETFs, 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
Capital Allocator 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. Exchange-Traded
Funds. Investments in investment companies may include shares
of 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 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. Exchange-Traded
Notes. Exchange-traded notes (“ETNs”) are debt securities that combine
certain aspects of ETFs and bonds. ETNs are not investment companies and thus
are not regulated under the 1940 Act. ETNs, like ETFs, are listed on exchanges
and generally track specified market indexes, and their value depends on the
performance of the underlying index and the credit rating of the issuer. ETNs
may be held to maturity, but unlike bonds there are no periodic interest
payments and principal is not protected. Master Limited Partnerships (Global Listed Infrastructure, Realty
Income and Capital Allocator 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 20 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-to-one 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. Each
Portfolio’s investments in MLPs is anticipated to consist primarily of
“qualified publicly traded partnerships” (“QPTPs”) that do not generate
non-qualifying income for the purposes of satisfying the Portfolio’s “gross
income test,” as further discussed in the Taxation section of this SAI. 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 21 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. Illiquid
securities may be difficult to value accurately, and 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. Money Market Instruments; Temporary Defensive Positions Repurchase
Agreements. Repurchase agreements are transactions by which a Portfolio
purchases a security and simultaneously commits to resell that security to the
seller at a mutually agreed upon time and price. The repurchase price may be
higher than the purchase price, the difference being income to a Portfolio, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to a Portfolio together with the repurchase price on repurchase. In
either case, the income to a Portfolio is unrelated to the interest rate on the
security itself. The Portfolios will generally enter into repurchase agreements
of short durations, from overnight to one week, although the underlying
securities generally have longer maturities. Bank
Debt Instruments. Bank debt instruments in which the Portfolios may invest
consist of certificates of deposit, banker’s acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or by banks or institutions, the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from 14 days to one year) at a stated or
variable interest rate. Banker’s acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been drawn on it by a
customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits
are non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Obligations
of U.S. branches of foreign banks may be general obligations of the parent bank
in addition to the issuing branch, or may be limited by the terms of a specific
obligation or by federal or state regulation as well as governmental action in
the country in which the foreign bank has its head office. A domestic branch of
a foreign bank with assets in excess of $1 billion may or may not be subject to
reserve requirements imposed by the Federal Reserve System or by the state in
which the branch is located if the branch is licensed in that state. In
addition, federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets 22 Commercial
Paper. Commercial paper consists of short-term (usually from one to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. Certain notes may have floating or variable rates.
Variable and floating rate notes with a demand notice period exceeding seven
days will be subject to a Portfolio’s policy with respect to illiquid
investments unless, in the judgment of the Funds, such note is considered to be
liquid. 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 33⅓% 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, International Equity, Realty Income, U.S. Realty and International Realty
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 Realty 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 33⅓%
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. 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 33⅓% 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” 23 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 (All Portfolios, except Small-Mid Cap Portfolio) 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 less expensive, 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 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. Pursuant
to regulations and/or published positions of the SEC, a Portfolio may be
required to segregate permissible liquid assets, or engage in other measures
approved by the SEC or its staff, to “cover” the Portfolio’s obligations
relating to its transactions in derivatives. For example, in the case of
futures contracts or forward contracts that are 24 Futures Transactions—In 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. 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, International Equity and Municipal 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. Capital
Allocator Portfolio may buy and sell commodity futures. A commodity futures
contract is an agreement between two parties in which one party agrees to buy a
commodity, such as an energy, agricultural or metal commodity, from the other
party at a later date at a price and quantity agreed-upon when the contract is
made. The commodities which underlie commodity futures contracts may be subject
to additional economic and non-economic variables, such as drought, weather,
embargoes, tariffs, and international economic, political and regulatory
developments. These factors may have a larger impact on commodity prices and
commodity-linked instruments, including futures contracts, than on traditional
securities. Certain commodities are also subject to limited pricing 25 flexibility
because of supply and demand factors. Others are subject to broad price
fluctuations as a result of the volatility of the prices for certain raw
materials and the instability of supplies of other materials. These factors,
when applicable, can be expected to impact related commodity futures contracts. Options—In
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. 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 26 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 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. 27 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 SAI. 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. 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,
other than with respect to Capital Allocator Portfolio, has no current
intention of engaging in short sales and will not do so without prior approval
of the Fund’s Board. 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 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. 28 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. A Portfolio may engage in forward commitments to increase the Portfolio’s
financial exposure to the types of securities in which it invests, which would
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 a Portfolio have
more than 33⅓% 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. Each
of these Portfolios may purchase securities of companies in initial public
offerings (“IPOs”) or shortly thereafter. An IPO is a company’s first offering
of equity securities to the public. Shares are given a market value reflecting
expectations for the corporation’s future growth. Special rules of FINRA apply to
the distribution of IPOs. Companies offering securities in IPOs generally 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 (All Portfolios except International Equity,
International Equity Select, High Yield and Municipal Portfolios) The
prices of securities of smaller capitalization companies 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. 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) 29 For
purposes of the Emerging Markets Multi-Strategy Portfolio’s policy in (viii)
and the Emerging Markets Debt Portfolio’s policy in (ix) in the preceding paragraph,
the Investment Manager generally considers an instrument to be economically
tied to an emerging market country if the issuer or guarantor is a government
of an emerging market country (or any political subdivision, agency, authority
or instrumentality of such government), if the issuer or guarantor is organized
under the laws of an emerging market country, or if the currency of settlement
of the security is a currency of an emerging market country. With respect to
derivative instruments, the Investment Manager generally considers such
instruments to be economically tied to emerging market countries if the
underlying assets are currencies of emerging market countries (or baskets or
indexes of such currencies), or instruments or securities that are issued or
guaranteed by governments of emerging market countries or by entities organized
under the laws of emerging market countries. Portfolios Other Than the Realty Portfolios The
investment objective of each Portfolio is a fundamental policy, which cannot be
changed without approval by the holders of a majority of the Portfolio’s
outstanding voting securities (as defined in the 1940 Act). In addition, each
Portfolio other than the Realty Portfolios (except as noted) has adopted
investment restrictions numbered 1 through 9 below 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 below are not
fundamental policies and may be changed, as to a Portfolio, by vote of a
majority of the Fund’s Board at any time. None
of these 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, Global Listed Infrastructure, International Equity
Select, International Strategic, International Small Cap, Emerging Markets,
Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy,
Emerging Markets Debt, High Yield, Municipal, Global Fixed Income and Capital
Allocator 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 30 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 33⅓%
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, Global Listed
Infrastructure, International Equity Select, International Strategic,
Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy,
Emerging Markets Debt, High Yield, Municipal, Global Fixed Income and Capital
Allocator Portfolios, invest in illiquid securities as defined in “Certain
Portfolio Securities—Illiquid 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 (except that the Global Listed
Infrastructure Portfolio will invest over 25% of its assets in industries
represented by infrastructure companies), 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,
Global Listed Infrastructure, International Equity Select, International
Strategic, International Small Cap, Emerging Markets, Developing Markets,
Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging Markets
Debt, High Yield, Municipal, Global Fixed Income and Capital Allocator
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, Global Listed Infrastructure,
International Equity Select, International Strategic, International Small
Cap, Emerging Markets, Developing Markets, Emerging Markets Blend, Emerging
Markets Multi-Strategy, Emerging Markets Debt, High Yield, Municipal, Global
Fixed Income and Capital Allocator 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, Emerging Markets Multi-Strategy, Emerging Markets
Debt, High Yield, Global Fixed Income and Capital Allocator Portfolios may
purchase or sell foreign currency forward exchange contracts); and
(C) for all Portfolios except Equity Value, Strategic Equity, Mid Cap,
Global Listed Infrastructure, International Equity Select, International
Strategic, Developing Markets, Emerging Markets Blend, Emerging Markets
Multi-Strategy, Emerging Markets Debt, High Yield, Municipal, Global Fixed
Income and Capital Allocator 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, Global Listed Infrastructure, International Equity Select, International
Strategic, Developing Markets, Emerging Markets Blend, Emerging Markets
Multi-Strategy, Emerging Markets Debt, High Yield, Municipal, Global Fixed
Income and Capital Allocator 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 31 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. pledge,
hypothecate, mortgage or otherwise encumber its assets other than to secure
permitted borrowings or to the extent related to investments in options,
forward contracts, futures contracts and options thereon, swaps and other
permissible investments, as applicable to each Portfolio (including, but not
limited to, the deposit of assets in escrow and collateral or initial or
variation margin arrangements); 11. for Equity
Value, Strategic Equity, Mid Cap, Global Listed Infrastructure, International
Equity Select, International Strategic, Developing Markets, Emerging Markets
Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, High Yield,
Municipal, Global Fixed Income and Capital Allocator Portfolios, invest in
illiquid securities as defined in “Certain Portfolio Securities—Illiquid
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 Equity
Value, Strategic Equity, Mid Cap, Global Listed Infrastructure, International
Equity Select, International Strategic, Developing Markets, Emerging Markets
Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, High Yield,
Municipal, Global Fixed Income and Capital Allocator Portfolios, invest in
interests in or leases relating to oil, gas, or other mineral exploration or
development programs; 14. for
International Equity Select Portfolio, make short sales of securities; or 15. 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 33⅓% 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. For purposes of Investment Restriction
No. 5, Municipal Securities issued by states, municipalities and other
political subdivisions, agencies, authorities and instrumentalities of states
and multistate agencies and authorities are not subject to industry
concentration restrictions. Realty Portfolios The
Realty Portfolios have adopted investment restrictions numbered 1 through 6
below as fundamental policies. These restrictions cannot be changed without
approval by the holders of a majority of the Portfolio’s outstanding voting securities
(as defined in the 1940 Act). Investment restrictions numbered 7 and 8 below
are not fundamental policies and may be changed, as to a Portfolio, by the
Board, but the change will only be effective after notice is given to
shareholders of the applicable Portfolio. None of the
Realty Portfolios may: 1. issue senior
securities, borrow money or pledge its assets, except that (i) the Portfolio
may borrow from banks in amounts not exceeding one-third of its total assets
(including the amount borrowed); and (ii) this restriction 32 shall not
prohibit the Portfolio from engaging in options, forward contracts, futures
contracts and options thereon, swaps, short sales or other permissible
investments; 2. underwrite
the securities of other issuers (except that the Portfolio may engage in
transactions involving the acquisition, disposition or resale of its
portfolio securities under circumstances where it may be considered to be an
underwriter under the Securities Act); 3. purchase or
sell real estate or interests in real estate, unless acquired as a result of
ownership of securities (although the Portfolio may purchase and sell
securities which are secured by real estate and securities of companies that
invest or deal in real estate); 4. purchase or
sell physical commodities or commodities contracts, unless acquired as a
result of ownership of securities or other instruments and provided that this
restriction does not prevent the Portfolio from engaging in transactions
involving currencies and futures contracts and options thereon or investing
in securities or other instruments that are secured by physical commodities; 5. make loans
of money (except for the lending of its portfolio securities, purchases of
debt securities consistent with the investment policies of the Portfolio and
except for repurchase agreements); 6. invest in
the securities of any one industry if as a result, more than 25% of the
Portfolio’s total assets would be invested in the securities of such
industry, except that (a) the foregoing does not apply to securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities; and
(b) the Portfolio shall invest more than 25% of its total assets in
securities of Realty Companies to the extent disclosed in the Portfolio’s
Prospectus and this SAI. * * * 7. with respect
to Investment Restriction 1 above, purchase portfolio securities while
outstanding borrowings exceed 5% of its assets; or 8. invest more
than 15% of the value of its net assets, computed at the time of investment,
in illiquid securities. Illiquid securities are those securities without
readily available market quotations, including repurchase agreements having a
maturity of more than seven days. Illiquid securities may include restricted
securities not determined by the Board to be liquid, non-negotiable time
deposits, over-the-counter options, and repurchase agreements providing for
settlement in more than seven days after notice. Board’s Oversight Role; Board Composition and Structure The
Board’s role in management of the Fund is oversight. As is the case with
virtually all investment companies (as distinguished from operating companies),
service providers to the Fund, primarily the Investment Manager and its affiliates,
have responsibility for the day-to-day management of the Portfolios, which
includes responsibility for risk management (including management of investment
performance and investment risk, valuation risk, issuer and counterparty credit
risk, compliance risk and operational risk). As part of its oversight, the
Board, or its committees or delegates, interacts with and receives reports from
senior personnel of service providers, including senior investment personnel of
the Investment Manager, the Fund’s and the Investment Manager’s Chief
Compliance Officer and portfolio management personnel with responsibility for
management of the Portfolios. The Board’s Audit Committee (which consists of
all of the Independent Directors, except Mr. Davidson) meets during its
scheduled meetings with, and between meetings have access to, the Fund’s
independent registered public accounting firm and the Fund’s Treasurer. The
Board also receives periodic presentations from senior personnel of the
Investment Manager or its affiliates regarding risk management generally, as
well as periodic presentations regarding specific operational, compliance or
investment areas such as trading and brokerage allocation and execution,
investment research and internal audit. The Board also receives reports from
counsel regarding regulatory compliance and governance matters. The Board has
adopted policies and procedures designed to address 33 certain risks
to the Portfolios. In addition, the Investment Manager and other service
providers to the Fund have adopted a variety of policies, procedures and
controls designed to address particular risks to the Portfolios. However, it is
not possible to eliminate all of the risks applicable to the Portfolios. The
Board’s oversight role does not make the Board a guarantor of the Portfolios’
investments or activities. The
1940 Act requires that at least 40% of the Fund’s Directors be Independent Directors
and as such are not affiliated with the Investment Manager. To rely on certain
exemptive rules under the 1940 Act, a majority of the Fund’s Directors must be
Independent Directors, and for certain important matters, such as the approval
of investment advisory agreements or transactions with affiliates, the 1940 Act
or the rules thereunder require the approval of a majority of the Independent
Directors. Currently, 75% of the Fund’s Directors are Independent Directors.
The Board does not have a Chairman, but the Independent Directors have
designated a lead Independent Director who chairs meetings or executive
sessions of the Independent Directors, reviews and comments on Board meeting
agendas and facilitates communication among the Independent Directors, their
counsel and management. The Board has determined that its leadership structure,
in which the Independent Directors have designated a lead Independent Director
to function as described above, is appropriate in light of the services that
the Investment Manager and its affiliates provide to the Fund and potential
conflicts of interest that could arise from these relationships. Directors and Officers Set
forth in the chart below are the names and certain biographical and other
information for each Director. Following the chart is additional information
about the Directors’ experience, qualifications, attributes or skills. Name (Age) Position(s) with the Fund Principal Occupation(s) and Other Public Non-Interested Directors: Kenneth S.
Davidson (66)(3) Director Davidson Capital Management Corporation, an
investment manager, President
(1978 – present) Aquiline Holdings LLC, an investment
manager, Partner (2006 –
present) Nancy A.
Eckl (49) Director American Beacon Advisors, Inc. (“American
Beacon”) and certain funds advised by American Beacon, Vice President (1990 – 2006) College Retirement Equities Fund (eight
accounts), Trustee (2007 –
present) TIAA-CREF Funds (52 funds) and TIAA-CREF
Life Funds (10 funds), Trustee
(2007 – present) TIAA Separate Account VA-1, Member of the Management Committee (2007
– present) Lester Z.
Lieberman (81) Director Private Investor 34 Name (Age) Position(s) with the Fund Principal Occupation(s) and Other Public Leon M.
Pollack (70) Director Private Investor Richard
Reiss, Jr. (67) Director Georgica Advisors LLC, an investment
manager, Chairman (1997 –
present) O’Charley’s, Inc., a restaurant chain, Director (1984 – present) Robert M.
Solmson (64) Director Fairwood Capital, LLC, a private investment
corporation engaged primarily in real estate and hotel investments, President (2008 – present) Interested Directors(4): Charles L.
Carroll (51) Chief
Executive Officer, Investment Manager, Deputy Chairman and Head of Global Marketing
(2004 – present) Ashish
Bhutani (51) Director Investment Manager, Chief Executive Officer (2004 – present) Lazard Ltd, Vice Chairman and Director (2010 – present) (1) The address of each
Director 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., 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,” currently comprised of 27 active investment portfolios). Each
Director serves an indefinite term, until his or her successor is elected,
and each Director serves in the same capacity for the other Lazard Funds. All
of the Independent Directors, except Mr. Lieberman, are also board members of
Lazard Alternative Strategies Fund, L.L.C. and Lazard Multi-Strategy 1099
Fund, closed-end registered management investment companies advised by an
affiliate of the Investment Manager. (The Fund, Lazard Retirement Series,
Inc., Lazard Global Total Return and Income Fund, Inc., Lazard World Dividend
& Income Fund, Inc., Lazard Alternative Strategies Fund, L.L.C. and
Lazard Multi-Strategy 1099 Fund are referred to herein as the “Lazard Fund
Complex,” which in total is comprised of 29 active investment portfolios.) (3) It is possible that Mr.
