THE
LAZARD FUNDS, INC.
30 Rockefeller Plaza
New York, New York 10112-6300
(800) 823-6300
STATEMENT
OF ADDITIONAL INFORMATION
October 31, 2013
The Lazard Funds, Inc. (the “Fund”)
is a no-load, open-end management investment company known as a mutual fund. This Statement of Additional Information (“SAI”),
which is not a prospectus, supplements and should be read in conjunction with the current Prospectus of the Fund, dated May 1,
2013, as may be revised or supplemented from time to time (the “Prospectus”), relating to the following twenty-four portfolios
(individually, a “Portfolio” and collectively, the “Portfolios”):
| |
Institutional
Shares |
Open Shares |
| US Equity |
|
|
Lazard US Equity Concentrated Portfolio
(“Equity Concentrated Portfolio”) |
LEVIX |
LEVOX |
Lazard US Strategic Equity Portfolio
(“Strategic Equity Portfolio”) |
LZUSX |
LZUOX |
Lazard US Mid Cap Equity Portfolio
(“Mid Cap Portfolio”) |
LZMIX |
LZMOX |
Lazard US Small-Mid Cap Equity Portfolio
(“Small-Mid Cap Portfolio”) |
LZSCX |
LZCOX |
| Global Equity |
|
|
Lazard Global Listed Infrastructure Portfolio
(“Global Listed Infrastructure Portfolio”) |
GLIFX |
GLFOX |
| International Equity |
|
|
Lazard International Equity Portfolio
(“International Equity Portfolio”) |
LZIEX |
LZIOX |
Lazard International Equity Select Portfolio
(“International Equity Select Portfolio”) |
LZSIX |
LZESX |
Lazard International Strategic Equity Portfolio
(“International Strategic Portfolio”) |
LISIX |
LISOX |
Lazard International Small Cap Equity Portfolio
(“International Small Cap Portfolio”) |
LZISX |
LZSMX |
| Emerging Markets |
|
|
Lazard Emerging Markets Core Equity Portfolio
(“Emerging Markets Core Portfolio”) |
ECEIX |
ECEOX |
Lazard Emerging Markets Equity Portfolio
(“Emerging Markets Portfolio”) |
LZEMX |
LZOEX |
Lazard Developing Markets Equity Portfolio
(“Developing Markets Portfolio”) |
LDMIX |
LDMOX |
Lazard Emerging Markets Equity Blend Portfolio
(“Emerging Markets Blend Portfolio”) |
EMBIX |
EMBOX |
Lazard Emerging Markets Multi-Strategy Portfolio
(“Emerging Markets Multi-Strategy Portfolio”) |
EMMIX |
EMMOX |
Lazard Emerging Markets Debt Portfolio
(“Emerging Markets Debt Portfolio”) |
LEDIX |
LEDOX |
Lazard Explorer Total Return Portfolio
(“Explorer Total Return Portfolio”) |
LETIX |
LETOX |
| Real Estate1 |
|
|
Lazard US Realty Income Portfolio
(“Realty Income Portfolio”) |
LRIIX |
LRIOX |
| 1 | Realty Income Portfolio, Realty Equity Portfolio and Global Realty Portfolio are referred to collectively as the “Realty
Portfolios.” |
| |
Institutional Shares |
Open Shares |
Lazard US Realty Equity Portfolio
(“Realty Equity Portfolio”) |
LREIX |
LREOX |
Lazard Global Realty Equity Portfolio2
(“Global Realty Portfolio”) |
LITIX |
LITOX |
| US Fixed Income |
|
|
Lazard US Short Duration Fixed Income Portfolio
(“Short Duration Fixed Income Portfolio”) |
UMNIX |
UMNOX |
Lazard US Corporate Income Portfolio
(“Corporate Income Portfolio”) |
LZHYX |
LZHOX |
| Global Fixed Income |
|
|
Lazard Global Fixed Income Portfolio
(“Global Fixed Income Portfolio”) |
LZGIX |
LZGOX |
| Targeted Volatility |
|
|
Lazard Multi-Asset Targeted Volatility Portfolio
(“Targeted Volatility Portfolio”) |
N/A |
N/A |
| Tactical Asset Allocation |
|
|
Lazard Capital Allocator Opportunistic Strategies
Portfolio
(“Capital Allocator Portfolio”) |
LCAIX |
LCAOX |
The Targeted Volatility Portfolio had not yet commenced operations
as of the date of this SAI and the Emerging Markets Core and Explorer Total Return Portfolios had not commenced operations as of
December 31, 2012, 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.
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.
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.
| 2 | As of August 15, 2013, the Portfolio changed its name from “Lazard International Realty Portfolio” to “Lazard
Global Realty Portfolio” and adopted the Portfolio’s current investment strategy. |
TABLE
OF CONTENTS
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 Equity Concentrated Portfolio, the Emerging Markets Debt Portfolio, the Explorer Total Return Portfolio, the Realty
Equity Portfolio and the Global 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”).
Individuals will generally be taxed at long-term capital gain rates on qualified dividend income. 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. 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, types of securities referred to as trust preferred securities, trust-originated preferred securities, monthly- or quarterly-income
bond, debt or preferred securities, corporate trust securities and other similarly structured securities.
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.
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 US 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
US 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 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.
Initial Public Offerings (All Portfolios, except Emerging
Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income and Global Fixed Income Portfolios).
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.
Fixed-Income Securities
The Emerging Markets Multi-Strategy, Emerging Markets Debt,
Explorer Total Return, Realty Income, Realty Equity, Global Realty, Short Duration Fixed Income, Corporate Income, Global Fixed
Income, Targeted Volatility and Capital Allocator Portfolios may invest in fixed-income securities as described in the Prospectus.
In addition, Equity Concentrated and Strategic Equity Portfolios each may invest up to 20% of its assets in US Government securities
and investment grade fixed-income securities of US corporations; Mid Cap, Small-Mid Cap and International Small Cap Portfolios
each may invest up to 20% of its assets in investment grade fixed-income securities; and Global Listed Infrastructure, International
Equity, International Equity Select and International Strategic Portfolios each may invest up to 20% of its assets in investment
grade fixed-income securities and short-term money market instruments. See also “Money Market Instruments; Temporary Defensive
Positions” below.
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 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. 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 US 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.
The values of fixed-income securities also may be affected by
changes in the credit rating or financial condition of the issuer. 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 to greater market
fluctuations than certain lower yielding, higher-rated fixed-income securities. See “Lower-Rated Securities” below for
a discussion of those securities.
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.
US Government Securities. US Government securities are
issued or guaranteed by the US Government or its agencies or instrumentalities. US 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 US Government agencies and instrumentalities
are supported by the full faith and credit of the US Treasury; others by the right of the issuer to borrow from the Treasury; others
by discretionary authority of the US 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
US Government currently provides financial support to such US 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 US 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 US government obligations may be adversely affected by S&P’s downgrade or any future downgrades of the US 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. Corporate 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 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.
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. Once the rating of a portfolio security has been changed or a rated security has ceased to be rated,
a Portfolio will consider all circumstances deemed relevant in determining whether to continue to hold the security. 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, Explorer Total Return, Realty Income, Realty Equity, Global Realty, Short Duration Fixed Income, Corporate
Income, Global Fixed Income and Targeted Volatility Portfolios only). Fixed-income securities rated below investment grade,
such as those rated Ba by Moody’s or BB by S&P, and as low as those rated Caa/CCC by a Rating Agency at the time of purchase
(commonly known as “high yield” or “junk bonds”), or, if unrated, deemed to be of comparable quality by the
Investment Manager, though higher yielding, are characterized by higher risk. See Appendix A for a general description of securities
ratings. These securities may be subject to certain risks with respect to the issuing entity and to greater market fluctuations
than certain lower yielding, higher-rated securities. These securities generally are considered by the Rating Agencies to be, on
balance, predominantly speculative with respect to the issuer’s ability to make principal and interest payments in accordance with
the terms of the obligation and generally will involve more credit risk than securities in the higher rating categories. Such securities’
higher yield compared to yields of securities rated investment grade 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, to the extent a Portfolio
invests in such securities, will be a substantial factor in the Portfolio’s relative share price volatility. The ratings of the
Rating Agencies represent their opinions as to the quality of the obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards of quality and, 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. The
Portfolios 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 Corporate Income Portfolio typically invests a substantial portion of its assets, and may invest up to 100% of its assets,
in securities rated, at the time of purchase, below investment grade by S&P or Moody’s and as low as C or Ca by S&P or
Moody’s, respectively, or the unrated equivalent as determined by the Investment Manager (“junk bonds”). 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.