Davidson could be deemed to be an affiliate of a company that has an indirect
ownership interest in a broker-dealer that the Investment Manager may use to
execute portfolio transactions for clients other than the Portfolios, and
thus an “interested person” (as defined in the 1940 Act) of the Fund.
However, due to the structure of Mr. Davidson’s relationship with the company
and the remote nature of any deemed affiliation with the broker-dealer, Mr.
Davidson is not identified as an “interested person” (as defined in the 1940
Act) of the Fund. Mr. Davidson participates in Fund Board meetings as if his
status were that of an “interested person” (as defined in the 1940 Act). (4) Messrs. Bhutani and Carroll
are “interested persons” (as defined in the 1940 Act) of the Fund because of
their positions with the Investment Manager. 35 Additional
information about each Director follows (supplementing the information provided
in the chart above), which describes some of the specific experiences,
qualifications, attributes or skills that each Director possesses which the
Board believes has prepared them to be effective Directors. The Board believes
that the significance of each Director’s experience, qualifications, attributes
or skills is an individual matter (meaning that experience that is important
for one Director may not have the same value for another) and that these
factors are best evaluated at the Board level, with no single Director, or
particular factor, being indicative of Board effectiveness. However, the Board
believes that Directors need to have the ability to critically review,
evaluate, question and discuss information provided to them, and to interact
effectively with Fund management, service providers and counsel, in order to
exercise effective business judgment in the performance of their duties; the
Board believes that its members satisfy this standard. Experience relevant to
having this ability may be achieved through a Director’s educational
background; business, professional training or practice (e.g., accounting or law), public service
or academic positions; experience from service as a board member (including the
Board of the Fund) or as an executive of investment funds, public companies or
significant private or not-for-profit entities or other organizations; and/or
other life experiences. The charter for the Board’s Nominating Committee contains
certain other factors considered by the Committee in identifying potential
Director nominees. To assist them in evaluating matters under federal and state
law, the Independent Directors are counseled by their own independent legal
counsel, who participates in Board meetings and interacts with the Investment
Manager; Fund and independent legal counsel to the Independent Directors has
significant experience advising funds and fund board members. The Board and its
committees have the ability to engage other experts as appropriate. The Board
evaluates its performance on an annual basis. • Charles L. Carroll is a Deputy Chairman of
the Investment Manager and Head of Global Marketing, responsible for
oversight of the Investment Manager’s global marketing efforts in the
Institutional, Financial Institutions, and Private Client arenas.
Additionally, he serves as Chief Executive Officer, President and Director of
the other Lazard Funds. Mr. Carroll joined the Investment Manager in 1993 as
Senior Vice President responsible for marketing Lazard investment solutions
to financial institutions worldwide. Mr. Carroll is a member of the firm’s
Global Management and Investment Oversight Committees. He entered the
investment field in 1987, joining Shearson Asset Management in New York City
as Vice President and National Product Manager. Mr. Carroll later served as
First Vice President and Consulting Services Director with Shearson Lehman
Brothers. Mr. Carroll attended the University of Utah and currently sits on the
Board of Trustees for the Williston Northampton School. • Ashish Bhutani is the Chief Executive
Officer of the Investment Manager, where from June 2003 to March 2004 he
served as Head of New Products and Strategic Planning. Mr. Bhutani also
serves as a Vice Chairman of Lazard Ltd and is a member of its Board of
Directors. Prior to joining the Investment Manager in 2003, he was Co-Chief
Executive Officer North America of Dresdner Kleinwort Wasserstein from 2001
through 2002, and was a member of its Global Corporate and Markets Board, and
its Global Executive Committee. Prior to that, Mr. Bhutani was with
Wasserstein Perella Group (the predecessor firm) from 1989 to 2001, where he
was Deputy Chairman of Wasserstein Perella Group and Chief Executive Officer
of Wasserstein Perella Securities. Mr. Bhutani began his career at Salomon
Brothers in 1985 as a Vice President in the fixed income group. • Kenneth S. Davidson
is a founding member of Aquiline Holdings LLC, a New York-based global
investment firm. From 1977 through 1995, Mr. Davidson was the founder and
managing partner of Davidson Weil Associates, and was previously a vice
president and senior portfolio manager at Oppenheimer Capital Corporation. He
also serves on the boards of several prominent non-profit organizations. Mr.
Davidson is a graduate of Colgate University. • Nancy A. Eckl has
over 20 years of experience working in the mutual fund/investment
management field in a wide range of capacities, including investment manager
selection/oversight, accounting, compliance and operations. From 1990 to
2006, Ms. Eckl was Vice President of American Beacon Advisors, Inc., an
investment management firm, and of the American Beacon Funds (open-end mutual
funds). Ms. Eckl also served as Vice President of certain other funds advised
by American Beacon Advisors. Ms. Eckl graduated from the University of Notre
Dame and is a Certified Public Accountant in the State of Texas. 36 • Lester Z. Lieberman is Chairman of the
Healthcare Foundation of New Jersey, an independent, endowed grant-making
organization. He retired as the chief executive at Clarkson Industries, Inc.,
a publicly-held manufacturing company. Prior to joining Clarkson Industries,
he founded Atmos Engineering Co., which was later sold to Clarkson
Industries. Mr. Lieberman serves on the boards of a number of established
non-profit organizations. He is a graduate of the Newark College of
Engineering, and he has received honorary degrees from Clarkson University
and the University of Medicine and Dentistry of New Jersey. • Leon M. Pollack spent 33 years in the
financial community, the last 13 as a managing director of the investment
firm of Donaldson, Lufkin & Jenrette. Mr. Pollack also is a board member
of non-profit organizations. Mr. Pollack received his bachelor’s degree in
history from Adelphi University’s College of Arts and Sciences and earned an
MA in education from New York University. • Richard Reiss, Jr. is the founder and
Chairman of Georgica Advisors LLC and its affiliated entities, Reiss Capital
Management and Value Insight Partners. Previously, Mr. Reiss was Managing
Partner of Cumberland Associates and its three investment funds and a Senior
Vice President and Director of Research at Shearson Lehman Brothers. Mr. Reiss
has served on the boards of a number of companies and non-profit
organizations. He received an AB, cum
laude, from Dartmouth College and a JD from New York University
School of Law. • Robert M. Solmson is the President of
Fairwood Capital, LLC, a private investment corporation engaged primarily in
real estate and hotel investments. Previously, Mr. Solmson was the former
Chairman and Chief Executive Officer of RFS Hotel Investors, a real estate
investment trust which he formed in 1993. He also served as its President.
Mr. Solmson has served on the boards of a number of corporations and
non-profit organizations. He graduated from Washington and Lee University. Set
forth below is the name and certain biographical and other information for the
Fund’s officers (in addition to Mr. Carroll). Name (Age) Position(s) with the Fund Principal Occupation(s) During the Past Nathan A.
Paul (38) Vice
President and Secretary Managing Director and General Counsel of
the Investment Manager Stephen St.
Clair (53) Treasurer Vice President of the Investment Manager Brian D.
Simon (49) Chief
Compliance Officer (January 2009) and Assistant Secretary Managing Director (since February 2011,
previously Director) of the Investment Manager and Chief Compliance Officer
(since January 2009) of the Investment Manager and the Fund Tamar
Goldstein (36) Assistant
Secretary Vice President (since March 2009) and
previously Counsel (November 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 (36) Assistant
Treasurer Vice President (since February 2011,
previously Fund Administration Manager) of the Investment Manager (1) The address of each officer
is Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York
10112-6300. (2) Each officer serves for an
indefinite term, until his or her successor is elected and qualifies or until
his or her earlier resignation or removal. Each officer, except Messrs. St.
Clair and Trelles, serves in the same capacity for the other funds in the
Lazard Fund Complex. 37 Board Committees, Share Ownership and Compensation 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”), other than Mr. Davidson. 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 six times and the nominating committee did not meet during
the fiscal year ended December 31, 2010. 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, 2010. Portfolio Ashish Charles
L. Kenneth
S. Nancy
A. Lester
Z. Leon
M. Richard Robert
M. Equity Value Portfolio None None None $1 - $10,000 None None None None Strategic Equity Portfolio None None None $1 - $10,000 None None None None Mid Cap Portfolio None Over $100,000 None $1 - $10,000 None None None None Small-Mid Cap Portfolio None None None None None None None None Global Listed
Infrastructure Portfolio None None None None None None None None International Equity
Portfolio None None None $10,001- $50,000 None None None None 38 Portfolio Ashish Charles
L. Kenneth
S. Nancy
A. Lester
Z. Leon
M. Richard Robert
M. International Equity Select
Portfolio None None None None None None None None International Strategic
Portfolio None None None None None None None None International Small Cap
Portfolio None None None None None None None None Emerging Markets Portfolio None Over $100,000 None $10,001- $50,000 None None None None Developing Markets
Portfolio None None None None None None None None Emerging Markets Blend
Portfolio Over $100,000 Over $100,000 None None None None None None High Yield Portfolio None Over $100,000 None None None None None None Capital Allocator Portfolio None Over $100,000 None None None None None None Aggregate Holdings of all
Lazard Funds Over $100,000 Over $100,000 None $10,001-$50,000 None None None None As
of December 31, 2010, 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. Director Aggregate Compensation from Total Compensation from Ashish
Bhutani None None Charles L.
Carroll None None Kenneth S.
Davidson $89,491 $[97,500] Nancy A.
Eckl $89,491 $[97,500] Lester Z.
Lieberman $90,868 $[99,000] Leon M.
Pollack $89,491 $[97,500] Richard
Reiss, Jr. $89,491 $[97,500] Robert M.
Solmson $84,907 $[92,500] 39 The Fund does
not compensate officers or Directors who are employees or affiliated persons of
the Investment Manager. As of the date of this SAI, 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 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, most of the portfolio managers
of the Portfolios 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. 40 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 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. 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 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. Portfolio Manager Registered Investment Other Pooled Other Accounts Michael A.
Bennett# 9 (3.8 billion) 3 (73.0 million) 279 (11.3 billion) Christopher
H. Blake# 9 (10.5 billion) 4 (693.7 million) 65 (2.3 billion) Daniel
Breslin 8 (4.0 billion) 1 (9.8 million) 29 (930 million) J. William
Charlton and 1 (139 million) 2 (45.1 million) 5 (240.2 million) Rohit
Chopra# 7 (21.7 billion) 15 (6.8 billion) 104 (10.2 billion) David R.
Cleary 1 (246.2 million) 3 (37.4 million) 314 (509 million) Jared
Daniels** Michael
DeBernardis# 3 (637.6 million) 6 (586.8 million) 28 (830.1 million) James M.
Donald# 10 (24.0 billion) 18 (6.8 billion) 214 (12.6 billion) Robert A.
Failla# 12 (11.1 billion) 5 (703.6 million) 88 (2.8 billion) Martin
Flood# 13 (12.6 billion) 5 (731.2 million) 199 (4.3 billion) Michael G.
Fry# 8 (3.4 billion) 4 (144.6 million) 242 (9.1 billion) Peter
Gillespie 3 (344.4 million) 6 (300.9 million) 7 (583.5 million) George
Grimbilas# none 2 (77.0 million) 225 (2.1 billion) Jai Jacob 5 (1.4 billion) 4 (239.3 million) 18 (693.8 million) Robin O.
Jones 1 (402.7 million) none 38 (2.3 billion) Arif Joshi# none 3 (65.0 million) 1 (66.7 million) Yvette
Klevan** Christopher
Komosa 1 (246.2 million) 3 (37.4 million) 314 (509 million) Andrew D.
Lacey# 15 (12.9 billion) 10 (976 million) 199 (5.4 billion) Jay P. Leupp 3 (21.8 million) none none Mark Little 1 (402.7 million) none 38 (2.3 billion) Kevin J.
Matthews# 2 (2.1 billion) none 191 (4.5 billion) Erik McKee# 7 (21.7 billion) 15 (6.8 billion) 104 (10.2 billion) John
Mulquiney 1 (115.9 million) 6 (819.3 million) 8 (1.4 billion) Kevin O’Hare 3 (344.4 million) 6 (300.9 million) 7 (583.5 million) Brian
Pessin# 2 (474.9 million) 7 (863.1 million) 48 (2.8 billion) Michael
Powers# 8 (3.4 billion) 3 (73.0 million) 241 (9.0 billion) 41 Portfolio Manager Registered Investment Other Pooled Other Accounts Eulogio
Ramos# none 2 (77.0 million) 225 (2.1 billion) John R.
Reinsberg# 6 (1.5 billion) 4 (121 million) 61 (5.6 billion) Warryn
Robertson# 1 (115.9 million) 8 (1 billion) 19 (5.0 billion) David R.
Ronco 2 (20.2 million) none none Edward
Rosenfeld# 1 (72.2 million) 7 (863.1 million) 10 (489.8 million) John R.
Senesac Jr.# none 2 (77.0 million) 225 (2.1 billion) Denise
Simon# none 3 (65.0 million) 1 (66.7 million) Nicholas
Sordoni 2 (352.5 million) 1 (37.4 million) 18 (809.5 million) Ronald
Temple# 9 (9.4 billion) 7 (715.5 million) 190 (5.1 billion) J. Richard
Tutino 4 (2.2 billion) 1 (37.4 million) 134 (2.1 billion) * Total assets in accounts as of December 31, 2010 and
as of June 30, 2011 with respect to Messrs. Leupp and Ronco. Information
provided in the table for Messrs. Leupp and Ronco is with respect to assets
of the Predecessor Funds. ** As of December 31, 2011. # 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. Bennett, Fry, Matthews and Powers manage one
registered investment company with assets under management of approximately
$2.1 billion. (2) Messrs. Blake, Failla and Flood manage one registered
investment company and one other account with assets under management of
approximately $6.5 billion and $39.8 million, respectively. (3) Mr. DeBernardis manages one other pooled investment
vehicle with assets under management of approximately $73.7 million. (4) Messrs. Chopra and McKee manage four other accounts
with assets under management of approximately $1.5 billion. (5) Mr. Donald manages one registered investment company
and four other accounts with assets under management of approximately $2.1
billion and $1.5 billion, respectively. (6) Mr. Grimbilas manages one other account with assets
under management of approximately $20.4 million. (7) Mr. Joshi and Ms. Simon manage three pooled vehicles
and one other account with assets under management of $65.0 million and $66.7
million, respectively. (8) Mr. Lacey and Mr. Temple manage one registered
investment company with assets under management of approximately $6.5
billion. (9) Mr. Pessin and Mr. Rosenfeld manage two other pooled
investment vehicles with assets under management of approximately $137.7
million. (10) Mr. Ramos and Mr. Senesac manage one other account
with assets under management of approximately $20.4 million. (11) Mr. Reinsberg manages four other pooled investment
vehicles with assets under management of approximately $121 million. (12) Mr. Robertson manages three other accounts with
assets under management of approximately $1.5 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 42 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, stock and restricted interests in funds
managed by the Investment Manager or its affiliates. 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. 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 Global
Listed Infrastructure Portfolio UBS Global
50/50 Infrastructure & Utilities® Index International
Equity Portfolio MSCI Europe,
Australasia and Far East (EAFE®) Index International
Equity Select Portfolio MSCI All
Country World Index ex-U.S. International
Strategic Portfolio MSCI EAFE
Index International
Small Cap Portfolio MSCI EAFE
Small Cap Index Emerging
Markets Portfolio MSCI
Emerging Markets Index Developing
Markets Portfolio MSCI
Emerging Markets Index Emerging
Markets Blend Portfolio MSCI
Emerging Markets Index Emerging
Markets Multi-Strategy Portfolio MSCI
Emerging Markets Index Emerging
Markets Debt Portfolio 50% JPMorgan
EMBI Global Diversified Index/ 50% JPMorgan
GBI-EM Global Diversified Index Realty Income
Portfolio 50% Wells
Fargo Hybrid and Preferred Securities REIT Index/ 50% FTSE
NAREIT All Equity REITs Index U.S. Realty
Portfolio FTSE NAREIT
All Equity REITs Index International
Realty Portfolio FTSE
EPRA/NAREIT Global ex US Index High Yield
Portfolio Merrill
Lynch High Yield Master II® Index Municipal
Portfolio Bank of
America Merrill Lynch 1-10 Year Municipal Bond Index Global Fixed
Income Portfolio Barclays
Capital Global Aggregate Bond Index Capital
Allocator Portfolio MSCI World
Index Ownership of Securities. As of December 31, 2010,* the portfolio
managers owned the following shares of the Portfolios: 43 Portfolio/Portfolio Manager Market Value of Shares Equity Value
Portfolio Andrew D. Lacey $100,001-$500,000 Martin Flood $1-$10,000 Nicholas Sordoni $10,001-$50,000 Ronald Temple $50,001-$100,000 J. Richard Tutino $10,001-$50,000 Strategic
Equity Portfolio Christopher H. Blake $10,001-$50,000 Robert A. Failla $1-$10,000 Martin Flood $10,001-$50,000 Andrew D. Lacey $100,001-$500,000 Ronald Temple None Mid Cap
Portfolio Christopher H. Blake $10,001-$50,000 Daniel Breslin None Robert A. Failla $10,001-$50,000 Martin Flood None Andrew D. Lacey $100,001-$500,000 Small-Mid
Cap Portfolio Daniel Breslin $10,001-$50,000 Michael DeBernardis $10,001-$50,000 Robert A. Failla None Andrew D. Lacey $100,001-$500,000 Global
Listed Infrastructure Portfolio John Mulquiney None Warryn Robertson None International
Equity Portfolio Michael A. Bennett $100,001-$500,000 Michael G. Fry None Michael Powers $50,001-$100,000 John R. Reinsberg $100,001-$500,000 International
Equity Select Portfolio Michael A. Bennett $100,001-$500,000 James M. Donald None Michael G. Fry None Kevin J. Matthews None Michael Powers $50,001-$100,000 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 $100,001-$500,000 International
Small Cap Portfolio Brian Pessin $10,001-$50,000 44 Portfolio/Portfolio Manager Market Value of Shares John R. Reinsberg $100,001-$500,000 Edward Rosenfeld $1-$10,000 Emerging
Markets Portfolio Rohit Chopra $10,001-$50,000 James M. Donald $500,001-$1,000,000 Erik McKee $100,001-$500,000 John R. Reinsberg $100,001-$500,000 Developing
Markets Portfolio James M. Donald Over
$1,000,000 Peter Gillespie $10,001-$50,000 Kevin O’Hare $100,001-$500,000 John R. Reinsberg $500,001-$1,000,000 Emerging
Markets Blend Portfolio James M. Donald None Jai Jacob $10,001-$50,000 Kevin O’Hare None Realty
Income Portfolio Jay P. Leupp Over
$1,000,000 David R. Ronco $1-$10,000 U.S. Realty
Portfolio Jay P. Leupp $100,001-$500,000 David R. Ronco $1-$10,000 International
Realty Portfolio Jay P. Leupp $100,001-$500,000 David R. Ronco None High Yield
Portfolio J. William Charlton $10,001-$50,000 Thomas M. Dzwil None Capital
Allocator Portfolio David R. Cleary $500,001-$1,000,000 Christopher Komosa $10,001-$50,000 * For Messrs. Leupp and Ronco, holdings shown are those
in shares of the corresponding Predecessor Fund as of May 31, 2011. 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. 45 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: 46 Portfolio Management Fee Rate Equity Value
Portfolio .70 % Strategic
Equity Portfolio .70 Mid Cap
Portfolio .75 Small-Mid
Cap Portfolio .75 Global
Listed Infrastructure Portfolio .90 International
Equity Portfolio .75 International
Equity Select Portfolio .85 International
Strategic Portfolio .75 International
Small Cap Portfolio .75 Emerging
Markets Portfolio 1.00 Developing
Markets Portfolio 1.00 Emerging
Markets Blend Portfolio 1.05 Emerging
Markets Multi-Strategy Portfolio 1.00 Emerging
Markets Debt Portfolio .80 Realty
Income Portfolio .75 U.S. Realty
Portfolio .80 International
Realty Portfolio .90 High Yield
Portfolio .55 Municipal
Portfolio .25 Global Fixed
Income Portfolio .50 Capital
Allocator Portfolio 1.00 Through
April 30, 2012 (except as otherwise noted), the Investment Manager has agreed
to waive its management fees and, if necessary, reimburse the Portfolio, to the
extent Total Annual Portfolio Operating Expenses exceed the percentage of the
value of the Portfolio’s average daily net assets set forth opposite the
Portfolio’s name, exclusive of taxes, brokerage, interest on borrowings, fees
and expenses of “Acquired Funds” (investments in other investment companies)
and extraordinary expenses, and excluding shareholder redemption fees or other
transaction fees: Maximum Total Portfolio Operating Expenses* Portfolio Institutional Shares Open Shares Equity Value
Portfolio** .75 % 1.05 % Strategic
Equity Portfolio .75 1.05 Mid Cap
Portfolio 1.05 1.35 Small-Mid
Cap Portfolio 1.15 1.45 Global
Listed Infrastructure Portfolio*** 1.30 1.60 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 Emerging
Markets Portfolio 1.30 1.60 Developing
Markets Portfolio 1.30 1.60 Emerging
Markets Blend Portfolio 1.35 1.65 Emerging
Markets Multi-Strategy Portfolio 1.30 1.60 Emerging
Markets Debt Portfolio 1.10 1.40 Realty
Income Portfolio**** 1.15 1.45 U.S. Realty
Portfolio**** 1.20 1.50 International
Realty Portfolio**** 1.30 1.60 High Yield Portfolio .55 .85 Municipal
Portfolio .40 .70 47 Maximum Total Portfolio Operating Expenses* Portfolio Institutional Shares Open Shares Global Fixed
Income Portfolio† .80 1.10 Capital
Allocator Portfolio 1.02 1.32 * The addition of any
Acquired Fund Fees and Expenses will cause Total Annual Portfolio Operating
Expenses After Fee Waiver and Expense Reimbursement to exceed the maximum
amounts shown. ** This agreement continues in
effect from May 1, 2012 through April 30, 2021, at levels of 1.10% and 1.40%
of the average daily net assets of the Portfolio’s Institutional Shares and
Open Shares, respectively. *** This agreement continues in
effect through April 30, 2021. **** This agreement will
continue in effect through September 23, 2014. † This agreement will
continue in effect through January 31, 2013. For
the fiscal years ended December 31, 2008, 2009 and 2010, 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: Portfolio Fee Payable For Fiscal Fee Payable For Fiscal Fee Payable For Fiscal Equity Value
Portfolio $ 64,432 $ 54,555 $ 82,276 Strategic
Equity Portfolio 611,937 491,605 556,433 Mid Cap
Portfolio 2,137,519 1,352,713 1,490,077 Small-Mid
Cap Portfolio 637,288 408,402 933,932 Global
Listed Infrastructure Portfolio — — 820,972 International
Equity Portfolio 1,679,042 1,031,583 1,106,469 International
Equity Select Portfolio 154,613 75,359 55,433 International
Strategic Portfolio 2,682,287 2,060,777 2,735,062 International
Small Cap Portfolio 1,275,372 541,008 503,229 Emerging
Markets Portfolio 64,375,771 76,191,090 148,785,989 Developing
Markets Portfolio 13,948 244,566 779,690 Emerging
Markets Blend Portfolio — — 103,881 High Yield
Portfolio 278,680 391,385 603,838 Capital
Allocator Portfolio 1,156,510 1,649,073 2,159,816 Portfolio Reduction in Reduction in Reduction in Equity Value
Portfolio $ 191,470 $ 162,664 $ 192,613 Strategic
Equity Portfolio 18,725 25,105 45,899 Mid Cap
Portfolio — — — Small-Mid
Cap Portfolio — 8,032 — Global
Listed Infrastructure Portfolio — 4,996 48,817 International
Equity Portfolio — — — International
Equity Select Portfolio 191,531 197,383 253,567 International
Strategic Portfolio — — — 48 Portfolio Reduction in Reduction in Reduction in International
Small Cap Portfolio — 34,170 50,665 Emerging
Markets Portfolio — — — Developing
Markets Portfolio 150,953 284,576 237,373 Emerging
Markets Blend Portfolio — — 457,173 High Yield
Portfolio 247,532 243,692 283,787 Capital
Allocator Portfolio 254,999 234,202 250,976 Portfolio Net Fee Paid For Net Fee Paid For Net Fee Paid For Equity Value
Portfolio $ (127,038 ) $ (108,109 ) $ (110,337 ) Strategic
Equity Portfolio 593,212 466,500 510,534 Mid Cap
Portfolio 2,137,519 1,352,713 1,490,077 Small-Mid
Cap Portfolio 637,288 400,370 933,932 Global
Listed Infrastructure Portfolio — (4,996 ) 772,155 International
Equity Portfolio 1,679,042 1,031,583 1,106,469 International
Equity Select Portfolio (36,918 ) (122,024 ) (198,134 ) International
Strategic Portfolio 2,682,287 2,060,777 2,735,062 International
Small Cap Portfolio 1,275,372 506,838 452,564 Emerging
Markets Portfolio 64,375,771 76,191,090 148,785,989 Developing
Markets Portfolio (137,005 ) (40,010 ) 542,317 Emerging
Markets Blend Portfolio — — (353,292 ) High Yield
Portfolio 31,148 147,693 320,051 Capital
Allocator Portfolio 901,511 1,414,871 1,908,840 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 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
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 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 49 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. Administrator, Custodian and Transfer Agent 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. 50 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 its 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. BFDS has agreed to waive the monthly minimum fee for six months after
a new Portfolio has commenced operations. 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. 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. Except
as described below, securities listed on foreign exchanges are valued at the
last reported sales price; securities listed on foreign exchanges not traded on
the valuation date are valued at the last quoted bid price. Options on stock
and stock indices traded on national securities exchanges are valued as of the
close of options trading on such exchanges (which is normally 4:10 p.m.,
Eastern time). Swap agreements on equity assets are valued at the equity basket
price as of the close of regular trading on the NYSE on each valuation date. Forward
currency contracts are valued at the current cost of offsetting the contracts.
Investments in money market funds are valued at the fund’s net asset value. Bonds
and other debt 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 by, or in
accordance with procedures approved by, the Board. 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 51 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 (including restricted or other illiquid
securities such as certain derivative instruments), such securities will be
valued at their fair value as determined by, or in accordance with procedures
approved by, the Board. 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. The fair value 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 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. General Subject
to the supervision of the Board, 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 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 has determined that securities
transactions for a Portfolio may be executed through a broker-dealer that may
be deemed to be an affiliate of the Investment Manager if, in the judgment of
the Investment Manager, the use of the broker-dealer 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 broker-dealer 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 rate for the International Strategic Portfolio was higher in
2009 than is usual due to extremely volatile market conditions. The portfolio
turnover in the Small-Mid Cap Portfolio was higher in 2009 than in 2008 52 and 2010
largely due to the market volatility during 2009, in particular, sharp
increases in market prices that triggered selling activity in its portfolio. The
Portfolios listed below held securities of their regular brokers or dealers
during the fiscal year ended December 31, 2010: Portfolio Broker/Dealer Value on December 31, 2010 Equity Value
Portfolio State Street
Bank and Trust Company $ 134 Bank of
America Corp. 325 Citigroup,
Inc. 62 The Goldman
Sachs Group, Inc. 176 JPMorgan
Chase & Co. 416 Morgan
Stanley 68 Wells Fargo
& Co. 493 Strategic
Equity Portfolio State Street
Bank and Trust Company 1,799 Bank of
America Corp. 702 JP Morgan
Chase & Co. 1,887 Morgan
Stanley 1,249 Wells Fargo
& Co. 1,779 Mid Cap
Portfolio State Street
Bank and Trust Company 8,870 Small-Mid
Cap Portfolio State Street
Bank and Trust Company 3,916 Global
Listed Infrastructure Portfolio State Street
Bank and Trust Company 302 International
Equity Portfolio State Street
Bank and Trust Company 3,649 UBS AG 2,438 International
Equity Select Portfolio State Street
Bank and Trust Company 112 UBS AG 115 International
Strategic Portfolio State Street
Bank and Trust Company 5,173 UBS AG 9,067 International
Small Cap Portfolio State Street
Bank and Trust Company 994 Emerging
Markets Portfolio State Street
Bank and Trust Company 647,515 Developing
Markets Portfolio State Street
Bank and Trust Company 6,704 Emerging
Markets Blend Portfolio State Street
Bank and Trust Company 3,367 High Yield
Portfolio State Street
Bank and Trust Company 4,274 Capital
Allocator Portfolio State Street
Bank and Trust Company 23,294 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 53 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. Brokerage Commissions In
connection with its portfolio securities transactions for the fiscal years
ended December 31, 2008, 2009 and 2010, each Portfolio indicated below paid
brokerage commissions as follows: Year Ended December 31, 2008 Portfolio Total Amount of Percentage of Percentage of Equity Value
Portfolio $ 17,596 — — — Strategic
Equity Portfolio 159,107 — — — Mid Cap
Portfolio 666,151 — — — 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 — — — Capital
Allocator Portfolio 225,699 — — — Year Ended December 31, 2009 Portfolio Total Amount of Percentage of Percentage of Equity Value
Portfolio $ 9,939 — — — Strategic
Equity Portfolio 99,229 — — — Mid Cap
Portfolio 340,706 — — — Small-Mid
Cap Portfolio 226,204 — — — Global
Listed Infrastructure Portfolio — — — — 54 Portfolio Total Amount of Percentage of Percentage of International
Equity Portfolio 232,045 — — — International
Equity Select Portfolio 11,889 — — — International
Strategic Portfolio 948,485 — — — International
Small Cap Portfolio 109,089 — — — Emerging
Markets Portfolio 19,728,544 — — — Developing
Markets Portfolio 91,637 — — — Capital
Allocator Portfolio 298,625 — — — Year Ended December 31, 2010 Portfolio Total Amount of Percentage of Percentage of Equity Value
Portfolio $ 12,154 — — — Strategic
Equity Portfolio 59,829 — — — Mid Cap
Portfolio 298,697 — — — Small-Mid
Cap Portfolio 286,462 — — — Global
Listed Infrastructure Portfolio 207,744 — — — International
Equity Portfolio 191,771 — — — International
Equity Select Portfolio 11,069 — — — International
Strategic Portfolio 561,562 — — — International
Small Cap Portfolio 64,082 — — — Emerging
Markets Portfolio 17,956,656 — — — Developing
Markets Portfolio 316,617 — — — Emerging
Markets Blend Portfolio 82,122 — — — Capital
Allocator Portfolio 273,454 — — — The
aggregate amount of transactions during the fiscal year ended December 31, 2010
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 Commissions and Equity Value
Portfolio $ 14,641,410 $ 12,154 Strategic
Equity Portfolio 74,662,935 59,829 Mid Cap
Portfolio 348,146,870 298,697 Small-Mid
Cap Portfolio 281,668,483 286,462 Global
Listed Infrastructure Portfolio 184,022,592 207,744 International
Equity Portfolio 155,102,684 191,771 International
Equity Select Portfolio 9,979,977 11,069 International
Strategic Portfolio 405,920,421 561,562 International
Small Cap Portfolio 61,860,758 64,082 Emerging
Markets Portfolio 9,882,152,586 17,956,656 Developing
Markets Portfolio 246,577,076 316,617 55 Portfolio Transaction Commissions and Emerging
Markets Blend Portfolio 78,222,647 82,122 Capital
Allocator Portfolio 495,211,534 273,454 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). 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. 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. 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 and Mercer Global Investments
pursuant to confidentiality agreements. Service providers receive holdings
information at a frequency appropriate to their services, which may be as
frequently as daily. 56 The Investment
Manager currently manages certain multi-strategy (“Multi-Strat”) investment
strategies. Using these strategies, the Investment Manager’s Multi-Strat
portfolio management team may allocate assets managed in separate accounts,
mutual funds, private investment funds or other available vehicles among
various strategies and vehicles managed by other portfolio management teams,
including allocating assets to a Portfolio or a Portfolio’s strategy or a
similar strategy managed by a Portfolio’s portfolio management team. For
example, the emerging market Multi-Strat strategy may allocate assets to the
Emerging Markets Portfolio and the Developing Markets Portfolio, as well as
certain other emerging market-related strategies managed by these Portfolios’ portfolio
management teams. The Investment Manager’s Multi-Strat portfolio management
team will allocate assets to a Portfolio or a related strategy in its
discretion, consistent with the investment objectives and guidelines associated
with the relevant client’s account. In making these allocation decisions, the
Multi-Strat portfolio management team will have access to detailed information
related to the underlying strategies that may not be available to other
investors or clients. This includes, but is not limited to, Portfolio holdings
information, transaction detail and performance information and access to the
Portfolios’ portfolio management teams. The Investment Manager has implemented
procedures designed to ensure that the Multi-Strat portfolio management team
does not trade in a way that disadvantages other Portfolio shareholders. 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 for its review. Any exceptions to the Fund’s portfolio holdings
disclosure policy are reported to the Board. 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. 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. 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 57 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. Exchange Privileges and Conversion Features.
The Fund may, in its discretion, accept requests by a shareholder or Service
Agent to exchange or convert holdings of one class of Portfolio shares for a
different class of shares of the same Portfolio, or to exchange shares of one
class of a Portfolio into shares of the same class of another Portfolio.