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.
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 (“NAV”) and could result in the Portfolio selling such securities at
lower prices than those used in calculating the Portfolio’s net asset value. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of these securities. In such cases, judgment may play
a greater role in valuation because less reliable, objective data may be available.
These securities may be particularly susceptible to economic
downturns. An economic recession could adversely affect the ability of the issuers of lower rated bonds to repay principal and
pay interest thereon and increase the incidence of default for such securities. It is likely that an economic recession could disrupt
severely the market for such securities and may have an adverse impact on their value.
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.
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 US 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.
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.
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.
Each Portfolio may invest in corporate obligations denominated
in US 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.”
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 US 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 (Short Duration Fixed Income
and Corporate Income Portfolios and, to a limited extent, Equity Concentrated, Strategic Equity, Mid Cap, Small-Mid Cap, Emerging
Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return, Realty Income, Realty Equity, Global Realty, Global Fixed
Income, Targeted Volatility 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 US
issuers, including the US Government or one of its agencies or instrumentalities, or private issuers.
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 US 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 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.
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. Some mortgage-related
securities have structures that make their reactions to interest rate changes and other factors difficult to predict, making their
value highly volatile.
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 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.
The US Treasury has historically had the authority to purchase
obligations of FNMA and FHLMC. In addition, in 2008, due to capitalization concerns, Congress provided the US Treasury with additional
authority to lend FNMA and FHLMC emergency funds and to purchase the companies’ stock, as described below. In September 2008, the
US Treasury and the Federal Housing Finance Agency (“FHFA”) announced that FNMA and FHLMC had been
placed in conservatorship.
Since 2009, FNMA and FHLMC have received significant capital support through US Treasury preferred stock purchases and Federal
Reserve purchases of their mortgage-backed securities. While the Federal Reserve’s purchases have terminated, the US Treasury announced
in December 2009 that it would continue its support for the entities’ capital as necessary to prevent a negative net worth through
at least 2012. While the US Treasury is committed to offset negative equity at FNMA and FHLMC through its preferred stock purchases
through 2012, no assurance can be given that the Federal Reserve, Treasury or FHFA initiatives discussed above will ensure that
FNMA and FHLMC will remain successful in meeting their obligations with respect to the debt and mortgage-backed securities they
issue beyond that date. In August 2012 it was reported that FNMA and FHLMC had collectively drawn $190 billion in federal aid and
paid $46 billion in dividends since being placed in conservatorship in 2008. When a credit rating agency downgraded long-term US
Government debt in August 2011, the agency also downgraded FNMA and FHLMC’s bond ratings, from AAA to AA+, based on their direct
reliance on the US Government (although that rating did not directly relate to their mortgage-backed securities). The US Government’s
commitment to ensure that FNMA and FHLMC have sufficient capital to meet their obligations is, however, unaffected by the downgrade.
Serious discussions among policymakers continue, however, as to whether FNMA and FHLMC should be nationalized, privatized, restructured,
or eliminated altogether. FNMA and FHLMC also are the subject of several continuing class action lawsuits and investigations by
federal regulators over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial
restatements) may continue to have an adverse effect on the guaranteeing entities. Future legislative and regulatory action could
alter the operations, ownership, structure and/or mission of these institutions, each of which may, in turn, impact the value of,
and cash flows on, any mortgage-backed securities guaranteed by FNMA and FHLMC, including any such mortgage-backed securities held
by a Portfolio.
Commercial Mortgage-Related Securities. Each of these
Portfolios may invest in commercial mortgage-related securities which generally are multi-class debt or pass-through certificates
secured by mortgage loans on commercial properties. Similar to residential mortgage-related securities, commercial mortgage-related
securities have been issued using a variety of structures, including multi-class structures featuring senior and subordinated classes.
These mortgage-related securities generally are constructed to provide protection to the senior classes 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.
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. Short Duration Fixed Income Portfolio and Corporate Income Portfolio each 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 greater than anticipated prepayments of principal, the Portfolio
may not fully recoup its initial investment in IOs. Conversely, if the underlying mortgage assets experience less than anticipated
prepayments of principal, the yield on POs could be materially and adversely affected.
Private Entity Securities. Each of these Portfolios may
invest in mortgage-related securities issued by commercial banks, savings and loan institutions, mortgage bankers, private mortgage
insurance companies and other non-governmental issuers. Timely payment of principal and interest on mortgage-related securities
backed by pools created by non-governmental issuers often is supported partially by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers
and the mortgage poolers. There can be no assurance that the private insurers or mortgage poolers can meet their obligations under
the policies, so that if the issuers default on their obligations the holders of the security could sustain a loss. No insurance
or guarantee covers the Portfolio or the price of the Portfolio’s shares. Mortgage-related securities issued by non-governmental
issuers generally offer a higher rate of interest than government-agency and government-related securities because there are no
direct or indirect government guarantees of payment.
CMO Residuals. CMO residuals are derivative mortgage
securities issued by agencies or instrumentalities of the US 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 US 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, Explorer Total Return, Realty Income, Realty Equity, Global Realty, Short Duration Fixed Income, Corporate
Income, Global Fixed Income and Targeted Volatility 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 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.
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, Realty Equity, Global
Realty, Short Duration Fixed Income, Corporate Income, Global Fixed Income and Targeted Volatility Portfolios only).
Each of these Portfolios may invest in US 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”). 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 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 which are attributable to interest
income received by the Portfolios from Municipal Securities generally will be subject to federal income tax. Each Portfolio may
invest in Municipal Securities, the ratings of which correspond with the ratings of other permissible investments for the Portfolio.
The Corporate Income 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.
Municipal Securities include certain private activity bonds
(a type of revenue bond), the income from which is subject to the federal alternative minimum tax.
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 and thus reduce available yield.
Floating and Variable Rate Demand Obligations (Realty
Income, Realty Equity, Global Realty, Short Duration Fixed Income, Global Fixed Income and Targeted Volatility 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.
Municipal Lease Obligations (Realty Income, Realty Equity,
Global Realty, Short Duration Fixed Income, Global Fixed Income and Targeted Volatility 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 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, Explorer Total Return, Realty Income, Realty Equity, Global Realty, Short Duration
Fixed Income, Corporate Income, Global Fixed Income and Targeted Volatility 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 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 US 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 US 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.
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 US investors. Individual foreign economies can differ favorably or unfavorably from
the US economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position. 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 US economy and are adversely affected when the US economy
weakens or its markets decline. For example, in 2007 and 2008, the meltdown in the US 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 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 US 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 emerging market countries, Emerging
Markets Core Portfolio’s policy to invest at least 80% of its net assets in equity securities that are economically tied to emerging
markets countries and Emerging Markets Debt Portfolio’s and Explorer Total Return 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.
Eurodollar and Yankee Dollar Investments (Global Fixed Income
and Targeted Volatility Portfolios only). Eurodollar instruments are bonds of foreign corporate and government issuers that
pay interest and principal in US dollars generally held in banks outside the United States, primarily in Europe. Yankee Dollar
instruments are US 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 US dollar-denominated certificates of deposit issued by
foreign branches of domestic banks; Eurodollar time deposits are US dollar-denominated deposits in a foreign branch of a US bank
or in a foreign bank; and Yankee certificates of deposit are US dollar-denominated certificates of deposit issued by a US branch
of a foreign bank and held in the United States. These investments involve risks that are different from investments in securities
issued by US 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.
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.
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.
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 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 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 failure to qualify as a REIT which is not cured
in accordance with applicable savings provisions in the Code, 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 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 invest 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 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, these
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, these 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.
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” 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
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
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), US 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.
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.
Foreign Banking Obligations (Global Fixed Income and Targeted
Volatility Portfolios 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.
Obligations of US 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
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.
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, Realty Equity and Global 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 Global
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, US Government securities or irrevocable letters of credit which will be maintained
at all times in an amount equal to at least 100% of the current market value of the loaned securities. If the collateral consists
of a letter of credit or securities, the borrower will pay the Portfolio a loan premium fee. If the collateral consists of cash,
the Portfolio will reinvest the cash and pay the borrower a pre-negotiated fee or “rebate”
from any return earned on
the investment. Should the borrower of the securities fail financially, the Portfolio may experience delays in recovering the loaned
securities or exercising its rights in the collateral. Loans are made only to borrowers that are deemed by the Investment Manager
to be of good financial standing. In a loan transaction, the Portfolio will also bear the risk of any decline in value of securities
acquired with cash collateral.