Exchange or conversion requests from one class of Portfolio shares for a
different class of the same Portfolio may include situations when a shareholder
becomes a client of a Service Agent that is not authorized to accept on the
Fund’s behalf purchase and redemption orders in the class of shares held by the
shareholder. For federal income tax purposes, a same-Portfolio share class
exchange is not expected to result in the realization by the investor of a
capital gain or loss; however, shareholders are advised to consult with their
own tax advisers with respect to the particular tax consequences to
shareholders of an investment in a Portfolio. 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. 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 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
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 0.25% 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 believes there is a reasonable
likelihood that the Distribution and Servicing Plan will benefit each Portfolio
and holders of its Open Shares. 58 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 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 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 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, 2010, the Portfolios paid the Distributor the amounts
set forth below with respect to their Open Shares under the Distribution and
Servicing Plan: Portfolio Amount Paid Under Equity Value
Portfolio $ 740 Strategic
Equity Portfolio 23,257 Mid Cap
Portfolio 169,410 Small-Mid
Cap Portfolio 52,110 Global
Listed Infrastructure Portfolio 211 International
Equity Portfolio 53,780 International
Equity Select Portfolio 8,900 International
Strategic Portfolio 71,179 International
Small Cap Portfolio 61,102 Emerging
Markets Portfolio 9,881,756 Developing
Markets Portfolio 110,878 Emerging
Markets Blend Portfolio 3,707 High Yield
Portfolio 51,508 Capital
Allocator Portfolio 24,185 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 59 programs; and
other forms of cash or non-cash compensation permissible under applicable
broker-dealer regulations. Income
dividends are normally declared each business day and paid monthly for Emerging
Markets Debt Portfolio, High Yield Portfolio, Municipal Portfolio and Global
Fixed Income Portfolio. For Global Listed Infrastructure Portfolio and Realty
Income Portfolio, dividends from net investment income, if any, are paid
quarterly. Dividends from net investment income, if any, on all Portfolios
except Global Listed Infrastructure Portfolio, Emerging Markets Debt Portfolio,
Realty Income Portfolio, High Yield Portfolio, Municipal Portfolio and Global
Fixed Income 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. 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 having all dividends and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks. The following
is only a general summary of some of the important federal income tax
considerations generally affecting each Portfolio and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of each Portfolio’s activities or to discuss state and local tax matters
affecting a Portfolio. Shareholders are urged to consult their own tax advisors
for more detailed information concerning the tax implications of investing in a
particular Portfolio. Taxation of the Portfolios Each Portfolio
intends to qualify for treatment as a regulated investment company (“RIC”)
under Subchapter M of the Code and intends to continue to so qualify if such
qualification is in the best interests of its shareholders. As a RIC, a
Portfolio will pay no federal income tax on its net investment income and net
realized capital 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 RIC, a Portfolio must, among other things: (a) derive in each
taxable year (the “gross income test”) at least 90% of its gross income from
(i) dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stocks, securities or foreign currencies
or other income (including but not 60 limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stocks, securities or currencies, and (ii) net
income from interests in “qualified publicly traded partnerships” (“QPTPs,” as
defined below); (b) diversify its holdings (the “asset diversification test”)
so that, at the end of each quarter of the taxable year, (i) at least 50% of
the market value of the Portfolio’s assets is represented by cash and cash
items (including receivables), U.S. Government securities, the securities of
other RICs and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5%
of the value of the Portfolio’s total assets and not greater than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of the Portfolio’s total assets is invested in the securities (other than
U.S. Government securities or the securities of other RICs) of a single issuer,
two or more issuers that the Portfolio controls and that are engaged in the
same, similar or related trades or businesses or one or more QPTPs; and (c)
distribute with respect to each taxable year at least 90% of the sum of the
Portfolio’s investment company taxable income (determined without regard to the
dividends paid deduction) and net tax-exempt interest income, if any, for such
year. In general,
for purposes of the gross income test described above, income derived from a
partnership will be treated as qualifying income only to the extent such income
is attributable to items of income of the partnership that would be qualifying
income if realized by a RIC. However, as noted above, 100% of the net income
derived from an interest in a QPTP is qualifying income for purposes of the
gross income test. A QPTP is defined as a partnership (i) interests in which
are traded on an established securities market or readily tradable on a secondary
market or the substantial equivalent thereof, (ii) that derives at least 90% of
its income from certain enumerated passive income sources described in Code
section 7704(d) and (iii) that would not satisfy the gross income test if it
were a RIC. Although income from a QPTP is qualifying income for purposes of
the gross income test, investment in QPTPs cannot exceed 25% of a Portfolio’s
assets. Gains from
foreign currencies (including foreign currency options, foreign currency swaps,
foreign currency futures and foreign currency forward contracts) currently
constitute qualifying income for purposes of the gross income test. However,
the Treasury Department has the authority to issue regulations (possibly with
retroactive effect) treating a RIC’s foreign currency gains as non-qualifying
income for purposes of the good income test to the extent that such income is
not directly related to the RIC’s principal business of investing in stock or
securities. A Portfolio’s
investment in MLPs may qualify as an investment in (1) a QPTP, (2) a “regular”
partnership, (3) a “passive foreign investment company” (a “PFIC”) or (4) a
corporation for U.S. federal income tax purposes. The treatment of particular
MLPs for U.S. federal income tax purposes will affect the extent to which a
Portfolio can invest in MLPs. The U.S. federal income tax consequences of a
Portfolio’s investments in “PFICs” and “regular” partnerships are discussed in
greater detail below. Pursuant to
the Regulated Investment Company Modernization Act of 2010 (the “Modernization
Act”), a RIC that fails the gross income test for a taxable year shall
nevertheless be considered to have satisfied the test for such year if (i) the
RIC satisfies certain procedural requirements, and (ii) the RIC’s failure to satisfy
the gross income test is due to reasonable cause and not due to willful
neglect. However, in such case, a tax is imposed on the RIC for the taxable
year in which, absent the application of the above cure provision, it would
have failed the gross income test equal to the amount by which (x) the RIC’s
non-qualifying gross income exceeds (y) one-ninth of the RIC’s qualifying gross
income, each as determined for purposes of applying the gross income test for
such year. Also pursuant
to the Modernization Act, a RIC that fails the asset diversification test as of
the end of a quarter shall nevertheless be considered to have satisfied the
test as of the end of such quarter in the following circumstances. If the RIC’s
failure to satisfy the asset diversification test at the end of the quarter is
due to the ownership of assets the total value of which does not exceed the
lesser of (i) one percent of the total value of the RIC’s assets at the end of
such quarter and (ii) $10,000,000 (a “de minimis failure”), the RIC shall be
considered to have satisfied the asset diversification test as of the end of
such quarter if, within six months of the last day of the quarter in which the
RIC identifies that it failed the asset diversification test (or such other
prescribed time period), the RIC either disposes of assets in order to satisfy
the asset diversification test, or otherwise satisfies the asset
diversification test. In the case of
a failure to satisfy the asset diversification test at the end of a quarter
under circumstances that do not constitute a de minimis failure, a RIC
shall nevertheless be considered to have satisfied the asset diversification
test as of the end of such quarter if (i) the RIC satisfies certain procedural
requirements; (ii) the RIC’s failure to satisfy 61 the asset
diversification test is due to reasonable cause and not due to willful neglect;
and (iii) within six months of the last day of the quarter in which the RIC
identifies that it failed the asset diversification test (or such other prescribed
time period), the RIC either disposes of the assets that caused the asset
diversification failure, or otherwise satisfies the asset diversification test.
However, in such case, a tax is imposed on the RIC, at the current rate of 35%,
on the net income generated by the assets that caused the RIC to fail the asset
diversification test during the period for which the asset diversification test
was not met. In all events, however, such tax will not be less than $50,000. As a RIC, a
Portfolio will pay no federal income tax on its net investment income and net
realized capital gains to the extent that such income and gains are distributed
to shareholders in accordance with applicable provisions of the Code. If a
Portfolio were to fail to qualify as a RIC in any taxable year, the Portfolio
would be subject to tax on its taxable income at corporate rates, and all
distributions from current or accumulated earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, would
be taxable to shareholders as ordinary income. Some portions of such
distributions may be eligible for the dividends received deduction in the case
of corporate shareholders and, for taxable years beginning before January 1,
2013 (unless such date is extended by future legislation), may be eligible for
a 15% preferential maximum tax rate in the case of shareholders taxed as
individuals, provided in both cases, the shareholder meets certain holding
period and other requirements in respect of the Portfolio’s shares (as
described below). In addition, a Portfolio could be required to recognize
unrealized gains, pay substantial taxes and interest and make substantial
distributions before requalifying as a RIC that is accorded special tax
treatment. A nondeductible
excise tax at a rate of 4% will be imposed on the excess, if any, of a
Portfolio’s “required distribution” over its actual distributions in any
calendar year. Generally, the required distribution is 98% of a Portfolio’s
ordinary income for the calendar year plus 98.2% of its capital gain net
income, determined under prescribed rules for this purpose, recognized during
the one-year period ending on October 31st of such year (or December 31st of
that year if the Portfolio is permitted to so elect and so elects) plus
undistributed amounts from prior years. Each Portfolio generally intends to
make distributions sufficient to avoid imposition of the excise tax, although
there can be no assurance that it will be able to do so. Each Portfolio
may in certain years use “equalization accounting” in determining the portion
of its net investment income and net realized capital gains that has been
distributed. A Portfolio that elects to use equalization accounting in a year
will allocate a portion of its 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 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 net realized capital
gains for any taxable year, such Portfolio may be liable for additional federal
income or excise tax or may jeopardize its treatment as a RIC. Although in
general the passive loss rules of the Code do not apply to RICs, such rules do
apply to a RIC with respect to items attributable to an interest in a QPTP. A
Portfolio’s investments in partnerships, including in QPTPs, may result in the
Portfolio being subject to state, local or foreign income, franchise or
withholding tax liabilities. Taxation of Portfolio Distributions For federal
income tax purposes, distributions of investment income generally are taxable
as ordinary income to the extent of the distributing Portfolio’s earnings and
profits. Taxes on distributions of capital gains are determined by how long the
Portfolio owned the investments that generated them, rather than how long a
shareholder has owned his or her shares. In general, a Portfolio will recognize
long-term capital gain or loss on assets it has owned (or is deemed to have
owned) for more than one year, and short-term capital gain or loss on
investments it has owned (or is deemed to have owned) for one year or less.
Distributions of “net capital gains,” that is, the excess of net long-term
capital gains over net short-term capital losses, that are properly
characterized by the Portfolio as capital gain dividends (“capital gain
dividends”) will generally be taxable to a shareholder receiving such
distributions as long-term capital gain. Long-term capital gain rates
applicable to individuals have been temporarily reduced, in general to 15%,
with lower rates applying to taxpayers in the 10% and 15% rate brackets, for
taxable years beginning before January 1, 2013. Distributions of net short-term
capital gains that exceed net long-term capital losses will generally be
taxable as ordinary income. The determination of whether a distribution is from
capital gains is generally made 62 taking into
account available net capital loss carryforwards, if any. Under the
Modernization Act, if a RIC has a “net capital loss” (that is, capital losses
in excess of capital gains) for a taxable year, that portion of the RIC’s net
capital loss consisting of the excess (if any) of the RIC’s net short-term
capital losses over its net long-term capital gains is treated as a short-term
capital loss arising on the first day of the RIC’s next taxable year, and that
portion of the RIC’s net capital loss consisting of the excess (if any) of the
RIC’s net long-term capital losses over its net short-term capital gains is
treated as a long-term capital loss arising on the first day of the RIC’s next
taxable year. Any such capital losses of a RIC may be carried forward to
succeeding taxable years of the RIC without limitation. Net capital loss
carryforwards of a RIC arising in taxable years of the RIC beginning on or
before December 22, 2010 (the date of enactment of the Modernization Act) may
be applied against any net realized capital gains of the RIC in each succeeding
year, or until their respective expiration dates, whichever is first. Distributions
are taxable to shareholders even if they are paid from income or gains earned
by a Portfolio before a shareholder’s investment (and thus were included in the
price the shareholder paid for his or her shares). Distributions are taxable
regardless of whether shareholders receive them in cash or in additional
shares. Distributions declared and payable by a Portfolio during October,
November or December to shareholders of record on a date in any such month and
paid by the Portfolio during the following January generally will be treated
for federal tax purposes as paid by the Portfolio and received by shareholders
on December 31st of the year in which the distributions are declared rather
than the calendar year in which they are received. A Portfolio
may elect to retain its net capital gain or a portion thereof for investment
and be taxed at corporate rates on the amount retained. In such case, the
Portfolio may designate its retained amount as undistributed capital gains in a
notice to its shareholders who will be treated as if each received a
distribution of his or her pro rata share of such gain, with the result that
each shareholder in the Portfolio will (i) be required to report his or her pro
rata share of such gain on his or her tax return as long-term capital gain,
(ii) receive a refundable tax credit for his or her pro rata share of the tax
paid by the Portfolio on the gain and (iii) increase the tax basis for his or
her shares in the Portfolio by an amount equal to the deemed distribution less
the tax credit. In general,
dividends (other than capital gain dividends) paid by a Portfolio to U.S.
individual shareholders may be eligible for the 15% preferential maximum tax
rate to the extent that the Portfolio’s income consists of dividends paid by
U.S. corporations and certain “qualified foreign corporations” on shares that
have been held by the Portfolio for at least 61 days during the 121-day period
commencing 60 days before the shares become ex-dividend. Dividends paid on
shares held by a Portfolio will not be taken into account in determining the
applicability of the preferential maximum tax rate to the extent that the
Portfolio is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property. Dividends paid by REITs are not generally eligible for the
preferential maximum tax rate. Further, a “qualified foreign corporation” does
not include any foreign corporation, which for its taxable year in which its
dividend was paid, or the preceding taxable year, is a passive foreign
investment company (discussed below). Unless extended, this favorable provision
will expire on December 31, 2012, and ordinary dividends will again be taxed at
tax rates applicable to ordinary income. In order to be eligible for the
preferential rate, the shareholder in the Portfolio must have held his or her
shares in the Portfolio for at least 61 days during the 121-day period
commencing 60 days before the Portfolio shares become ex-dividend. Additional
restrictions on a shareholder’s qualification for the preferential rate may
apply. In general,
dividends (other than capital gain dividends) paid by a Portfolio to U.S.
corporate shareholders may be eligible for the dividends received deduction to
the extent the Portfolio’s income consists of dividends paid by U.S.
corporations (other than REITs) on shares that have been held by the Portfolio
for at least 46 days during the 91-day period commencing 45 days before the
shares become ex-dividend. Dividends paid on shares held by a Portfolio will
not be taken into account for this purpose if the stock on which the dividend
is paid is considered to be “debt-financed” (generally, acquired with borrowed
funds), or to the extent that the Portfolio is under an obligation (pursuant to
a short sale or otherwise) to make related payments with respect to positions
in substantially similar or related property. Moreover, the dividend received
deduction may be disallowed or reduced if the corporate shareholder fails to
satisfy the foregoing holding period and other requirements with respect to its
shares of the Portfolio or by application of the Code. It is anticipated that
dividends (other than capital gain dividends) paid by the Equity Value,
Strategic Equity, Mid Cap, Small-Mid Cap, Global Listed Infrastructure and
Capital Allocator Portfolios may be eligible for the dividends-received
deduction, but that dividends paid by the other Portfolios will not be eligible
for the dividends-received deduction. 63 If a Portfolio
makes a distribution that is or is considered to be in excess of its current
and accumulated “earnings and profits” for the relevant period, the excess
distribution will be treated as a return of capital to the extent of a
shareholder’s tax basis in his or her shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces a shareholder’s basis in his
or her shares, thus reducing any loss or increasing any gain on a subsequent
taxable disposition by the shareholder of such shares. For taxable
years beginning after December 31, 2012, an additional 3.8% Medicare tax will
be imposed on certain net investment income (including ordinary dividends and
capital gain distributions received from a RIC and net gains from redemptions
or other taxable dispositions of RIC shares) of U.S. individuals, estates and
trusts to the extent that such person’s “modified adjusted gross income” (in
the case of an individual) or “adjusted gross income” (in the case of an estate
or trust) exceeds a threshold amount. Sale, Exchange or Redemption of Shares A sale,
exchange or redemption of shares in a Portfolio will give rise to a gain or
loss. Any gain or loss realized upon a taxable disposition of shares will be
treated as long-term capital gain or loss if the shares have been held for more
than 12 months. Otherwise, the gain or loss on the taxable disposition of
Portfolio shares of a Portfolio will be treated as short-term capital gain or
loss. However, any
loss realized upon a taxable disposition of shares held for six months or less
will be treated as long-term, rather than short-term, to the extent of any
capital gain dividends received (or deemed received) by the shareholder with
respect to the shares. Further, all or a portion of any loss realized upon a
taxable disposition of shares of a Portfolio will be disallowed if other
substantially identical shares of the Portfolio are purchased (including by
means of a dividend reinvestment plan) within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss. If a
shareholder recognizes a loss with respect to shares of a Portfolio of $2
million or more for an individual shareholder or $10 million or more for a
corporate shareholder, the shareholder must file with the IRS a disclosure
statement on Form 8886. Direct shareholders of portfolio securities are in many
cases excepted from this reporting requirement, but under current guidance
shareholders of a RIC are not excepted. Future guidance may extend the current
exception from this reporting requirement to shareholders of most or all RICs.
The fact that a loss is reportable under these regulations does not affect the
legal determination of whether the taxpayer’s treatment of the loss is proper.
Shareholders should consult their tax advisors to determine the applicability
of these regulations in light of their individual circumstances. Legislation passed by Congress in 2008
requires the Portfolios (or their administrative agent) to report to the IRS
and furnish to Portfolio shareholders the cost basis information and holding
period for Portfolio shares purchased on or after January 1, 2012, and redeemed
on or after that date. The Portfolios will permit Portfolio shareholders to
elect from among several IRS-accepted cost basis methods, including average
cost. In the absence of an election, the Portfolios will use average cost as
the default cost basis method. The cost basis method a shareholder elects may
not be changed with respect to a redemption of shares after the settlement date
of the redemption. Portfolio shareholders should consult with their tax
advisors to determine the best IRS-accepted cost basis method for their tax
situation and to obtain more information about how the new cost basis reporting
rules apply to them. PFICs Certain
Portfolios that invest in foreign securities may own shares in certain foreign
entities that are treated as PFICs for U.S. federal income tax purposes. A
Portfolio that owns shares of a PFIC may be subject to U.S. federal income 64 tax (including
interest charges) on distributions received from the PFIC or gains from a
disposition of shares in the PFIC. To avoid this treatment, a Portfolio owning
PFIC shares may make an election to mark the gains (and to a limited extent
losses) in a PFIC “to market” as though it had sold and repurchased its
holdings in the PFIC on the last day of the Portfolio’s taxable year. Such
gains and losses are treated as ordinary income and loss. Alternatively, a
Portfolio may in certain cases elect to treat a PFIC as a “qualified electing
fund” (a “QEF”), in which case the Portfolio will be required to include in its
income annually its share of the QEF’s income and net capital gains, regardless
of whether the Portfolio receives any distribution from the QEF. If the QEF
incurs losses for a taxable year, these losses will not pass through to the
Portfolio and, accordingly, cannot offset other income and/or gains of the
Portfolio. A Portfolio may not be able to make the QEF election with respect to
many PFICs because of certain requirements that the PFICS would have to
satisfy. The
mark-to-market and QEF elections may accelerate the recognition of income
(without the receipt of cash) and increase the amount required to be
distributed by a Portfolio to avoid taxation. Making either of these elections
therefore may require a Portfolio to liquidate investments (including when it
is not advantageous to do so) to meet its distribution requirements, which also
may accelerate the recognition of gain and affect the Portfolio’s total return.
Dividends paid by PFICs generally will not be eligible to be treated as
qualified dividend income. Non-U.S. Taxes Investment
income that may be received by a Portfolio from sources within foreign
countries may be subject to foreign taxes withheld at the source. Tax treaties
between the United States and certain countries may reduce or eliminate such
taxes. If more than
50% of the value of a Portfolio’s total assets at the close of its taxable year
consists of stock or securities of foreign corporations, or, as provided in the
Modernization Act, if at least 50% of the value of a Portfolio’s total assets
at the close of each quarter of its taxable year is represented by interests in
other RICs, that Portfolio may elect to “pass through” to its shareholders the
amount of foreign taxes paid or deemed paid by that Portfolio. If that
Portfolio so elects, each of its shareholders would be required to include in
gross income, even though not actually received, his or her pro rata share of
the foreign taxes paid or deemed paid by that Portfolio, but would be treated
as having paid his or her pro rata share of such foreign taxes and would
therefore be allowed to either deduct such amount in computing taxable income
or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as
foreign source income his or her pro rata share of such foreign taxes plus the
portion of dividends received from the Portfolio representing income derived
from foreign sources. No deduction for foreign taxes could be claimed by an
individual shareholder who does not itemize deductions. In certain
circumstances, a shareholder that (i) has held shares of the Portfolio for less
than a specified minimum period during which it is not protected from risk of
loss or (ii) is obligated to make payments related to the dividends will not be
allowed a foreign tax credit for foreign taxes deemed imposed on dividends paid
on such shares. Additionally, the Portfolio must also meet this holding period
requirement with respect to its foreign stocks and securities in order for
“creditable” taxes to flow-through. Foreign Currency Transactions Gains or losses attributable to
fluctuations in exchange rates between the time a Portfolio accrues income or
receivables or expenses or other liabilities denominated in a foreign currency
and the time that Portfolio actually collects such income or receivables or
pays such liabilities are generally treated as ordinary income or loss.
Similarly, gains or losses on foreign currency forward contracts and the disposition
of debt securities denominated in a foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and
disposition dates, also are treated as ordinary income or loss. 65 Financial Products A
Portfolio’s investments in options, futures contracts, forward contracts, swaps
and derivatives, as well as any of its other hedging, short sale or similar
transactions, may be subject to one or more special tax rules (including
notional principal contract, constructive sale, straddle, wash sale, short sale
and other rules), the effect of which may be to accelerate income to the
Portfolio (including, potentially, without a corresponding receipt of cash with
which to make required distributions), defer Portfolio losses, cause
adjustments in the holding periods of Portfolio securities, convert capital
gains into ordinary income, render dividends that would otherwise be eligible
for the dividends received deduction or a preferential rate of taxation
ineligible for such treatment, convert long-term capital gains into short-term
capital gains and convert short-term capital losses into long-term capital
losses. These rules could therefore affect the amount, timing and character of
distributions to shareholders of a Portfolio. In addition, because the tax
rules applicable to derivative financial instruments are in some cases
uncertain under current law, an adverse determination or future guidance by the
IRS with respect to these rules (which determination or guidance could be
retroactive) may affect whether a Portfolio has made sufficient distributions,
and otherwise satisfied the applicable requirements, to maintain its
qualification as a RIC and avoid Portfolio-level taxation. Payments with Respect to Securities Loans A
Portfolio’s participation in loans of securities may affect the amount, timing
and character of distributions to shareholders. With respect to any security
subject to a securities loan, any (i) amounts received by a Portfolio in place
of dividends earned on the security during the period that such security was
not directly held by a Portfolio will not give rise to qualified dividend
income and (ii) withholding taxes accrued on dividends during the period that such
security was not directly held by a Portfolio will not qualify as a foreign tax
paid by such Portfolio and therefore cannot be passed through to shareholders
even if the Portfolio meets the requirements described in “Non-U.S. Taxes,”
above. Securities Issued or Purchased at a Discount and Payment-in-Kind
Securities A
Portfolio’s investments, if any, in securities issued or purchased at a
discount, as well as certain other securities (including zero coupon
obligations and certain redeemable preferred stock), may require the Portfolio
to accrue and distribute income not yet received. Similarly, a Portfolio’s
investment in payment-in-kind securities will give rise to income which is
required to be distributed even though the Portfolio receives no payment in
cash on the security during the year. In order to generate sufficient cash to
make its requisite distributions, a Portfolio may be required to borrow money
or sell securities in its portfolio that it otherwise would have continued to
hold. Certain Higher-Risk and High Yield Securities Certain
Portfolios may invest in lower-quality fixed income securities, including debt
obligations of issuers not currently paying interest or that are in default.
Investments in debt obligations that are at risk of or are in default present
special tax issues for a Portfolio. Tax rules are not entirely clear on the
treatment of such debt obligations, including as to whether and to what extent
a Portfolio should recognize market discount on such a debt obligation, when a
Portfolio may cease to accrue interest, original issue discount or market
discount, when and to what extent a Portfolio may take deductions for bad debts
or worthless securities and how a Portfolio shall allocate payments received on
obligations in default between principal and interest. These and other related
issues would be addressed by a Portfolio if it invests in such securities as
part of the Portfolio’s efforts to ensure that it distributes sufficient income
to preserve its status as a RIC and does not become subject to U.S. federal
income or excise tax. Investing in Municipal Securities If
the Municipal Portfolio invests substantially all of its assets in U.S.
municipal securities, virtually all of the dividends to be paid by the
Municipal Portfolio will constitute “exempt-interest dividends.” Such
exempt-interest dividends will be exempt from federal income taxes. It is
possible, however, that a portion of the dividends paid by the Municipal
Portfolio will not be exempt from federal income taxes. Social Security
recipients who receive income dividends from the Portfolio may have to pay
taxes on a portion of their Social Security benefits. Shareholders will
receive a Form 1099-DIV, Form 1099-INT or other IRS forms, as required,
reporting the 66 taxability of
all dividends. The Portfolio will also advise shareholders of the percentage of
dividends, if any, which should be included in the computation of the
alternative minimum tax. Assuming
the Municipal Portfolio pays exempt-interest dividends, any interest on money a
shareholder of the Portfolio borrows that is directly or indirectly used to
purchase shares in the Portfolio will not be deductible. Further, entities or persons that are
“substantial users” (or persons related to “substantial users”) of facilities
financed by private activity bonds or industrial development bonds should
consult their tax advisors before purchasing shares of the Municipal
Portfolio. The income from such
bonds may not be tax-exempt for such substantial users. There also may be
collateral federal income tax consequences regarding the receipt of dividends
exempt from federal income tax by shareholders such as S corporations,
financial institutions and property and casualty insurance companies. A
shareholder falling into any such category should consult its tax adviser
concerning its investment in the Municipal Portfolio. As
a general rule, any loss realized upon a taxable disposition of shares in the
Municipal Portfolio that have been held for six months or less will be
disallowed to the extent of any exempt-interest dividends received (or deemed
received) by the shareholder with respect to the shares. Under the
Modernization Act, this loss disallowance rule, however, does not apply with
respect to a regular dividend paid by a RIC which declares exempt-interest
dividends on a daily basis in an amount equal to at least 90% of its net
tax-exempt interest and distributes such dividends on a monthly or more
frequent basis. The Municipal Portfolio expects to satisfy these distribution
requirements, with the result that any loss realized by a shareholder upon a
sale, exchange or redemption of shares in the Municipal Portfolio should not be
subject to this loss disallowance rule. Proposals
have been and may be introduced before Congress that would restrict or
eliminate the federal income tax exemption of interest on municipal securities.
If such a proposal were enacted, the availability of such securities for
investment by the Municipal Portfolio and the value of its portfolio would be
affected. In that event, the Municipal Portfolio would reevaluate its
investment objective and policies. Investing in Mortgage Entities Special
tax rules may apply to the investments by a Portfolio in entities which invest
in or finance mortgage debt. Such investments include residual interests in
REMICs and interests in a REIT which qualifies as a taxable mortgage pool under
the Code or has a qualified REIT subsidiary that is a taxable mortgage pool
under the Code. Although it is the practice of each Portfolio, other than the
High Yield Portfolio which may hold residual interests in REMICs, not to make
such investments, there is no guarantee that a Portfolio will be able to avoid an
inadvertent investment in REMIC residual interests or a taxable mortgage pool. Such
investments may result in a Portfolio receiving excess inclusion income (“EII”)
in which case a portion of its distributions will be characterized as EII and
shareholders receiving such distributions, including shares held through
nominee accounts, will be deemed to have received EII. This can result in the
Portfolio being required to pay tax on the portion of its EII that is allocated
to disqualified organizations, including certain cooperatives, agencies or
instrumentalities of a government or international organization, and tax-exempt
organizations that are not subject to tax on unrelated business taxable income
(“UBTI”). In addition, such amounts generally cannot be offset by net operating
losses, will be treated as UBTI to tax-exempt organizations that are not
disqualified organizations, and will be subject to a 30% withholding tax for
shareholders who are not U.S. persons, notwithstanding any otherwise applicable
exemptions or rate reductions in any relevant tax treaties. Special
tax consequences also apply where charitable remainder trusts invest in RICs
that invest directly or indirectly in residual interests in REMICs or in
taxable mortgage pools. Furthermore, any investment in residual interests of a
REMIC can create complex tax consequences to both a Portfolio and its
shareholders, especially if a Portfolio has state or local governments or other
tax-exempt organizations as shareholders. Investments in Pass-Through Entities Some
amounts received by a Portfolio with respect to its investments in MLPs will
likely be treated as a return of capital because of accelerated deductions
available with respect to the activities of such MLPs. On the disposition 67 of an
investment in such an MLP, the Portfolio will likely realize taxable income in
excess of economic gain with respect to that asset (or, if the Portfolio does
not dispose of the MLP, the Portfolio likely will realize taxable income in
excess of cash flow with respect to the MLP in a later period), and the
Portfolio must take such income into account in determining whether the
Portfolio has satisfied its distribution requirements. The Portfolio may have
to borrow or liquidate securities to satisfy its distribution requirements and
to meet its redemption requests, even though investment considerations might
otherwise make it undesirable for the Portfolio to sell securities or borrow
money at such time. Tax-Exempt Shareholders Under
current law, each Portfolio serves to “block” (that is, prevent the attribution
to shareholders of) UBTI from being realized by its tax-exempt shareholders
(including, among others, individual retirement accounts, 401(k) accounts,
Keogh plans, pension plans and certain charitable entities). Notwithstanding
the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its
investment in a Portfolio if shares in the Portfolio constitute debt-financed
property in the hands of the tax-exempt shareholder within the meaning of
Section 514(b) of the Code. As noted above, a tax-exempt shareholder may also
recognize UBTI if a Portfolio recognizes EII derived from direct or indirect
investments in residual interests in REMICs or taxable mortgage pools. If a
charitable remainder annuity trust or a charitable remainder unitrust (each as
defined in Section 664 of the Code) has UBTI for a taxable year, a 100% excise
tax on the UBTI is imposed on the trust. Backup Withholding Each
Portfolio generally is required to withhold and remit to the U.S. Treasury
Department a percentage of the taxable distributions and redemption proceeds
paid to certain shareholders who fail to properly furnish the Portfolio with a
correct taxpayer identification number, who has under-reported dividend or
interest income, or who fails to certify to the applicable Portfolio that he or
she is not subject to such withholding. Corporate shareholders, certain foreign
persons and other shareholders specified in the Code and applicable regulations
are generally exempt from backup withholding, but may need to provide
documentation to the Portfolio to establish such exemption. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder’s U.S. federal income tax liability, provided the
appropriate information is furnished to the IRS. Foreign (Non-U.S.) Shareholders U.S.
taxation of a shareholder of a Portfolio who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, or a foreign
corporation (a “foreign shareholder”) as defined in the Code, depends on
whether the income of the Portfolio is “effectively connected” with a U.S.
trade or business carried on by the shareholder. Income
Not Effectively Connected. Subject to the discussion below, if the income
from a Portfolio is not “effectively connected” with a U.S. trade or business
carried on by the foreign shareholder, distributions of investment company
taxable income will generally be subject to U.S. tax at the rate of 30% (or
lower treaty rate, except in the case of any EII allocated to the
shareholders), which tax is generally withheld from such distributions. Capital
gain dividends and any amounts retained by a Portfolio which are properly
reported by the Portfolio as undistributed capital gains will not be subject to
U.S. tax, except in very limited circumstances. In the case of a foreign
shareholder, a Portfolio may be required to withhold U.S. income tax on
distributions of net capital gain unless the foreign shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption (generally by providing a U.S. Tax Form W-8BEN). For
taxable years of a Portfolio beginning before January 1, 2012,
properly-reported dividends are generally exempt from U.S. withholding tax
where they (i) are paid in respect of the Portfolio’s “qualified net interest
income” (generally, the Portfolio’s U.S. source interest income, other than
certain contingent interest and interest from obligations of a corporation or
partnership in which the Portfolio is at least a 10% shareholder, reduced by
expenses that are allocable to such income) or (ii) are paid in respect of the
Portfolio’s “qualified short-term capital gains” (generally, the excess of the
Portfolio’s net short-term capital gain over the Portfolio’s long-term capital
loss for such taxable year). However, depending on its circumstances, the
Portfolio may report all, some or none of its potentially 68 eligible
dividends as such qualified net interest income or as qualified short-term
capital gains and/or treat such dividends, in whole or in part, as ineligible
for this exemption from withholding. In order to qualify for this exemption
from withholding, a foreign shareholder will need to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN or other applicable form). In the case
of shares of a Portfolio held through an intermediary, the intermediary may
withhold even if the Portfolio designates the payment as qualified net interest
income or qualified short-term capital gain. Foreign shareholders should
contact their intermediaries with respect to the application of these rules to
their accounts. If
the Portfolio is a “U.S. real property holding corporation,” or would be but
for the operation of certain exclusions, distributions by the Portfolio that
are realized on account of certain capital gain dividends from REITs and, for
calendar years before 2012, gains from the sales or exchanges of “United States
real property interests,” will generally cause the foreign shareholder to be
treated as recognizing such gain as income effectively connected with a U.S.