Derivatives (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 Portfolios have claimed exclusions from the definition of
the term “commodity pool operator” (“CPO”) under the Commodity Exchange Act (the “CEA”) and, therefore,
are not subject to registration or regulation as a CPO under the CEA. As a result of recent amendments by the Commodity Futures
Trading Commission (the “CFTC”) to its rules, certain Portfolios may be limited in their ability to use commodity futures
or options thereon, engage in certain swaps transactions or make certain other investments (collectively, “commodity interests”)
if the Portfolios continue to rely on this exclusion from the definition of CPO. Under the amendments, in order to be eligible
to continue to rely on this exclusion, if a Portfolio uses commodity interests other than for bona fide hedging purposes (as defined
by the CFTC) the aggregate initial margin and premiums required to establish these positions (after taking into account unrealized
profits and unrealized losses on any such positions and excluding the amount by which options are “in-the-money” at the
time of purchase) may not exceed 5% of a Portfolio’s NAV, or, alternatively, the aggregate net notional value of those positions,
as determined at the time the most recent position was established, may not exceed 100% of the Portfolio’s NAV (after taking into
account unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations,
a Portfolio may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity
options or swaps markets. Even if a Portfolio’s direct use of commodity interests complies with the trading limitations described
above, the Portfolio may have indirect exposure to commodity interests in excess of such limitations. Such exposure may result
from the Portfolio’s investment in other investment vehicles, including investment companies that are not managed by the Investment
Manager or one of its affiliates, certain securitized vehicles that may invest in commodity interests and/or non-equity REITs that
may invest in commodity interests (collectively, “underlying funds”). Because the Investment Manager may have limited
or no information as to the commodity interests in which an underlying fund invests at any given time, the CFTC has issued temporary
no-action relief permitting registered investment companies, such as the Portfolios, to continue to rely on the exclusion from
the definition of CPO. The Investment Manager, on behalf of the Portfolios, has filed the required notice to claim this no-action
relief. In order to rely on the temporary no-action relief, the Investment Manager must meet certain conditions and the Portfolios
must otherwise comply with the trading and market restrictions described above with respect to their direct investments in commodity
interests.
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.
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.
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 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.
Futures Transactions—In General (All Portfolios, except
Small-Mid Cap and International Equity Portfolios). Each Portfolio may enter into futures contracts in US domestic markets,
or on exchanges located outside the United States. Foreign markets may offer advantages such as trading opportunities or arbitrage
possibilities not available in the United States. Foreign markets, however, may have greater risk potential than domestic markets.
For example, some foreign exchanges are principal markets so that no common clearing facility exists and an investor may look only
to the broker for performance of the contract. In addition, any profits a Portfolio might realize in trading could be eliminated
by adverse changes in the currency exchange rate, or the Portfolio could incur losses as a result of those changes. Transactions
on foreign exchanges may include both commodities which are traded on domestic exchanges and those which are not. Unlike trading
on domestic commodity exchanges, trading on foreign commodity exchanges is not regulated by the CFTC.
Engaging in these transactions involves risk of loss to the
Portfolio which could adversely affect the value of the Portfolio’s net assets. Although each of these Portfolios intends to purchase
or sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market
will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract,
no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the trading
day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Portfolio to substantial losses.
Specific Futures Transactions. Each Portfolio other than
Small-Mid Cap, International Equity, Emerging Markets
Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income
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.
Each Portfolio other than Mid Cap, Small-Mid Cap and International
Equity Portfolios may purchase and sell interest rate futures contracts. An interest rate future obligates the Portfolio to purchase
or sell an amount of a specific debt security at a future date at a specific price.
Each Portfolio, except Small-Mid Cap and International Equity
Portfolios, may buy and sell foreign currency futures. A currency future obligates the Portfolio to purchase or sell an amount
of a specific currency at a future date at a specific price.
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 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 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 US 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 (All Portfolios, except Small-Mid Cap and
International Equity Portfolios). To the extent consistent with the Portfolio’s investment objective and management policies
as set forth herein, each Portfolio 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.
Structured Securities (Emerging Markets Multi-Strategy, Global
Fixed Income and Targeted Volatility 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 (the “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.
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 US 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 US dollars, between trade and settlement date, the value of a security the Portfolio has agreed
to buy or sell; to hedge the US 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 US
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 US 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.
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.
Smaller Company Securities (All Portfolios except International
Equity, International Equity Select, Short Duration Fixed Income and Corporate Income 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.
INVESTMENT RESTRICTIONS
Under normal circumstances, each of the following Portfolios
will invest at least 80% of its net assets, plus any borrowings for investment purposes, as follows (or other investments with
similar economic characteristics): (i) Equity Concentrated and Strategic Equity Portfolios—equity securities of US companies;
(ii) Mid Cap Portfolio—equity securities of mid cap US companies; (iii) Small-Mid Cap Portfolio—equity securities of
small-mid cap US 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 Core Portfolio—equity securities
of companies that are economically tied to emerging market countries; (viii) 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; (ix) Emerging Markets Multi-Strategy Portfolio—securities and other investments that
are economically tied to emerging market countries; (x) Emerging Markets Debt Portfolio—debt securities that are economically
tied to emerging market countries; (xi) Realty Income Portfolio—dividend-paying common and preferred stocks, convertible
securities, fixed income securities and other investments related to US Realty Companies, as well as certain synthetic instruments
related to US Realty Companies; (xii) Realty Equity Portfolio—equity securities (including common, convertible and preferred
stocks) of US Realty Companies, as well as certain synthetic instruments related to US Realty Companies; (xiii) Global Realty Portfolio—equity
securities (including common, convertible and preferred stocks) of Realty Companies, as well as certain synthetic instruments relating
to Realty Companies; (xiv) Short Duration Fixed Income Portfolio—fixed-income securities of US issuers; (xv) Corporate Income
Portfolio—fixed-income securities issued by corporations or other non-governmental issuers similar to corporations, which
securities are tied economically to the US; and (xvi) Global Fixed Income Portfolio—Fixed Income Investments as defined in
the Prospectus. Each of these Portfolios has adopted a policy to provide its shareholders with at least 60 days’ prior notice of
any change with respect to its 80% policy.
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
Each Portfolio’s investment objective 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 Concentrated, Strategic Equity, Mid Cap, Global
Listed Infrastructure, International Equity Select, International Strategic, International Small Cap, Emerging Markets Core, Emerging
Markets, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return,
Short Duration Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility 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 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 Concentrated, Strategic Equity, Mid Cap, Global Listed Infrastructure,
International Equity Select, International Strategic, Emerging Markets Core, Developing Markets, Emerging Markets Blend, Emerging
Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income, Global Fixed
Income, Targeted Volatility 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 US 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 Concentrated, Strategic Equity, Mid Cap, Global Listed Infrastructure,
International Equity Select, International Strategic, International Small Cap, Emerging Markets Core, Emerging Markets, Developing
Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return, Short Duration
Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility 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 Concentrated,
Strategic Equity, Mid Cap, Global Listed Infrastructure, International Equity Select, International Strategic, International Small
Cap, Emerging Markets Core, Emerging Markets, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging
Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility 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 Concentrated, Strategic Equity, Mid Cap, International Equity,
International Equity Select, International Strategic, Emerging Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return,
Corporate Income, Global Fixed Income, Targeted Volatility and Capital Allocator Portfolios may purchase or sell foreign currency
forward exchange contracts); and (C) for all Portfolios except Equity Concentrated, Strategic Equity, Mid Cap, Global Listed
Infrastructure, International Equity Select, International Strategic, Emerging Markets Core, Developing Markets, Emerging Markets
Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income,
Global Fixed Income, Targeted |
| | Volatility 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 Concentrated, Strategic Equity, Mid Cap, Global Listed Infrastructure, International Equity Select, International
Strategic, Emerging Markets Core, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging Markets
Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility 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 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 Concentrated, Strategic Equity, Mid Cap, Global Listed Infrastructure, International
Equity Select, International Strategic, Emerging Markets Core, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy,
Emerging Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility
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 Concentrated, Strategic Equity, Mid Cap, Global Listed Infrastructure, International
Equity Select, International Strategic, Emerging Markets Core, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy,
Emerging Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income, Global Fixed Income, Targeted Volatility
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 days (not including Sundays and holidays). 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
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 US 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. |
MANAGEMENT
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)
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 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 specific characteristics
and circumstances of the Fund, including, but not limited to: (i) services that the Investment Manager and its affiliates provide
to the Fund and potential conflicts of interest that could arise from these relationships; (ii) the extent to which the day-to-day
operations of the Fund are conducted by Fund officers and employees of the Investment Manager and its affiliates; and (iii) the
Board’s oversight role in management of the Fund.
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)
Address(1) |
Position(s) with the Fund
(Since) and Term(2) |
Principal Occupation(s) and Other Public
Company Directorships Held During the Past
Five Years(2) |
| |
|
|
| Non-Interested Directors: |
|
|
| |
|
|
| Kenneth S. Davidson (67) |
Director
(August 1995) |
Davidson Capital Management Corporation,
an investment manager, President (1978 – present)
Balestra Capital, Ltd., an investment
manager and adviser, Senior Advisor (July 2012 – present)
Aquiline Holdings
LLC, an investment manager, Partner (2006 – June 2012) |
Name (Age)
Address(1) |
Position(s) with the Fund
(Since) and Term(2) |
Principal Occupation(s) and Other Public
Company Directorships Held During the Past
Five Years(2) |
| |
|
|
| Nancy A. Eckl (50) |
Director
(April 2007) |
College Retirement Equities Fund (eight accounts),
Trustee (2007 – present)
TIAA-CREF Funds (59 funds) and TIAA-CREF Life Funds (10 funds), Trustee (2007 – present)
TIAA Separate Account VA-1, Member of the Management Committee (2007 – present)
American Beacon Advisors, Inc. (“American Beacon”)
and certain funds advised by American Beacon, Vice President (1990 – 2006)
|
| Lester Z. Lieberman (82) |
Director
(October 1991) |
Private Investor |
| |
|
|
| Leon M. Pollack (72) |
Director
(August 2006) |
Private Investor |
| |
|
|
| Richard Reiss, Jr. (68) |
Director
(May 1991) |
Georgica Advisors LLC, an investment manager, Chairman (1997 – present)
O’Charley’s, Inc., a restaurant chain, Director (1984 – 2012) |
| |
|
|
| Robert M. Solmson (65) |
Director
(September 2004) |
Fairwood Capital, LLC, a private investment corporation engaged primarily in real estate and hotel investments, President (2008 – present)
|
| |
|
|
| Interested Directors(3): |
|
|
| |
|
|
| Charles L. Carroll (52) |
Chief Executive Officer,
President and Director
(June 2004) |
Investment Manager, Deputy Chairman and Head of Global Marketing (2004 – present) |
| |
|
|
| Ashish Bhutani (52) |
Director
(July 2005) |
Investment Manager, Chief Executive Officer (2004 – present)
Lazard Ltd, Vice Chairman and Director (2010 – present) |
| |
|
|
| (1) | The address of each Director of the Fund 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, 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 30 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
Alternative Strategies 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 Alternative Strategies 1099 Fund are referred
to herein as the “Lazard Fund Complex,” which in total is comprised of 32 active investment portfolios.) |
| (3) | Messrs. Bhutani and Carroll are “interested persons”
(as defined in the 1940 Act) of the Fund because of their positions with the Investment Manager. |
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 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 President of Davidson
Capital Management Corporation and a Senior Advisor at Balestra Capital, Ltd. Previously, he
was associated with Aquiline Holdings LLC (from 2006 to June 2012), a New York-based global investment firm, where he was a founding
member. 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. |
| · | 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. 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 are the names and certain
biographical and other information for the Fund’s officers (in addition to Mr. Carroll).
Name (Age)
Address(1) |
Position(s) with the Fund
(Since) and Term(2) |
Principal Occupation(s) During the Past
Five Years |
| |
|
|
| Nathan A. Paul (40) |
Vice President and Secretary
(April 2002) |
Managing Director and General Counsel of the Investment Manager |
| |
|
|
| Stephen St. Clair (54) |
Treasurer
(May 2003) |
Vice President of the Investment Manager |
| |
|
|
| Brian D. Simon (51) |
Chief Compliance Officer
(January 2009) and Assistant Secretary
(November 2002) |
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 (38) |
Assistant Secretary
(February 2009) |
Senior Vice President (since February 2012, previously Vice President and Counsel) of the Investment Manager |
| |
|
|
| Cesar A. Trelles (38) |
Assistant Treasurer
(December 2004) |
Vice President (since February 2011, previously Fund Administration Manager) of the Investment Manager |
| |
|
|
| (1) | The address of each officer of the Fund 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. Messrs.
St. Clair and Trelles serve in the same capacity for the other Lazard Funds. |
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”).
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 three times and the nominating committee
did not meet during the fiscal year ended December 31, 2012.
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, 2012.
| Portfolio | |
Ashish
Bhutani | |
Charles L.
Carroll | |
Kenneth S.
Davidson | |
Nancy A.
Eckl | |
Lester Z.
Lieberman | |
Leon M.
Pollack | |
Richard
Reiss, Jr. | |
Robert M.
Solmson |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Equity Concentrated Portfolio | |
None | |
None | |
None | |
$1 - $10,000 | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Strategic Equity Portfolio | |
None | |
Over $100,000 | |
None | |
$1 - $10,000 | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Mid Cap Portfolio | |
None | |
None | |
None | |
$1 - $10,000 | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Small-Mid Cap Portfolio | |
None | |
None | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Global Listed Infrastructure Portfolio | |
Over $100,000 | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| International Equity Portfolio | |
None | |
None | |
None | |
$1 - $10,000 | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| International Equity Select Portfolio | |
None | |
None | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| International Strategic Portfolio | |
Over $100,000 | |
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 | |
$50,001-$100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Emerging Markets Blend Portfolio | |
Over $100,000 | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Emerging Markets Multi-Strategy Portfolio | |
None | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Emerging Markets Debt Portfolio | |
None | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Realty Income Portfolio | |
None | |
None | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
Realty Equity Portfolio | |
None | |
None | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Global Realty Portfolio | |
None | |
None | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Short Duration Fixed Income Portfolio | |
None | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Corporate Income Portfolio | |
None | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Capital Allocator Portfolio | |
Over $100,000 | |
Over $100,000 | |
None | |
None | |
None | |
None | |
None | |
None |
| | |
| |
| |
| |
| |
| |
| |
| |
|
| Aggregate Holdings of all Lazard Funds | |
Over $100,000 | |
Over $100,000 | |
None | |
$50,001-$100,000 | |
None | |
None | |
None | |
None |
As of December 31, 2012, none of the Directors or his or her
immediate family members owned securities of the Investment Manager or the Distributor or any person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common control with the Investment Manager or the Distributor.