trade or business (subject to the rules described below for effectively
connected income). Generally, the Portfolio is required to withhold at a 35%
rate on a distribution to a foreign shareholder attributable to such gains, and
such a distribution may subject a foreign shareholder to a U.S. tax filing
obligation and may create a branch profits tax liability for foreign corporate
shareholders. Under a de minimis exception to the rule described
above, if a foreign shareholder has not held more than 5% of the Portfolio’s
shares at any time during the one-year period ending on the date of the
distribution, the foreign shareholder is not treated as receiving a
distribution attributable to gains from U.S. real property interests or capital
gain dividends from REITs, but is, instead, treated as receiving an ordinary
distribution subject to U.S. tax at the rate of 30% (or lower treaty rate). Any
gain that a foreign shareholder realizes upon the sale or exchange of shares of
a Portfolio will ordinarily be exempt from U.S. tax unless at any time during
the shorter of the period during which the foreign shareholder held such shares
and the five-year period ending on the date of the disposition of those shares,
the Portfolio was a U.S. real property holding corporation and the foreign
shareholder actually or constructively held more than 5% of the Portfolio’s
shares. In the latter event the gain would be subject to withholding tax and
otherwise taxed in the same manner as for a U.S. shareholder. A corporation is
a “U.S. real property holding corporation” if the fair market value of its U.S.
real property interests equals or exceeds 50% of the fair market value of such
interests plus its interests in real property located outside the United States
plus any other assets used or held for use in a business. Notwithstanding the
foregoing, gains recognized in calendar years before 2012 upon a disposition of
shares of a Portfolio will not be subject to U.S. income or withholding taxes
if the Portfolio is “domestically controlled” (as such term is defined in the
Code). Foreign
shareholders that engage in certain “wash sale” and/or substitute dividend
payment transactions the effect of which is to avoid the receipt of
distributions from a Portfolio that would be treated as gain effectively
connected with a United States trade or business may be treated as having
received such distributions. Foreign shareholders of a Portfolio should consult
their tax advisors regarding the application of the foregoing rule. Income
Effectively Connected. If the income from a Portfolio is “effectively
connected” with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Portfolio which are reported by the
Portfolio as undistributed capital gains, and any gains realized upon the sale
or exchange of shares of the Portfolio will be subject to U.S. income tax at
the graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate shareholders may also be subject to the branch
profits tax imposed by the Code. The
tax consequences to a foreign shareholder entitled to claim the benefits of an
applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in a Portfolio. The Hiring Incentives to Restore Employment Act Under
provisions of The Hiring Incentives to Restore Employment Act, P.L. 111-147
(the “HIRE Act”), certain payments of U.S. source interest, dividends, and
other fixed or determinable annual or periodical gains, profits and income, as
well as gross proceeds from the sale or disposition of property of a type that
can produce U.S. source 69 dividends or
interest (all such payments, “withholdable payments”), which are made to a
“foreign financial institution,” which term may include certain foreign
shareholders, may be subject to a 30% withholding tax, if the foreign financial
institution does not, among other things, comply, under an agreement with the
Secretary of the U.S. Treasury or his/her delegate, with prescribed due
diligence requirements necessary to determine which of its accounts (including
equity interests in the foreign financial institution) are held by specified
United States persons or United States owned foreign entities (such accounts,
“United States accounts”), and prescribed reporting requirements in respect of
its United States accounts. Further, a 30% withholding tax may apply in respect
of “passthru payments” made by a foreign financial institution to certain
account holders that do not comply with reasonable information requests aimed
at enabling the foreign financial institution to identify its United States
accounts and meet applicable reporting obligations. The HIRE Act will further
impose a 30% withholding tax on certain payments to non-financial foreign
entities. The scope of the applicable HIRE Act provisions is not entirely clear
and no assurance can be given that some or all of the income of a Portfolio,
and/or certain of the Portfolio’s shareholders will not be subject to any of
the above described withholding taxes or that information will not be required
to be reported to the IRS in respect of a shareholder’s interest in the
Portfolio. To comply with the requirements of the HIRE Act, a Portfolio may, in
appropriate circumstances, require shareholders to provide information and tax
documentation regarding their direct and indirect owners. While the withholding
tax provisions of the HIRE Act were to have been effective beginning in 2013,
the U.S. Treasury Department and the IRS have indicated that future regulatory
guidance will provide for a phased-in implementation of these provision, with
withholding on withholdable payments, other than gross proceeds, to begin on
January 1, 2014, withholding on withholdable payments in the form of gross
proceeds to begin on January 1, 2015, and withholding on certain “passthru
payments” to begin on a date to be provided in future guidance, but no earlier
than January 1, 2015. The
HIRE Act also imposes information reporting requirements on individuals (and,
to the extent provided in future regulations, certain domestic entities) that
hold any interest in a “specified foreign financial asset” if the aggregate
value of all such assets held by such individual exceeds $50,000. Significant
penalties can apply upon a failure to make the required disclosure and in
respect of understatements of tax attributable to undisclosed foreign financial
assets. This information reporting requirement is generally applicable for
taxable years beginning after March 18, 2010. The scope of this reporting
requirement is not entirely clear and all shareholders should consult their own
tax advisors as to whether reporting may be required in respect of their
indirect interests in certain investments of a Portfolio. Possible Legislative Changes The
tax consequences described herein may be affected (possibly with retroactive
effect) by various legislative bills and proposals that may be initiated in
Congress. Several provisions of the Code relating to the taxation of RICs and
their foreign shareholders will expire at the end of 2011, and it is possible
that those provisions could be legislatively extended. Similarly, several
preferential tax provisions discussed herein (including the taxation to
individuals of qualified dividend income at capital gains rates, as well as
certain preferential tax rates) are set to expire at the end of 2012, but may,
through legislative action, be extended or otherwise modified. Prospective
investors should consult their own tax advisers regarding the status of any
proposed legislation and the effect, if any, on their investment in a
Portfolio. Other Tax Matters Special
tax rules apply to investments through defined contribution plans and other
tax-qualified plans. Shareholders should consult their tax advisors to
determine the suitability of shares of a Portfolio as an investment through
such plans and the precise effect of such an investment in their particular tax
situation. Dividends,
distributions and gains from the sale of Portfolio shares may be subject to
state, local and foreign taxes. Shareholders are urged to consult their tax
advisors regarding specific questions as to federal, state, local and, where
applicable, foreign taxes. Portfolio
shareholders should consult their own tax advisers regarding the state, local
and foreign tax consequences of an investment in shares and the particular tax
consequences to them of an investment in a Portfolio. 70 Any
non-U.S. shareholders are advised to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a
Portfolio. ADDITIONAL INFORMATION ABOUT THE FUND AND
PORTFOLIOS As
of March 4, 2011, 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: Name and Address Percentage of Total Equity Value Portfolio Lazard
Capital Markets LLC 66% Mitra &
Co 24% Strategic Equity Portfolio Charles
Schwab & Co., Inc. 35% Lazard
Capital Markets LLC 14% National
Financial Services Corp. 12% Lazard
Capital Markets LLC 8% Mid Cap Portfolio City of Los
Angeles 25% Merrill
Lynch 19% 71 Citistreet
Core Market 16% State Street
Bank as Trustee for Olin Corporation Contribution 7% DCGT 5% Small-Mid Cap Portfolio Mac &
Co. 45% Alaska
Retirement Management Board 28% Global Listed Infrastructure Portfolio Genworth Financial Trust Company 83% International Equity Portfolio Charles
Schwab & Co., Inc. 31% Lazard
Capital Markets LLC 10% Dengel &
Co. 8% Lazard
Capital Markets LLC 8% 72 Citigroup
Global Markets Inc. 7% National
Financial Services Corp. 6% International Equity Select Portfolio Merrill
Lynch 31% Citigroup
Global Markets Inc. 12% Charles
Schwab & Co., Inc. 8% First Clearing, LLC 5% International Strategic Portfolio Lazard Capital Markets LLC 15% Lazard Capital Markets LLC 12% Mac & Co. 8% Mac & Co. 6% 73 Mac & Co. 5% International Small Cap Portfolio Wells Fargo
Bank 54% National Financial Services Corp. 18% Lazard Capital Markets LLC 13% Emerging Markets Portfolio National
Financial Services Corp. 24% Citigroup
Global Markets Inc. 16% Charles
Schwab & Co., Inc. 7% First Clearing, LLC 5% Developing Markets Portfolio Citigroup Global Markets Inc. 34% Merrill Lynch 11% 74 First Clearing, LLC 11% National Financial Services, LLC 9% Charles Schwab & Co., Inc. 6% Georgia Tech Foundation Inc. 5% Morgan Stanley Smith Barney 5% Emerging Markets Blend Portfolio Charles Schwab & Co., Inc. 45% National Financial Services Corp. 32% Wells Fargo Bank 5% Emerging Markets Debt Portfolio Lazard Capital Markets LLC 98% High Yield Portfolio Mac &
Co. 16% 75 Merrill Lynch 10% Lazard
Capital Markets LLC 8% SEI Private
Trust Co. 7% Municipal Portfolio Knotfloat
& Co. 13% Lazard
Capital Markets LLC 13% Lazard
Capital Markets LLC 12% Lazard
Capital Markets LLC 10% Lazard
Capital Markets LLC 8% Lazard
Capital Markets LLC 8% Lazard
Capital Markets LLC 6% Lazard
Capital Markets LLC 6% 76 Lazard
Capital Markets LLC 6% Capital Allocator Portfolio Charles
Schwab & Co., Inc. 16% National
Financial Services Corp. New York, NY
10281 7% Name and Address Percentage of Total Equity Value Portfolio Charles
Schwab & Co., Inc. 31% National
Financial Services LLC 10% Pershing LLC 8% National
Financial Services LLC 8% Ameritrade
Inc. 6% Pershing LLC 5% National
Financial Services LLC 5% 77 National
Financial Services LLC 5% Strategic Equity Portfolio Priac as
Trustee/Custodian 67% Merrill
Lynch 9% Mid Cap Portfolio Charles
Schwab & Co., Inc. 36% ING Life
Insurance and Annuity Company 9% Citistreet
Core Market 9% Merrill
Lynch 6% Nationwide
Trust Company, Custodian 5% Reliance
Trust Company 5% Small-Mid Cap Portfolio Nationwide
Life Insurance, NWVA 11% 78 Nationwide
Life Insurance, QVPA 11% Charles
Schwab & Co., Inc. 11% Prudential
Retirement Insurance & Annuity Co. 10% Mercer Trust
Co. 5% International Equity Portfolio Charles
Atwood Company 18% Prudential
Retirement Insurance & Annuity Co. 14% Charles
Schwab & Co., Inc. 6% International Equity Select Portfolio Nationwide
Trust Co. 20% Charles
Schwab & Co., Inc. 16% National
Financial Services LLC 13% 79 First Clearing, LLC 10% William
Blair & Co. LLC 8% William
Blair & Co. LLC 5% Lazard
Capital Markets LLC 5% International Strategic Portfolio Genworth
Financial Trust Co. 40% Charles
Schwab & Co., Inc. 33% Ameritrade
Inc. 14% International Small Cap Portfolio Charles
Schwab & Co., Inc. 65% Ameritrade
Inc. 6% Emerging Markets Portfolio 80 Charles
Schwab & Co., Inc. 26% Morgan
Stanley Smith Barney 16% Developing Markets Portfolio Charles
Schwab & Co., Inc. 34% Morgan
Stanley Smith Barney 10% Emerging Markets Blend Portfolio Charles
Schwab & Co., Inc. 40% Vanguard
Brokerage Services 16% High Yield Portfolio Morgan
Stanley Smith Barney 12% Capital Allocator Portfolio Charles
Schwab & Co., Inc. 26% Morgan
Stanley Smith Barney 15% 81 National
Financial Services LLC 6% 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 SAI, 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. 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 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 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. 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. 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 82 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 SAI 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 SAI 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. The
“Dow Jones U.S. Select Real Estate Securities IndexSM” is a
product of Dow Jones Indexes, a licensed trademark of CME Group Index
Services LLC (“CME”), and has been licensed for use. “Dow Jones®”,
“Dow Jones U.S. Select Real Estate Securities IndexSM” and “Dow
Jones Indexes” are service marks of Dow Jones Trademark Holdings, LLC (“Dow
Jones”), have been licensed to CME and have been sub-licensed for use for
certain purposes by the Investment Manager. Realty Income Portfolio and U.S.
Realty Portfolio, which compare their performance to the Dow Jones U.S.
Select Real Estate Securities IndexSM, are not sponsored,
endorsed, sold or promoted by Dow Jones, CME or their respective affiliates and
Dow Jones, CME and their respective affiliates make no representation
regarding the advisability of investing in such product(s). “Wells
Fargo Hybrid and Preferred Securities” and “WHPS” are service marks of Wells
Fargo & Company. Wells Fargo & Company does not guarantee the
accuracy or completeness of the Wells Fargo Hybrid and Preferred Securities
REIT Index (“WHPS”) and shall have no liability for any errors, omissions or
interruptions to publication. Wells Fargo & Company does not sponsor or
advise any product or service that references WHPS, nor does Wells Fargo
& Company represent that any use of WHPS by any person is appropriate,
suitable or fit for the uses to which it is put. BofA
Merrill Lynch is licensing the BofA Merrill Lynch indices “as is,” makes no
warranties regarding the same, does not guarantee the suitability, quality,
accuracy, timeliness, and/or completeness of BofA Merrill Lynch indices or
any data included in, related to, or derived therefrom, assumes no liability
in connection with their use, and does not sponsor, endorse, or recommend any
company, or any of its products or services. 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. Anchin, Block & Anchin LLP
is the independent registered public accounting firm for the Fund. 83 RATING CATEGORIES The following
is a description of certain ratings assigned by S&P and Moody’s. S&P An S&P
issue credit rating is a forward-looking opinion about the creditworthiness of
an obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The opinion reflects S&P’s view of the
obligor’s capacity and willingness to meet its financial commitments as they
come due, and may assess terms, such as collateral security and subordination,
which could affect ultimate payment in the event of default. Issue credit
ratings can be either long term or short term. Short-term ratings are generally
assigned to those obligations considered short-term in the relevant market. In
the U.S., for example, that means obligations with an original maturity of no
more than 365 days—including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term rating
addresses the put feature, in addition to the usual long-term rating.
Medium-term notes are assigned long-term ratings. Long-Term Issue Credit Ratings Issue credit
ratings are based, in varying degrees, on S&P’s analysis of the following
considerations: • likelihood
of payment—capacity and
willingness of the obligor to meet its financial commitment on an obligation
in accordance with the terms of the obligation; • nature of
and provisions of the obligation; and • protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors’ rights. Issue ratings
are an assessment of default risk, but may incorporate an assessment of
relative seniority or ultimate recovery in the event of default. Junior
obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply
when an entity has both senior and subordinated obligations, secured and
unsecured obligations, or operating company and holding company obligations.) 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. An obligation
rated “AA”
differs from the highest-rated obligations only to a small degree. The
obligor’s capacity to meet its financial commitment on the obligation is very
strong. 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. 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. 84 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. 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. 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. 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. An obligation
rated “CC”
is currently highly vulnerable to nonpayment. A “C”
rating is assigned to obligations that are currently highly vulnerable to
nonpayment, obligations that have payment arrearages allowed by the terms of
the documents, or obligations of an issuer that is the subject of a bankruptcy
petition or similar action which have not experienced a payment default. Among
others, the “C” rating may be assigned to subordinated debt, preferred stock or
other obligations on which cash payments have been suspended in accordance with
the instrument’s terms or when preferred stock is the subject of a distressed exchange
offer, whereby some or all of the issue is either repurchased for an amount of
cash or replaced by other instruments having a total value that is less than
par. An obligation
rated “D”
is in payment default. The “D” rating category is used when payments on an
obligation, including a regulatory capital instrument, 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 similar action if payments on an obligation are jeopardized. An obligation’s
rating is lowered to “D” upon completion of a distressed exchange offer,
whereby some or all of the issue is either repurchased for an amount of cash or
replaced by other instruments having a total value that is less than par. Note: The
ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories. An “NR”
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. Short-Term Issue Credit Ratings 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 designated with a plus sign (+). This indicates that the obligor’s
capacity to meet its financial commitment on these obligations is extremely
strong. 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. 85 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. A short-term
obligation rated “B” is regarded as having significant
speculative characteristics. Ratings of “B-1,” “B-2,” and “B-3” may be assigned
to indicate finer distinctions within the “B” category. The obligor currently
has the capacity to meet its financial commitment on the obligation; however,
it faces major ongoing uncertainties which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the obligation. A short-term
obligation rated “B-1” is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors. A short-term
obligation rated “B-2” is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to
other speculative-grade obligors. A short-term
obligation rated “B-3” is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors. 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. A short-term
obligation rated “D” is in payment default. The “D” rating
category is used when payments on an obligation, including a regulatory capital
instrument, 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. Municipal Short-Term Note Ratings Definitions An S&P
U.S. municipal note rating reflects S&P’s opinion about the liquidity
factors and market access risks unique to the notes. Notes due in three years
or less will likely receive a note rating. Notes with an original maturity of
more than three years will most likely receive a long-term debt rating. In
determining which type of rating, if any, to assign, S&P analysis will
review the following considerations: • amortization
schedule—the larger the
final maturity relative to other maturities, the more likely it will be
treated as a note; and • source of
payment—the more
dependent the issue is on the market for its refinancing, the more likely it
will be treated as a note. Note rating
symbols are as follows: SP-1 Strong
capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation. SP-2 Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. SP-3 Speculative
capacity to pay principal and interest. 86 Moody’s Long-Term Obligations Ratings and Definitions Moody’s
long-term obligation ratings are opinions of the relative credit risk of
fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default. Obligations
rated “Aaa”
are judged to be of the highest quality, with minimal credit risk. Obligations
rated “Aa”
are judged to be of high quality and are subject to very low credit risk. Obligations
rated “A”
are considered upper-medium grade and are subject to low credit risk. Obligations
rated “Baa”
are subject to moderate credit risk. They are considered medium-grade and as
such may possess certain speculative characteristics. Obligations
rated “Ba”
are judged to have speculative elements and are subject to substantial credit
risk. Obligations
rated “B”
are considered speculative and are subject to high credit risk. Obligations
rated “Caa”
are judged to be of poor standing and are subject to very high credit risk. Obligations
rated “Ca”
are highly speculative and are likely in, or very near, default, with some
prospect of recovery of principal and interest. Obligations
rated “C”
are the lowest rated class of bonds and are typically in default, with little
prospect for recovery of principal or interest. Note: Moody’s
appends numerical modifiers 1, 2, and 3 to 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. Short-Term Ratings Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs
or to individual short-term debt instruments. Such obligations generally have
an original maturity not exceeding thirteen months, unless explicitly noted. Moody’s
employs the following designations to indicate the relative repayment ability
of rated issuers: P-1 Issuers (or supporting institutions)
rated Prime-1 have a superior ability to repay short-term debt obligations. P-2 Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations. P-3 Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay
short-term obligations. NP Issuers
(or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories. Short-Term
Obligation Ratings — There are three rating categories for short-term municipal
obligations that are considered investment grade. These ratings are designated
as Municipal Investment Grade (“MIG”) and are divided 87 MIG 1 This
designation denotes superior credit quality. Excellent protection is afforded
by established cash flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing. MIG 2 This
designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group. MIG 3 This
designation denotes acceptable credit quality. Liquidity and cash flow
protection may be narrow, and market access for refinancing is likely to be
less well-established. SG This
designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection. Demand
Obligation Ratings — In the case of variable rate demand obligations (“VRDOs”),
a two-component rating is assigned; a long- or short-term debt rating and a
demand obligation rating. The first element represents Moody’s evaluation of
the degree of risk associated with scheduled principal and interest payments.
The second element represents Moody’s evaluation of the degree of risk associated
with the ability to receive purchase price upon demand (“demand feature”),
using a variation of the MIG rating scale, the Variable Municipal Investment
Grade or VMIG rating. When either
the long- or short-term aspect of a VRDO is not rated, that piece is designated
NR, e.g.,
Aaa/NR or NR/VMIG 1. VMIG rating
expirations are a function of each issue’s specific structural or credit
features. VMIG 1 This
designation denotes superior credit quality. Excellent protection is afforded
by the superior short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand. VMIG 2 This
designation denotes strong credit quality. Good protection is afforded by the
strong short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon
demand. VMIG 3 This
designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment
of purchase price upon demand. SG This
designation denotes speculative-grade credit quality. Demand features rated
in this category may be supported by a liquidity provider that does not have
an investment grade short-term rating or may lack the structural and/or legal
protections necessary to ensure the timely payment of purchase price upon
demand. 88 THE LAZARD FUNDS, INC. PART C. OTHER INFORMATION ITEM 28. EXHIBITS. (a) Articles of
Incorporation, Articles of Amendment and Articles Supplementary(1), (2), (3),
(6), (7), (8), (9), (10), (11), (12), (13), (14), (15), * (b) By-Laws(8) (d)(1) Investment
Management Agreement, as revised* (d)(2) Expense
Limitation Agreement, as revised* (e) Distribution
Agreement, as revised(7) (g) Amended and
Restated Custodian Contract(1) (h)(1) Revised
Transfer Agency and Service Agreement(1) (h)(2) Amendment to
Revised Transfer Agency and Service Agreement(1) (h)(3) Administration
Agreement(4) (i) Opinion and
Consent of Counsel(5) (j) Consent of
Independent Registered Public Accounting Firm* (m)(1) Distribution
and Servicing Plan, as revised* (m)(2) Form of
Servicing Agreement, as revised* (n) 18f-3 Plan,
as revised* (p) Code of
Ethics* Other
Exhibits: (s) Powers of
Attorney of Board Members(9) * Filed
herewith. 1. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 28 filed with the
Securities and Exchange Commission (the “SEC”) on April 29, 2003. 2. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 22 filed with the
SEC on December 29, 2000. 3. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 25 filed with the
SEC on April 30, 2001. 4. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 8 filed with the
SEC on October 13, 1995. 5. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 9 filed with the
SEC on December 27, 1995. 6. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 31 filed with the
SEC on December 3, 2004. 7. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 34 filed with the
SEC on July 20, 2005. 8. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 38 filed with the
SEC on February 27, 2006. 9. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 42 filed with the
SEC on February 13, 2008. 10. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 44 filed with the
SEC on April 29, 2008. 11. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 48 filed with the
SEC on September 24, 2008. 12. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 51 filed with the
SEC on December 22, 2009. 13. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 53 filed with the
SEC on April 9, 2010. 14. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 58 filed with the
SEC on March 25, 2011. 15. Incorporated
by reference from Registrant’s Post-Effective Amendment No. 62 filed with the
SEC on August 12, 2011. ITEM 29. PERSONS
CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT. None. ITEM 30. INDEMNIFICATION. Reference is
made to Article NINTH of Registrant’s Articles of Incorporation filed as
Exhibit (a) and to Section 2-418 of the Maryland General Corporation Law. The
application of these provisions is limited by Article VIII of Registrant’s
By-Laws filed as Exhibit (b) and by the following undertaking set forth in the
rules promulgated by the SEC: Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in such Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a director,
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Registrant will unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in such Act and will be governed by the final
adjudication of such issue. Reference also
is made to the Investment Management Agreement and the Distribution Agreement
filed as Exhibits (d) and (e), respectively. ITEM 31. BUSINESS AND
OTHER CONNECTIONS OF INVESTMENT ADVISER. The
descriptions of personnel of Lazard Asset Management LLC (“LAM”) under the
Captions “Fund Management” in the Prospectus and “Management” in the Statement
of Additional Information constituting Parts A and B, respectively, of this
Registration Statement are incorporated by reference herein. The following is a
list of the directors and senior officers of the Investment Manager. None of
the persons listed below has had other business connections of a substantial
nature during the past two fiscal years. Title / Name Directors Kenneth M.
Jacobs Alexander F.
Stern Chief Executive Officer and Director Ashish
Bhutani Deputy Chairmen Charles
Carroll Andrew Lacey John
Reinsberg Chairman USA Robert P.
DeConcini Senior Managing Directors Andreas
Huebner Robert
Prugue Bill Smith Managing Directors Jennifer
Abate Ardra Belitz Michael
Bennett Christopher
Blake Nicholas
Bratt Charles
Burgdorf Irene Cheng Henry Choon Rohit Chopra David Cleary Kenneth
Colton Robert
Connin Alan Custis Kun Deng James Donald Anthony
Dote, Jr. Yury
Dubrovsky Robert
Failla Michael Fry Jeffrey
Gould Timothy
Griffen William
Holzer Peter
Hunsberger Arif Joshi Matthias
Kruse John Lee Mark Little Carmine
Lizza Gerald B. Mazzari Keiichi Miki Jonathan
Morris Andrew
Norris Kevin O’Hare Nathan A.
Paul Brian Pessin David
Pizzimenti Michael
Powers Ganesh
Ramachandran Eulogio
(Joe) Ramos Sean
Reynolds Susan
Roberts Nina
Saglimbeni James
Schachtel Ulrich
Schweiger Brian Simon Denise Simon Darrin Sokol Jeremy
Taylor Ronald
Temple Richard
Tutino Merida
Welles Markus van
de Weyer ITEM 32. PRINCIPAL
UNDERWRITERS. (a) Lazard Asset
Management Securities LLC, a Delaware limited liability company, is the
principal underwriter of the Registrant and also serves as the principal
underwriter of Lazard Retirement Series, Inc. (b) The
following information is given regarding directors and officers of Lazard
Asset Management Securities LLC, whose principal business address is 30
Rockefeller Plaza, New York, New York 10112. Name Position and Offices with Underwriter Position and Offices with Charles L.
Carroll Chief
Executive Officer President
and Director Brian D.
Simon Chief
Compliance Officer None Gerald B.
Mazzari Chief
Financial Officer and Chief Operating Officer None Nathan A.
Paul Chief Legal
Officer Secretary (c) Not
applicable. ITEM 33. LOCATION OF
ACCOUNTS AND RECORDS. The majority
of the accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained as follows: journals, ledgers, securities records and
other original records are maintained primarily at the offices of Registrant’s
custodian, State Street Bank and Trust Company. All other records so required
to be maintained are maintained at the offices of LAM, 30 Rockefeller Plaza,
New York, New York 10112. ITEM 34. MANAGEMENT
SERVICES. Not
applicable. ITEM 35. UNDERTAKINGS. None. SIGNATURES Pursuant to
the requirements of the Securities Act of 1933 and the Investment Company Act
of 1940, the Registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 17th day of
November, 2011. THE LAZARD
FUNDS, INC. By: /s/ Charles
L. Carroll Charles L.
Carroll, Chief Executive Officer Pursuant to
the requirements of the Securities Act of 1933, this Amendment to Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated. /s/ Charles
L. Carroll President
and Director November 17,
2011 Charles L.
Carroll /s/ Stephen
St. Clair Treasurer
and Chief Financial Officer November 17,
2011 Stephen St.
Clair /s/ Ashish
Bhutani Director November 17,
2011 Ashish
Bhutani /s/ Kenneth
S. Davidson* Director November 17,
2011 Kenneth S.
Davidson /s/ Nancy A.
Eckl* Director November 17,
2011 Nancy A.
Eckl /s/ Lester
Z. Lieberman* Director November 17,
2011 Lester Z.
Lieberman /s/ Leon M.
Pollack* Director November 17,
2011 Leon M.
Pollack /s/ Richard
Reiss, Jr.* Director November 17,
2011 Richard
Reiss, Jr. /s/ Robert
M. Solmson* Director November 17,
2011 Robert M.
Solmson *By: /s/ Nathan
A. Paul Attorney-in-fact,
Nathan A. Paul Exhibit Index (a) Articles
Supplementary (d)(1) Investment
Management Agreement, as revised (d)(2) Expense
Limitation Agreement, as revised (m)(1) Distribution
and Servicing Plan, as revised (m)(2) Form of
Servicing Agreement, as revised (n) 18f-3 Plan,
as revised (j) Consent of
Independent Registered Public Accounting Firm (p) Code of
Ethics
30 Rockefeller Plaza
New York, New York 10112-6300
Telephone: (800) 823-6300
http://www.LazardNet.com
30 Rockefeller Plaza
New York,
New York 10112-6300
Telephone: (800) 823-6300
30 Rockefeller Plaza
New York, New York 10112-6300
One Lincoln Street
Boston, Massachusetts 02111
P.O. Box 8514
Boston, Massachusetts 02266-8514
Telephone: (800) 986-3455
Anchin, Block & Anchin LLP
1375 Broadway
New York, NY 10018
http://www.anchin.com
180
Maiden Lane
New York, New York 10038-4982
http://www.stroock.com
(“Equity Value Portfolio”)
(“Strategic Equity Portfolio”)
(“Mid Cap Portfolio”)
(“Small-Mid Cap Portfolio”)
(“Global Listed Infrastructure Portfolio”)
(“International Equity Portfolio”)
(“International Equity Select Portfolio”)
(“International Strategic Portfolio”)
(“International Small Cap Portfolio”)
(“Emerging Markets Portfolio”)
(“Developing Markets Portfolio”)
(“Emerging Markets Blend Portfolio”)
(“Emerging Markets Multi-Strategy Portfolio”)
(“Emerging Markets Debt Portfolio”)
(“Realty Income Portfolio”)
(“U.S. Realty Portfolio”)
(“International Realty Portfolio”)
(“High Yield Portfolio”)
(“Municipal Portfolio”)
(“Global Fixed Income Portfolio”)
(“Capital Allocator Portfolio”)
Hybrid-Preferred
Securities. Hybrid-preferred securities are typically
junior and fully subordinated liabilities of an issuer or the beneficiary of a
guarantee that is junior and fully subordinated to the other liabilities of the
guarantor. In addition, hybrid-preferred securities typically permit an issuer
to defer the payment of income for eighteen months or more without triggering
an event of default. Generally, the maximum deferral period is five years.
Because of their subordinated position in the capital structure of an issuer,
the ability to defer payments for extended periods of time without default
consequences to the issuer, and certain other features (such as restrictions on
common dividend payments by the issuer or ultimate guarantor when full
cumulative payments on the hybrid preferred securities have not been made),
these hybrid-preferred securities are often treated as close substitutes for
traditional preferred securities, both by issuers and investors.
Hybrid-preferred securities have many of the key characteristics of equity due
to their subordinated position in an issuer’s capital structure and because
their quality and value are heavily dependent on the profitability of the issuer
rather than on any legal claims to specific assets or cash flows.
Hybrid-preferred securities include, but are not limited to, trust preferred
securities (TRUPS®); enhanced trust preferred securities (Enhanced
TRUPS®); trust-originated preferred securities (TOPrS®);
monthly-income preferred securities (MIPS®); quarterly-income bond
securities (QUIBS®); quarterly-income debt securities (QUIDS®);
quarterly-income preferred securities (QUIPSSM®); corporate trust
securities (CorTS®); public income notes (PINES®); and
other hybrid-preferred securities.2
The
Emerging Markets Multi-Strategy, Emerging Markets Debt, Realty Income, Realty
Equity, International Realty, High Yield, Municipal, Global Fixed Income and
Capital Allocator 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 Global Listed Infrastructure,
International Equity, International Equity Select and International Strategic
Portfolios may each invest up to 20% of its assets in investment grade
fixed-income securities and short-term money market instruments.
to greater
market fluctuations than certain lower yielding, higher-rated fixed-income
securities. See “Lower-Rated Securities” below for a discussion of those
securities.
Portfolio
to buy additional bonds at the favorable rate or to sell the warrants at a
profit. If interest rates rise, the warrants would generally expire with no
value. Corporate income-producing securities also may include forms of
preferred or preference stock, which may be considered equity securities. The
rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate such as
interest rates or other financial indicators. The rate of return or return of principal
on some debt obligations may be linked or indexed to the level of exchange
rates between the U.S. dollar and a foreign currency or currencies. Such
securities may include those whose principal amount or redemption price is
indexed to, and thus varies directly with, changes in the market price of
certain commodities, including gold bullion or other precious metals.
Variable and Floating Rate Securities. Variable
and floating rate securities provide for a periodic adjustment in the interest
rate paid on the obligations. The interest rate on variable or floating rate
securities is ordinarily determined by reference to or is a percentage of a
bank’s prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates or some other objective measure. 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. Certain of these 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.
Participation
Interests (All Portfolios except the Realty Portfolios). Each
Portfolio may purchase from financial institutions participation interests in
securities in which the Portfolio may invest.
Mortgage-Related
Securities (High Yield Portfolio and, to a limited extent, Equity Value,
Strategic Equity, Mid Cap, Small-Mid Cap, Emerging Markets Multi-Strategy,
Emerging Markets Debt, Realty Income, U.S. Realty, International Realty, Global
Fixed Income and Capital Allocator Portfolios only). Mortgage-related
securities, which may be considered a form of derivative, are 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 those described below and including pass-through
securities, 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. The Realty Portfolios are each limited to investing 5% of
the Portfolio’s assets in mortgage-related securities issued or guaranteed by
U.S. issuers, including the U.S. Government or one of its agencies or
instrumentalities, or private issuers.