Each Director who is not an affiliated person of the Investment
Manager or any of its affiliates is paid by all of the Lazard Funds: (1) an annual retainer of $100,000, (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 Chair, Nancy A. Eckl,
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, 2012 by the Fund and by the funds in the Lazard Fund Complex (comprised of 30 active investment portfolios
as of December 31, 2012), was as follows:
| Director |
Aggregate Compensation from
the Fund |
Total Compensation from
the Lazard Fund Complex |
| |
|
|
| Ashish Bhutani |
None |
None |
| Charles L. Carroll |
None |
None |
| Kenneth S. Davidson |
$113,842 |
$165,000 |
| Nancy A. Eckl |
$113,842 |
$165,000 |
| Lester Z. Lieberman |
$99,887 |
$110,250 |
| Leon M. Pollack |
$113,842 |
$165,000 |
| Richard Reiss, Jr. |
$113,842 |
$165,000 |
| Robert M. Solmson |
$112,490 |
$163,500 |
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. |
| 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
Companies ($*) |
Other Pooled Investment
Vehicles ($*) |
Other Accounts
($*)## |
| |
|
|
|
| Michael A. Bennett# |
10 (4.9 billion) |
6 (181.8 million) |
242 (13.9 billion) |
| Christopher H. Blake# |
12 (8.8 billion) |
5 (721.0 million) |
73 (2.8 billion) |
| Thomas Boyle** |
none |
1 (2.9 million) |
2 (3.2 million) |
| Daniel Breslin |
8 (2.1 billion) |
none |
21 (415.9 million) |
| Rohit Chopra# |
9 (19.1 billion) |
15 (7.7 billion) |
90 (11.9 billion) |
| David R. Cleary# |
1 (228.2 million) |
3 (48.9 million) |
310 (635.6 million) |
| Jared Daniels |
2 (12.3 million) |
4 (222.5 million) |
25 (1.7 billion) |
| Michael DeBernardis# |
4 (575.2 million) |
4 (280.3 million) |
21 (415.7 million) |
| James M. Donald# |
13 (21.4 billion) |
19 (7.9 billion) |
188 (14.5 billion) |
| Thomas M. Dzwil |
1 (187.3 million) |
1 (68.9 million) |
4 (373.3 million) |
| Robert A. Failla# |
13 (9.2 billion) |
4 (687.8 million) |
42 (2.7 billion) |
| Martin Flood# |
17 (10.9 billion) |
9 (1.1 billion) |
190 (4.8 billion) |
| Michael G. Fry# |
9 (3.7 billion) |
5 (178.4 million) |
196 (10.0 billion) |
| Peter Gillespie# |
6 (1.3 billion) |
6 (416.2 million) |
10 (2.0 billion) |
|
George Grimbilas#
Alex Ingham# |
1 (19.7 million)
3 (88.9 million) |
2 (145.6 million)
6 (287.8 million) |
217 (2.3 billion)
5 (319.1 million) |
| Jai Jacob |
6 (2.4 billion) |
1 (17.6 million) |
5 (812.5 million) |
| Robin O. Jones |
1 (1.2 billion) |
1 (3.4 million) |
46 (4.0 billion) |
| Arif T. Joshi# |
2 (312.2 million) |
24 (1.2 billion) |
13 (3.7 billion) |
| Yvette Klevan |
2 (12.3 million) |
4 (222.5 million) |
25 (1.7 billion) |
| Antony Knep** |
3 (231.2 million) |
none |
2 (4.8 million) |
| Christopher Komosa# |
1 (228.2 million) |
3 (48.9 million) |
310 (635.6 million) |
| Andrew D. Lacey# |
17 (11.0 billion) |
14 (1.6 billion) |
183 (6.1 billion) |
| Jay P. Leupp |
3 (177.2 million) |
none |
2 (7.1 million) |
|
Mark Little
Stephen Marra |
1 (1.2 billion)
6 (2.4 billion) |
1 (3.4 million)
1 (17.6 million) |
46 (4.0 billion)
5 (812.5 million) |
| Kevin J. Matthews# |
2 (2.1 billion) |
none |
140 (3.9 billion) |
| Erik McKee# |
11 (19.1 billion) |
17 (7.7 billion) |
90 (11.9 billion) |
| John Mulquiney |
1 (137.8 million) |
5 (965.4 million) |
7 (1.4 billion) |
| Kevin O’Hare# |
6 (1.3 billion) |
6 (416.2 million) |
10 (2.0 billion) |
| Michael Powers# |
9 (3.7 billion) |
5 (178.4 million) |
196 (10.0 billion) |
| Eulogio (Joe) Ramos# |
1 (19.7 million) |
2 (145.6 million) |
220 (2.4 billion) |
| John R. Reinsberg# |
7 (2.7 billion) |
5 (122.7 million) |
72 (8.6 billion) |
| Warryn Robertson# |
1 (137.8 million) |
8 (1.2 billion) |
16 (5.5 billion) |
| Paul Rogers** |
none |
1 (2.9 million) |
2 (3.2 million) |
| David R. Ronco |
3 (177.2 million) |
none |
2 (7.1 million) |
| Edward Rosenfeld# |
1 (62.7 million) |
6 (547.1 million) |
7 (482.9 million) |
| Stephen Russell** |
none |
1 (2.9 million) |
2 (3.2 million) |
| John R. Senesac Jr.# |
1 (19.7 million) |
2 (145.6 million) |
220 (2.4 billion) |
| Denise S. Simon# |
2 (312.2 million) |
24 (1.2 billion) |
13 (3.7 billion) |
| Ronald Temple# |
12 (9.4 billion) |
12 (1.3 billion) |
172 (5.8 billion) |
| * |
As of December 31, 2012. |
| ** |
As of September 30, 2013. |
| # | 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 and Fry manage one registered
investment company and one other account with assets under management of approximately $2.1 billion and $80.3 million, respectively. |
| |
(2) | Mr. Blake manages one registered investment
company and one other account with assets under management of approximately $6.4 billion and $319.7 million, respectively. |
| |
(3) | Messrs. Chopra and McKee manage three other accounts and one other pooled investment
vehicle with assets under management of approximately $1.7 billion and $5.4 million, respectively. |
| |
(4) | Mr. Cleary manages two other accounts with assets under management of approximately
$46.0 million. |
| |
(5) | Mr. DeBernardis manages one other pooled
investment vehicle with assets under management of approximately $83.4 million. |
| |
(6) | Mr. Donald manages one registered investment company, three other accounts and one
other pooled vehicle with assets under management of approximately $2.1 billion, $1.7 billion and $5.4 million, respectively. |
| |
(7) | Messrs. Failla and Flood manage one registered investment company and one other account
with assets under management of approximately $6.4 billion and $319.7 million, respectively. |
| |
(8) | Mr. Gillespie manages one other account and one other pooled investment vehicle with
assets under management of approximately $1.5 billion and $8.0 million, respectively. |
| |
(9) | Mr. Ingham manages one other pooled investment vehicle with assets under management
of $83.4 million. |
| |
(10) | Mr. Joshi and Ms. Simon manage four other accounts with assets under management of
approximately $1.4 billion. |
| |
(11) | Mr. Komosa manages two other accounts with assets under management of approximately
$46.0 million. |
| |
(12) | Messrs. Lacey and Temple manage one registered investment company and one other account
with assets under management of approximately $6.4 billion and $319.7 million, respectively. |
| |
(13) | Mr. Matthews manages one registered investment company with assets under management
of approximately $2.1 billion. |
| |
(14) | Mr. O’Hare manages one other account and one other pooled investment vehicle with
assets under management of approximately $1.5 billion and $8.0 million, respectively. |
| |
(15) | Mr. Powers manages one registered investment company and one other account with assets
under management of approximately $2.1 billion and $80.3 million, respectively. |
| |
(16) | Mr. Reinsberg manages one other account and three other pooled investment vehicles
with assets under management of approximately $80.3 million and $86.1 million, respectively. |
| |
(17) | Mr. Robertson manages two other accounts with assets under management of approximately
$1.6 billion. |
| |
(18) | Mr. Rosenfeld manages two other pooled investment vehicles with assets under management
of approximately $149.1 million. |
| ## | Includes an aggregation of any Similar
Accounts within managed account programs where the third party program sponsor is responsible for applying specific client objectives,
guidelines and limitations against the model portfolio managed by the portfolio management team. |
Compensation for Portfolio Managers. The Investment
Manager’s portfolio managers are generally responsible for managing multiple types of accounts that may, or may not, invest in
securities in which the Fund may invest or pursue a strategy similar to a Portfolio’s strategies. Portfolio managers responsible
for managing the Portfolios may also manage sub-advised registered investment companies, collective investment trusts, unregistered
funds and/or other pooled investment vehicles, separate accounts, separately managed account programs (often referred to as “wrap
accounts”) and model portfolios.
The Investment Manager compensates portfolio managers by a competitive
salary and bonus structure, which is determined both quantitatively and qualitatively. Salary and bonus are paid in cash, 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. A portion of a portfolio manager’s variable bonus is awarded under a deferred
compensation arrangement pursuant to which the portfolio manager may allocate certain amounts awarded among certain Portfolios,
in shares that vest in two to three years.
| Portfolio |
Index |
| Equity Concentrated Portfolio |
S&P 500® 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
(Hedged) |
| International Equity Portfolio |
MSCI Europe, Australasia and Far East (EAFE®) Index |
| International Equity Select Portfolio |
MSCI All Country World Index ex-US |
| International Strategic Portfolio |
MSCI EAFE Index |
| International Small Cap Portfolio |
MSCI EAFE Small Cap Index |
| Emerging Markets Core Portfolio |
MSCI Emerging Markets 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
|
| Explorer Total Return 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 |
| Realty Equity Portfolio |
FTSE NAREIT All Equity REITs Index |
| Global Realty Portfolio |
FTSE EPRA/NAREIT Global Index |
Short Duration Fixed Income Portfolio
|
Bank of America Merrill Lynch 1-3 Year Treasury Index
|
| Corporate Income Portfolio |
Bank of America Merrill Lynch BB-B US Cash Pay Non-Distressed
High Yield Index |
| Global Fixed Income Portfolio |
Barclays Capital Global Aggregate Bond Index |
| Targeted Volatility Portfolio |
50/50 MSCI World Index and Barclays Capital Global Aggregate Bond Index |
| Capital Allocator Portfolio |
MSCI World Index |
Ownership of Securities. As of December 31, 2012
(except as otherwise noted), the portfolio managers owned the following shares of the Portfolios:
|
Portfolio/Portfolio Manager
|
Market Value of Shares* |
| Equity Concentrated Portfolio |
|
| Christopher H. Blake |
None |
| Martin Flood |
$10,001-$50,000 |
| Andrew D. Lacey |
$500,001-$1,000,000 |
| |
|
| Strategic Equity Portfolio |
|
| Christopher H. Blake |
$500,001-$1,000,000 |
| Robert A. Failla |
$50,001-$100,000 |
| Martin Flood |
$10,001-$50,000 |
| Andrew D. Lacey |
$500,001-$1,000,000 |
| Ronald Temple |
$100,001-$500,000 |
| |
|
| Mid Cap Portfolio |
|
| Christopher H. Blake |
$100,001-$500,000 |
| Daniel Breslin |
None |
| Robert A. Failla |
$100,001-$500,000 |
| Martin Flood |
$10,001-$50,000 |
| Andrew D. Lacey |
$500,001-$1,000,000 |
| |
|
| Small-Mid Cap Portfolio |
|
| Daniel Breslin |
None |
| Michael DeBernardis |
$10,001-$50,000 |
| Robert A. Failla |
$10,001-$50,000 |
| Andrew D. Lacey |
$100,001-$500,000 |
| |
|
| Global Listed Infrastructure Portfolio |
|
| John Mulquiney |
None |
| Warryn Robertson |
$10,001-$50,000 |
| |
|
| 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 |
$100,001-$500,000 |
| Robin O. Jones |
None |
| Mark Little |
None |
| John R. Reinsberg |
$100,001-$500,000 |
|
Portfolio/Portfolio Manager
|
Market Value of Shares* |
| International Small Cap Portfolio |
|
| Alex Ingham |
None |
| John R. Reinsberg |
$100,001-$500,000 |
| Edward Rosenfeld |
$1-$10,000 |
| |
|
| Emerging Markets Core Portfolio** |
|
| Thomas Boyle |
None |
| Paul Rogers |
None |
| Stephen Russell |
None |
| |
|
| 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 |
None |
| 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 |
Over $1,000,000 |
| Jai Jacob |
$100,001-$500,000 |
| Kevin O’Hare |
$100,001-$500,000 |
| |
|
| Emerging Markets Multi-Strategy Portfolio |
|
| Jai Jacob |
$50,001-$100,000 |
| |
|
| Emerging Markets Debt Portfolio |
|
| Arif T. Joshi |
None |
| Denise S. Simon |
$100,001-$500,000 |
| |
|
| Realty Income Portfolio |
|
| Jay P. Leupp |
$500,001-$1,000,000 |
| David R. Ronco |
$10,001-$50,000 |
| |
|
| Realty Equity Portfolio |
|
| Jay P. Leupp |
$100,001-$500,000 |
| David R. Ronco |
$1-$10,000 |
| |
|
| Global Realty Portfolio |
|
| Jay P. Leupp |
$100,001-$500,000 |
| David R. Ronco |
$1-$10,000 |
| Antony Knep** |
None |
| |
|
|
Short Duration
Fixed Income |
|
| Eulogio Ramos |
$100,001-$500,000 |
| John R. Senesac, Jr. |
$50,001-$100,000 |
| George Grimbilas |
$10,001-$50,000 |
| David R. Cleary |
None |
|
Portfolio/Portfolio Manager
|
Market Value of Shares* |
| Corporate Income Portfolio |
|
| David R. Cleary |
None |
| Thomas M. Dzwil |
None |
| |
|
| Capital Allocator Portfolio |
|
| David R. Cleary |
Over $1,000,000 |
| Christopher Komosa |
$100,001-$500,000 |
| * | A portion of Portfolio shares shown as owned by a portfolio manager may consist of
shares allocated to the Portfolio under deferred compensations arrangement described above. |
| ** | As of September 30, 2013. |
Investment Manager and Investment Management Agreement
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.
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 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 in the Prospectus.
As described in the Prospectus, the Investment Manager has agreed
to waive its management fees and, if necessary, reimburse each Portfolio, to the extent Total Annual Portfolio Operating Expenses
exceed a percentage of the value of the Portfolio’s average daily net assets (shown in the Prospectus), 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.
For the fiscal years ended December 31, 2010, 2011 and 2012,
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
Year Ended
December 31, 2010 | |
Fee Payable For Fiscal
Year Ended
December 31, 2011 | |
Fee Payable For Fiscal
Year Ended
December 31, 2012 |
| | |
| | |
| | |
| |
| Equity Concentrated Portfolio | |
$ | 82,276 | | |
$ | 90,343 | | |
$ | 389,863 | |
| Strategic Equity Portfolio | |
| 556,433 | | |
| 532,456 | | |
| 567,107 | |
| Mid Cap Portfolio | |
| 1,490,077 | | |
| 1,309,722 | | |
| 800,884 | |
| Small-Mid Cap Portfolio | |
| 933,932 | | |
| 1,677,491 | | |
| 1,826,602 | |
| Global Listed Infrastructure Portfolio | |
| 820,972 | | |
| 1,605,324 | | |
| 1,125,894 | |
| International Equity Portfolio | |
| 1,106,469 | | |
| 894,914 | | |
| 850,462 | |
| International Equity Select Portfolio | |
| 55,433 | | |
| 56,004 | | |
| 62,905 | |
| International Strategic Portfolio | |
| 2,735,062 | | |
| 3,278,964 | | |
| 6,014,249 | |
| International Small Cap Portfolio | |
| 503,229 | | |
| 492,830 | | |
| 450,937 | |
| Emerging Markets Portfolio | |
| 148,785,989 | | |
| 165,270,120 | | |
| 151,690,449 | |
| Developing Markets Portfolio | |
| 779,690 | | |
| 2,377,995 | | |
| 3,423,720 | |
| Emerging Markets Blend Portfolio | |
| 103,881 | | |
| 1,071,924 | | |
| 1,670,264 | |
| Emerging Markets Multi-Strategy Portfolio | |
| — | | |
| 317,396 | | |
| 806,772 | |
| Emerging Markets Debt Portfolio | |
| — | | |
| 296,699 | | |
| 1,613,547 | |
| Realty Income Portfolio* | |
| — | | |
| 36,893 | | |
| 447,491 | |
| Realty Equity Portfolio* | |
| — | | |
| 5,715 | | |
| 309,718 | |
| Global Realty Portfolio* | |
| — | | |
| 5,555 | | |
| 35,873 | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| 22,197 | | |
| 46,025 | |
| Corporate Income Portfolio | |
| 603,838 | | |
| 834,199 | | |
| 992,709 | |
| Global Fixed Income Portfolio | |
| — | | |
| — | | |
| 16,123 | |
| Capital Allocator Portfolio | |
| 2,159,816 | | |
| 2,552,451 | | |
| 2,537,917 | |
| Portfolio | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2010 | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2011 | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2012 |
| | |
| |
| |
|
| Equity Concentrated Portfolio | |
$ | 192,613 | | |
$ | 189,564 | | |
$ | 199,946 | |
| Strategic Equity Portfolio | |
| 45,899 | | |
| 193,763 | | |
| 202,311 | |
| Mid Cap Portfolio | |
| — | | |
| — | | |
| — | |
| Small-Mid Cap Portfolio | |
| — | | |
| — | | |
| — | |
| Global Listed Infrastructure Portfolio | |
| 48,817 | | |
| 3,000 | | |
| — | |
| International Equity Portfolio | |
| — | | |
| — | | |
| — | |
| International Equity Select Portfolio | |
| 253,567 | | |
| 235,676 | | |
| 231,523 | |
| International Strategic Portfolio | |
| — | | |
| — | | |
| — | |
| International Small Cap Portfolio | |
| 50,665 | | |
| 25,396 | | |
| 30,622 | |
| Emerging Markets Portfolio | |
| — | | |
| — | | |
| — | |
| Developing Markets Portfolio | |
| 237,373 | | |
| 20,330 | | |
| — | |
| Emerging Markets Blend Portfolio | |
| 457,173 | | |
| 206,064 | | |
| 39,603 | |
| Emerging Markets Multi-Strategy Portfolio | |
| — | | |
| 293,815 | | |
| 230,588 | |
| Emerging Markets Debt Portfolio | |
| — | | |
| 229,341 | | |
| 66,877 | |
| Portfolio | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2010 | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2011 | |
Reduction in
Fee For Fiscal
Year Ended
December 31, 2012 |