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 a
Portfolio. Moreover, with respect to certain stripped mortgage-backed
securities, if the underlying mortgage securities experience greater than
anticipated prepayments of principal, a 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 a 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.
classes. These
mortgage-related securities generally are constructed to provide protection to
the senior classes of 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.
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.
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. Each of these Portfolios other than the Realty
Portfolios may invest in these and other types of asset-backed securities that
may be developed in the future. The Realty Portfolios are each limited to
investing in asset-backed securities issued by private issuers, and up to 5% of
the Portfolio’s total assets only.
Floating
and Variable Rate Demand Obligations (Realty
Income, U.S. Realty, International Realty, Municipal and Global Fixed Income
Portfolios only). The Portfolio may purchase floating and variable rate
demand notes and bonds, which are tax exempt obligations ordinarily having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal at any time or at specified intervals. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Portfolio’s right to redeem is dependent on the ability of
the borrower to pay principal and interest on demand.
Taxable Investments (Municipal Portfolio only). From
time to time, on a temporary basis other than for temporary defensive purposes
(but not to exceed 20% of the value of Municipal Portfolio’s net assets) or for
temporary defensive purposes, Municipal Portfolio may invest in taxable
short-term investments consisting of: notes and commercial paper of corporate
issuers; obligations of the U.S. Government, its agencies or instrumentalities;
certificates of deposit of U.S. domestic banks, including foreign branches of
domestic banks; time deposits; bankers’ acceptances and other short-term bank
obligations; and repurchase agreements in respect of any of the foregoing.
Dividends paid by the Portfolio that are attributable to income earned by the
Portfolio from taxable investments will be taxable to investors. See “Dividends
and Distributions.”
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. However, the capital markets in the U.S. and
internationally have experienced unprecedented volatility in recent years,
causing significant declines in the value and liquidity of many securities.
These market conditions may continue or worsen.
Eurodollar
and Yankee Dollar Investments (Global Fixed Income Portfolio only).
Eurodollar instruments are bonds of foreign corporate and government issuers
that pay interest and principal in U.S. dollars generally held in banks outside
the United States, primarily in Europe. Yankee Dollar instruments are U.S.
dollar-denominated bonds typically issued in the United States by foreign
governments and their agencies and foreign banks and corporations. Eurodollar
certificates of deposit are U.S. dollar-denominated certificates of deposit
issued by foreign branches of domestic banks; Eurodollar time deposits are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or in a foreign
bank; and Yankee certificates of deposit are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States. These investments involve risks that are different from
investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
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 macroeconomic and other
factors affecting the stock market in general, expectations of interest rates,
investor 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.
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 shares of money market mutual
funds (except Small-Mid Cap and International Equity Portfolios), U.S.
Government securities, repurchase agreements, bank obligations and commercial
paper and other short-term obligations (“Money Market Instruments”). Each
Portfolio also may purchase Money Market Instruments when it has cash reserves
or in anticipation of taking a market position, and the Global Fixed Income
Portfolio may invest in Money Market Instruments as part of its investment strategy.
Foreign
Banking Obligations (Global Fixed Income Portfolio only).
Obligations of foreign branches and foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks may be general obligations of
the parent banks in addition to the issuing branch, or may be limited by the
terms of a specific obligation and governmental regulation. Such obligations
are subject to different risks than are those of domestic banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls, seizure of assets, declaration of a
moratorium and foreign withholding and other taxes on interest income. Foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank
than about a domestic bank.
within the
state in an amount equal to a specified percentage of the aggregate amount of
liabilities of the foreign bank payable at or through all of its agencies or
branches within the state.
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.
not
contractually required to cash settle, a Portfolio must either set aside liquid
assets equal to such contracts’ full notional value (generally, the total
numerical value of the asset underlying a future or forward contract at the
time of valuation) or maintain offsetting positions while the positions are
open. With respect to futures contracts or forward contracts that are
contractually required to cash settle, however (such as a “non-deliverable”
forward currency contract), a Portfolio is permitted to set aside liquid assets
in an amount equal to the Portfolio’s daily marked-to-market net obligation (i.e.,
the Portfolio’s daily net liability) under the contracts, if any, rather than
such contracts’ full notional value. By setting aside assets equal to only its
net obligations under cash-settled futures and forward contracts, a Portfolio
may employ leverage to a greater extent than if the Portfolio were required to
segregate assets equal to the full notional value of such contracts. 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.
Specific
Futures Transactions. Each Portfolio other than
Small-Mid Cap, International Equity, Emerging Markets Debt, High Yield,
Municipal and Global Fixed Income 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 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.
Structured
Securities (Emerging Markets Multi-Strategy and Global Fixed Income Portfolios
only).
Structured securities are securities whose cash flow characteristics depend
upon one or more indices or that have embedded forwards or options or
securities where a Portfolio’s investment return and the issuer’s payment
obligations are contingent on, or highly sensitive to, changes in the value of
underlying assets, indices, interest rates, cash flows or market (embedded
index). When a Portfolio purchases a
structured security, it will make a payment of principal to the counterparty. Some
structured securities have a guaranteed repayment of principal while others
place a portion (or all) of the principal at risk. Guarantees are subject to
the risk of default by the counterparty or its credit provider.
The terms of such structured securities normally provide that their
principal and/or interest payments are to be adjusted upwards or downwards (but
not ordinarily below zero) to reflect changes in the embedded index while the
structured securities are outstanding. As a result, the interest and/or
principal payments that may be made on a structured security may vary widely,
depending upon a variety of factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or interest
payments. The rate of return on structured securities may be determined by
applying a multiplier to the performance or differential performance of the
embedded index. Application of a multiplier involves leverage that will serve
to magnify the potential for gain and the risk of loss. Structured securities
may be issued in subordinated and unsubordinated classes, with subordinated
classes typically having higher yields and greater risks than an unsubordinated
class. Structured securities may not have an active trading market.
Initial Public Offerings (All Portfolios, except Emerging Markets Debt,
High Yield, Municipal and Global Fixed Income Portfolios)
Equity Value
and Strategic Equity—equity securities of U.S. companies; (ii) Mid Cap
Portfolio—equity securities of medium-size U.S. companies; (iii) Small-Mid Cap
Portfolio—equity securities of small-mid cap U.S. companies; (iv) Global Listed
Infrastructure Portfolio—equity securities of infrastructure companies; (v)
International Equity, International Equity Select and International Strategic
Portfolios—equity securities; (vi) International Small Cap Portfolio—equity
securities of small cap companies; (vii) Emerging Markets, Developing Markets
and Emerging Markets Blend Portfolios—equity securities of companies whose
principal business activities are located in emerging market countries as
defined in the Prospectus; (viii) Emerging Markets Multi-Strategy
Portfolio—securities and other investments that are economically tied to
emerging market countries; (ix) Emerging Markets Debt Portfolio—debt securities
that are economically tied to emerging market countries; (x) Realty Income
Portfolio—dividend-paying common and preferred stocks, convertible securities,
fixed income securities and other investments related to U.S. Realty Companies,
as well as certain synthetic instruments related to U.S. Realty Companies; (xi)
U.S. Realty Portfolio—equity securities (including common, convertible and
preferred stocks) of U.S. Realty Companies, as well as certain synthetic
instruments related to U.S. Realty Companies; (xii) International Realty Portfolio—equity
securities (including common, convertible and preferred stocks) of non-U.S.
Realty Companies, as well as certain synthetic instruments relating to non-U.S.
Realty Companies; (xiii) High Yield Portfolio—bonds 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;
(xiv) Municipal Portfolio— municipal securities, the interest on which is, in
the opinion of issuer’s counsel at the time of issuance, exempt from regular
federal income taxes; and (xv) Global Fixed Income Portfolio—Fixed Income
Investments as defined in the Prospectus. Municipal Portfolio’s policy in (xiv)
is a fundamental policy which cannot be changed without approval by the holders
of a majority of the Portfolio’s outstanding voting securities (as defined in
the 1940 Act); each other Portfolio has adopted a policy to provide its
shareholders with at least 60 days’ prior notice of any change with respect to
its 80% policy.
Address(1)
(Since) and Term(2)
Company Directorships Held During the Past
Five Years(2)
(August 1995)
(April 2007)
(October 1991)
Address(1)
(Since) and Term(2)
Company Directorships Held During the Past
Five Years(2)
(August 2006)
(May 1991)
(September 2004)
President and Director
(June 2004)
(July 2005)
Address(1)
(Since) and Term(2)
Five Years
(April 2002)
(May 2003)
(November 2002)
(February 2009)
(December 2004)
Bhutani
Carroll
Davidson
Eckl
Lieberman
Pollack
Reiss, Jr.
Solmson
Bhutani
Carroll
Davidson
Eckl
Lieberman
Pollack
Reiss, Jr.
Solmson
[Each
Director who is not an affiliated person of the Investment Manager or any of
its affiliates is paid by all of the Lazard Funds: (1) an annual retainer of
$80,000, (2) a per meeting in person regular or special meeting fee of $5,000
($1,500 for telephonic participation), including Board, committee, subcommittee
or other special meetings specifically authorized by the Board and held in
connection with delegated Fund business, and (3) a telephone Audit Committee or
special Board meeting fee of $1,500, with an additional annual fee for the
Audit Committee Chairman, Lester Z. Lieberman, of $5,000.] The Independent
Directors also are reimbursed for travel and other out-of-pocket expenses for
attending Board and committee meetings. No additional compensation is provided
in respect of committee meetings held in conjunction with a meeting of the
Board. Compensation is divided among the Lazard Funds based on relative net
assets. The Directors do not receive benefits from the Fund pursuant to any
pension, retirement or similar arrangement. The aggregate amount of
compensation paid to each Director for the year ended December 31, 2010 by the
Fund and by the funds in the Lazard Fund Complex (comprised of 29 active
investment portfolios), was as follows:
the Fund
the Lazard Fund Complex
Companies ($*)
Investment
Vehicles ($*)
($*)##
Thomas M.
Dzwil
Companies ($*)
Investment
Vehicles ($*)
($*)##
The
Investment Manager, a wholly-owned subsidiary of Lazard Ltd (collectively with
the Investment Manager and its other affiliates, “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
Year Ended
December 31, 2008
Year Ended
December 31, 2009
Year Ended
December 31, 2010
Fee For Fiscal
Year Ended
December 31, 2008
Fee For Fiscal
Year Ended
December 31, 2009
Fee For Fiscal
Year Ended
December 31, 2010
Fee For Fiscal
Year Ended
December 31, 2008
Fee For Fiscal
Year Ended
December 31, 2009
Fee For Fiscal
Year Ended
December 31, 2010
Fiscal
Year Ended
December
31, 2008
Fiscal
Year Ended
December
31, 2009
Fiscal
Year Ended
December
31, 2010
(in $000s)
Brokerage
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Total Brokerage
Transactions
Effected Through
Lazard
Brokerage
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Total Brokerage
Transactions
Effected Through
Lazard
Brokerage
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Total Brokerage
Transactions
Effected Through
Lazard
Brokerage
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Total Brokerage
Transactions
Effected Through
Lazard
Amount
Concessions
Amount
Concessions
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 Investment Manager, appropriate
investments for the Portfolio. In addition, securities accepted in payment for
Portfolio shares must meet the Portfolio’s investment objective and policies
and be acquired by the Portfolio for investment and not for resale. A Portfolio
or the Investment Manager may impose additional conditions on accepting
securities in payment for Portfolio shares. The contribution of securities to
the Portfolio may be a taxable transaction to the shareholder.
Distribution and Servicing
Plan For Fiscal Year
Ended December 31, 2010
The Fund
intends to declare as a dividend on the outstanding shares of Emerging Markets
Debt Portfolio, High Yield Portfolio, Municipal Portfolio and Global Fixed
Income Portfolio substantially all of each 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 these Portfolios ordinarily will be paid on
the last business day of each month. Shareholders who redeem all their shares
of a 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.
Investment
income for a Portfolio includes, among other things, dividends and interest
income, accretion of market and original issue discount and amortization of
premium, as applicable.
As discussed below under “Investing in
Municipal Securities,” any loss realized upon a taxable disposition of shares
in the Municipal Portfolio that have been held for six months or less will be
disallowed to the extent of any exempt-interest dividends received (or deemed
received) by the shareholder with respect to the shares. Under the
Modernization Act, this loss disallowance rule, however, does not apply with
respect to a regular dividend paid by a RIC which declares exempt-interest
dividends on a daily basis in an amount equal to at least 90% of its net
tax-exempt interest and distributes such dividends on a monthly or more
frequent basis.
It is
anticipated that each of Global Listed Infrastructure, International Equity,
International Equity Select, International Strategic, International Small Cap,
Emerging Markets, Developing Markets, Emerging Markets Blend, Emerging Markets
Multi-Strategy, Emerging Markets Debt, International Realty and Global Fixed
Income 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
should consult his or her own tax advisor regarding the potential application
of foreign tax credits.
Institutional Shares Outstanding
Lazard Frères & Co. LLC
30 Rockefeller Plaza
New York, NY 10112
FBO 79
11270 West Park Place, Suite 400
Milwaukee, WI 53224
FBO Its Customers
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Iron Workers Local 40361
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FBO Its Customers
One World Financial Center
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Lazard Frères & Co. LLC
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State Street Bank as Trustee
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State Street Bank & Trust Co.
2 Avenue de Lafayette
Boston, MA 02111-1724
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50 Evergreen Avenue
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The Baycrest Centre Foundation
3560 Bathurst Street
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Market Street International
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P.O. Box 3198
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525 William Penn Place
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525 William Penn Place
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P.O. Box 1533
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FBO Its Customers
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10 Marine Drive
Marine Atlantic Port Aux Basques NL AOM ICO
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388 Greenwich St.
New York, NY 10013
FBO Its Customers
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388 Greenwich St.
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2801 Market Street
St. Louis, MO 63103-2523
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One World Financial Center
200 Liberty Street, 5th Floor
New York, NY 10281
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101 Montgomery Street
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New York, NY 10112-0015
Harborside Financial Center
Plaza 2, Floor 3
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FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
FBO University of Co. Hosp DB
P.O. Box 1533
Minneapolis, MN 55480-1533
Lazard Asset Management LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246
Henry Preston Ingram
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
FBO Harlysville Bank
One Freedom Valley Drive
Oaks, PA 19456
P.O. Box 5496
Boston, MA 02206-5496
Charles Ferrara
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
IJM Limited Partnership
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Charlotte K. Wallace
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Marsha Davidson
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
June Eng
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Ingrid B. Josephson
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Emery Castimore
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
Muriel Freedman
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FBO Its Customers
One World Financial Center
200 Liberty Street
Open Shares Outstanding
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FEBO Marjorie L. Brown
Bedford, OH
P.O. Box 2052
Jersey City, NJ 07303
FEBO Wegmans 401K Plan
Camillus, NY
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103
P.O. Box 2052
Jersey City, NJ 07303
FEBO Sue Mathis
5 Terraza Drive
Newport Beach, CA 92657-1510
FEBO Wegmans 401K Plan
5613 Silver Street Road
Auburn, NY 13021-8791
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246
FBO 24000996
101 Montgomery Street
San Francisco, CA 94104
151 Farmington Avenue, TN41
Hartford, CT 06156
State Street Bank as Trustee
1 Heritage Drive
North Quincy, MA 02171
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246
FBO IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
8515 East Orchard Road 2T2
Greenwood Village, CO 80111-5002
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103
FBO Thermsys Corp. and Thermalex Inc.
1 Investors Way M5 N1G
Norwood, MA 02062-1599
136 E. Michigan Avenue, Suite 1201
Kalamazoo, MI 49007
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103
Special Custody Account
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FBO IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FEBO Bernhardt-Reese Unit Trust
60 Macbain Avenue
Atherton, CA 94027
FBO Its Customers
10750 Wheat First Drive
Glen Allen, VA 23060
Gizmo Partners LP
222 West Adams Street
Chicago, IL 60606-5312
Jonathan and Natalie Stein
222 West Adams Street
Chicago, IL 60606-5312
Frances Trust
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015
3200 North Central Avenue
Phoenix, AZ 85012
Special Custody Account
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103
Special Custody Account
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103
Special Custody Account
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
Special Custody Account
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
P.O. Box 1170
Valley Forge, PA 19482-1170
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FBO Its Customers
101 Montgomery Street
San Francisco, CA 94104
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FEBO Comar Inc.
One Comar Place
Buena, NJ 08310-1523
U.S. Municipal Short-Term Debt and Demand
Obligation Ratings
into three levels—MIG
1 through MIG 3. In addition, those short-term obligations that are of
speculative quality are designated SG, or speculative grade. MIG ratings expire
at the maturity of the obligation.
Registrant