| Realty Income Portfolio* | |
| — | | |
| 62,535 | | |
| 3,268 | |
| Realty Equity Portfolio* | |
| — | | |
| 72,941 | | |
| 118,194 | |
| Global Realty Portfolio* | |
| — | | |
| 79,081 | | |
| 156,071 | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| 224,278 | | |
| 180,327 | |
| Corporate Income Portfolio | |
| 283,787 | | |
| 284,996 | | |
| 292,518 | |
| Global Fixed Income Portfolio | |
| — | | |
| — | | |
| 237,268 | |
| Capital Allocator Portfolio | |
| 250,976 | | |
| 284,251 | | |
| 274,403 | |
| Portfolio | |
Net Fee Paid For
Fiscal Year Ended
December 31, 2010 | |
Net Fee Paid For
Fiscal Year Ended
December 31, 2011 | |
Net Fee Paid For
Fiscal Year Ended
December 31, 2012 |
| | |
| | | |
| | | |
| | |
| Equity Concentrated Portfolio | |
$ | (110,337) | | |
$ | (99,221) | | |
$ | 189,917 | |
| Strategic Equity Portfolio | |
| 510,534 | | |
| 338,693 | | |
| 364,796 | |
| Mid Cap Portfolio | |
| 1,490,077 | | |
| 1,309,722 | | |
| 800,884 | |
| Small-Mid Cap Portfolio | |
| 933,932 | | |
| 1,677,491 | | |
| 1,826,602 | |
| Global Listed Infrastructure Portfolio | |
| 772,155 | | |
| 1,602,324 | | |
| 1,125,894 | |
| International Equity Portfolio | |
| 1,106,469 | | |
| 894,914 | | |
| 850,462 | |
| International Equity Select Portfolio | |
| (198,134) | | |
| (179,672) | | |
| (168,618) | |
| International Strategic Portfolio | |
| 2,735,062 | | |
| 3,278,964 | | |
| 6,014,249 | |
| International Small Cap Portfolio | |
| 452,564 | | |
| 467,434 | | |
| 420,315 | |
| Emerging Markets Portfolio | |
| 148,785,989 | | |
| 165,270,120 | | |
| 151,690,449 | |
| Developing Markets Portfolio | |
| 542,317 | | |
| 2,357,665 | | |
| 3,423,720 | |
| Emerging Markets Blend Portfolio | |
| (353,292) | | |
| 865,860 | | |
| 1,630,661 | |
| Emerging Markets Multi-Strategy Portfolio | |
| — | | |
| 23,581 | | |
| 576,184 | |
| Emerging Markets Debt Portfolio | |
| — | | |
| 67,358 | | |
| 1,546,670 | |
| Realty Income Portfolio* | |
| — | | |
| (25,642) | | |
| 444,223 | |
| Realty Equity Portfolio* | |
| — | | |
| (67,226) | | |
| 191,524 | |
| Global Realty Portfolio* | |
| | | |
| (73,526) | | |
| (120,198) | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| (202,081) | | |
| (134,302) | |
| Corporate Income Portfolio | |
| 320,051 | | |
| 549,203 | | |
| 700,191 | |
| Global Fixed Income Portfolio | |
| — | | |
| — | | |
| (221,145) | |
| Capital Allocator Portfolio | |
| 1,908,840 | | |
| 2,268,200 | | |
| 2,263,514 | |
| * | For the period after September 23, 2011 (the date the Portfolio became a series of
the Fund) through December 31, 2011. |
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 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, which is attached as Appendix B (the “Proxy Voting Policy”).
Non-equity securities, such as debt obligations and money market
instruments, are not usually considered to be voting securities, and proxy voting, if any, is typically limited to the solicitation
of consents to changes in or waivers of features of debt securities, or plans of reorganization involving the issuer of the security.
In the rare event that proxies are solicited with respect to any of these securities, the Investment Manager would vote the proxy
in accordance with the principles set forth in the Proxy Voting Policy, including the procedures used when a vote presents a conflict
between the interests of Fund shareholders, on the one hand, and those of the Investment Manager or any affiliated person of the
Fund or the Investment Manager, on the other.
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
The Fund has entered into an administration agreement with State
Street Bank and Trust Company (“State Street”), One Lincoln Street, Boston, Massachusetts 02111, to provide certain
administrative services to the Portfolios. Each Portfolio bears the cost of such services at a fixed annual rate of $42,500, plus
$7,500 per additional class, and 0.02% of average daily net assets up to $1 billion and 0.01% of average daily net assets over
$1 billion. State Street has agreed to waive $18,750 of the $42,500 annual fee for the Emerging Markets Core, Explorer Total Return,
Global Realty, Short Duration Fixed Income, Global Fixed Income and Targeted Volatility Portfolios until each Portfolio’s
net assets reach $25 million.
State Street also acts as the Fund’s custodian. As the
Fund’s custodian, State Street, among other things, maintains a custody account or accounts in the name of each Portfolio;
receives and delivers all assets for each Portfolio upon purchase and upon sale or maturity; collects and receives all income and
other payments and distributions on account of the assets of each Portfolio and disburses the Portfolio’s assets in payment
of its expenses. The custodian does not determine the investment policies of any Portfolio or decide which securities any Portfolio
will buy or sell.
Boston Financial Data Services, Inc. (“BFDS”), P.O.
Box 8154, Boston, Massachusetts 02266-8154, is the Fund’s transfer and dividend disbursing agent. Under a transfer agency
agreement with the Fund, BFDS arranges for the maintenance of shareholder account records for each Portfolio, the handling of certain
communications between shareholders and the Fund and the payment of dividends and distributions payable by the Fund. For 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 US or foreign exchanges or markets are generally based on the last reported sales price on the exchange or market
on which the security is principally 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 most recent quoted 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. Exchange-traded options and futures contracts are valued at the last sales price at the close of business on the exchanges
on which they trade (which is normally 4:10 p.m. Eastern time). Swap agreements, such as credit default and interest rate swap
agreements and swap agreements with respect to equity securities, are valued by an independent pricing service. Forward currency
contracts are valued using quotations from an independent pricing service. Investments in money market funds are valued at the
fund’s net asset value. Repurchase agreements are valued at the principal amounts plus accrued interest.
Bonds and other fixed-income securities that are not exchange-traded
are valued on the basis of prices provided by independent pricing services which are based primarily on institutional trading in
similar groups of securities, or by using brokers’ quotations or 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.
The Valuation Committee of the Investment Manager, which meets
periodically under the direction of the Board, 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.
If a significant event materially affecting the value of securities
occurs between the close of the exchange or market on which the security is principally traded and the time when a Portfolio’s
net asset value is calculated, or when current market quotations otherwise are determined not to be readily available or reliable
(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 fair value of foreign securities may
be determined with the assistance of an independent 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. 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.
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.
PORTFOLIO TRANSACTIONS
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 in the Equity Concentrated Portfolio
was elevated in 2012 as a result of implementation of the strategy change effective May 30, 2013. The portfolio turnover in the
Global Listed Infrastructure Portfolio was
elevated in 2012 due to a significant decrease in cash flows.
The portfolio turnover in the Emerging Markets Multi-Strategy Portfolio was elevated in 2012 due to an allocation to a new investment
strategy. The portfolio turnover in the Emerging Markets Debt Portfolio was elevated in 2012 due to an increase in Portfolio share
purchases and related portfolio trading activity. The portfolio turnover in the Realty Income Portfolio was lower in 2012 than
in 2011 due to reduced market volatility, which allowed for longer average holding time for Portfolio positions.
The Portfolios listed below held securities of their regular
brokers or dealers during the fiscal year ended December 31, 2012:
| Portfolio | |
Broker/Dealer | |
Value on December 31, 2012
(in $000s) |
| | |
| |
| | |
| Equity Concentrated Portfolio | |
State Street Bank and Trust Company | |
$ | 13,156 | |
| | |
| |
| | |
| Strategic Equity Portfolio | |
State Street Bank and Trust Company | |
| 1,324 | |
| | |
Citigroup, Inc. | |
| 2,556 | |
| | |
| |
| | |
| Mid Cap Portfolio | |
State Street Bank and Trust Company | |
| 923 | |
| | |
| |
| | |
| Small-Mid Cap Portfolio | |
State Street Bank and Trust Company | |
| 10,244 | |
| | |
| |
| | |
| Global Listed Infrastructure Portfolio | |
State Street Bank and Trust Company | |
| 1,996 | |
| | |
| |
| | |
| International Equity Portfolio | |
State Street Bank and Trust Company | |
| 3,105 | |
| | |
| |
| | |
| International Equity Select Portfolio | |
State Street Bank and Trust Company | |
| 100 | |
| | |
| |
| | |
| International Strategic Portfolio | |
State Street Bank and Trust Company | |
| 20,768 | |
| | |
| |
| | |
| International Small Cap Portfolio | |
State Street Bank and Trust Company | |
| 379 | |
| | |
| |
| | |
| Emerging Markets Portfolio | |
State Street Bank and Trust Company | |
| 162,902 | |
| | |
| |
| | |
| Developing Markets Portfolio | |
State Street Bank and Trust Company | |
| 9,267 | |
| | |
| |
| | |
| Emerging Markets Blend Portfolio | |
State Street Bank and Trust Company | |
| 8,062 | |
| | |
| |
| | |
| Emerging Markets Multi-Strategy Portfolio | |
State Street Bank and Trust Company | |
| 11,223 | |
| | |
| |
| | |
| Emerging Markets Debt Portfolio | |
State Street Bank and Trust Company | |
| 945 | |
| | |
| |
| | |
| Realty Income Portfolio | |
State Street Bank and Trust Company | |
| 7,119 | |
| | |
| |
| | |
| Realty Equity Portfolio | |
State Street Bank and Trust Company | |
| 2,014 | |
| | |
| |
| | |
| Global Realty Portfolio | |
State Street Bank and Trust Company | |
| 27 | |
| | |
| |
| | |
| Short Duration Fixed Income Portfolio | |
State Street Bank and Trust Company | |
| 461 | |
| | |
| |
| | |
| Corporate Income Portfolio | |
State Street Bank and Trust Company | |
| 9,101 | |
| | |
| |
| | |
| Global Fixed Income Portfolio | |
State Street Bank and Trust Company | |
| 29 | |
| | |
Credit Suisse USA, Inc. | |
| 27 | |
| | |
JPMorgan Chase & Co. | |
| 75 | |
| | |
Goldman Sachs Group, Inc. | |
| 29 | |
| | |
| |
| | |
| Capital Allocator Portfolio | |
State Street Bank and Trust Company | |
| 37,898 | |
| | |
JPMorgan Chase & Co. | |
| 10,939 | |
Research and Statistical Information
Consistent with the requirements of best execution, brokerage
commissions on a Portfolio’s transactions may be paid to brokers in recognition of investment research and information furnished
as well as for brokerage and execution services provided by such brokers. The Investment Manager may in its discretion cause accounts
to pay such broker-dealers a commission for effecting a portfolio transaction in excess of the amount of commission another broker
or dealer adequately qualified to effect such transaction would have charged for effecting that transaction. This may be done where
the Investment Manager has determined in good faith that such commission is reasonable in relation to the value of the brokerage
and/or research to that particular transaction or to the Investment Manager’s overall responsibilities with respect to the
accounts as to which it exercises investment discretion.
The Investment Manager receives a wide range of research (including
proprietary research) and brokerage services from brokers. These services include information on the economy, industries, groups
of securities, and individual companies; statistical information; technical market action, pricing and appraisal services; portfolio
management computer services (including trading and settlement systems); risk management analysis; and performance analysis. Broker-dealers
may also supply market quotations to the Fund’s custodian for valuation purposes.
Any research received in respect of a Portfolio’s brokerage
commission may be useful to the Portfolio, but also may be useful in the management of the account of another client of the Investment
Manager. Similarly, the research received for the commissions of such other client may be useful for the Portfolio.
Brokerage Commissions
In connection with its portfolio securities transactions for
the fiscal years ended December 31, 2010, 2011 and 2012, each Portfolio indicated below paid brokerage commissions as follows:
Year Ended December 31, 2010
| Portfolio | |
Total Brokerage
Commissions
Paid | |
Amount of
Brokerage
Commissions
Paid to Lazard | |
Percentage of
Total Brokerage
Commissions Paid
to Lazard | |
Percentage of Total
Brokerage
Transactions
Effected Through Lazard |
| | |
| | | |
| | | |
| | | |
| | |
| Equity Concentrated 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 | | |
| — | | |
| — | | |
| — | |
Year Ended December 31, 2011
| Portfolio | |
Total Brokerage
Commissions
Paid | |
Amount of
Brokerage
Commissions
Paid to Lazard | |
Percentage of
Total Brokerage
Commissions Paid
to Lazard | |
Percentage of Total
Brokerage
Transactions
Effected Through
Lazard |
| | |
| | | |
| | | |
| | | |
| | |
| Equity Concentrated Portfolio | |
$ | 12,856 | | |
| — | | |
| — | | |
| — | |
| Strategic Equity Portfolio | |
| 73,209 | | |
| — | | |
| — | | |
| — | |
| Mid Cap Portfolio | |
| 295,660 | | |
| — | | |
| — | | |
| — | |
| Small-Mid Cap Portfolio | |
| 445,159 | | |
| — | | |
| — | | |
| — | |
| Global Listed Infrastructure Portfolio | |
| 603,920 | | |
| — | | |
| — | | |
| — | |
| International Equity Portfolio | |
| 140,222 | | |
| — | | |
| — | | |
| — | |
| International Equity Select Portfolio | |
| 9,681 | | |
| — | | |
| — | | |
| — | |
| International Strategic Portfolio | |
| 758,970 | | |
| — | | |
| — | | |
| — | |
| International Small Cap Portfolio | |
| 46,907 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Portfolio | |
| 14,507,822 | | |
| — | | |
| — | | |
| — | |
| Developing Markets Portfolio | |
| 669,193 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Blend Portfolio | |
| 240,490 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Multi-Strategy Portfolio | |
| 63,503 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Debt Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Realty Income Portfolio* | |
| 21,808 | | |
| — | | |
| — | | |
| — | |
| Realty Equity Portfolio* | |
| 1,474 | | |
| — | | |
| — | | |
| — | |
| Global Realty Portfolio* | |
| 1,415 | | |
| — | | |
| — | | |
| — | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Corporate Income Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Capital Allocator Portfolio | |
| 502,298 | | |
| — | | |
| — | | |
| — | |
| * | For the period after September 23, 2011 (the date the Portfolio became a series of the Fund) through December 31, 2011. |
Year Ended December 31, 2012
| Portfolio | |
Total Brokerage
Commissions
Paid | |
Amount of
Brokerage
Commissions
Paid to Lazard | |
Percentage of
Total Brokerage
Commissions Paid
to Lazard | |
Percentage of Total
Brokerage
Transactions
Effected Through
Lazard |
| | |
| | | |
| | | |
| | | |
| | |
| Equity Concentrated Portfolio | |
$ | 99,715 | | |
| — | | |
| — | | |
| — | |
| Strategic Equity Portfolio | |
| 56,766 | | |
| — | | |
| — | | |
| — | |
| Mid Cap Portfolio | |
| 173,405 | | |
| — | | |
| — | | |
| — | |
| Small-Mid Cap Portfolio | |
| 321,898 | | |
| — | | |
| — | | |
| — | |
| Global Listed Infrastructure Portfolio | |
| 99,160 | | |
| — | | |
| — | | |
| — | |
| International Equity Portfolio | |
| 137,356 | | |
| — | | |
| — | | |
| — | |
| International Equity Select Portfolio | |
| 9,616 | | |
| — | | |
| — | | |
| — | |
| International Strategic Portfolio | |
| 1,602,331 | | |
| — | | |
| — | | |
| — | |
| International Small Cap Portfolio | |
| 67,994 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Portfolio | |
| 12,165,108 | | |
| — | | |
| — | | |
| — | |
| Developing Markets Portfolio | |
| 827,885 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Blend Portfolio | |
| 376,620 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Multi-Strategy Portfolio | |
| 117,869 | | |
| — | | |
| — | | |
| — | |
| Emerging Markets Debt Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Realty Income Portfolio | |
| 157,921 | | |
| — | | |
| — | | |
| — | |
| Realty Equity Portfolio | |
| 84,769 | | |
| — | | |
| — | | |
| — | |
| Global Realty Portfolio | |
| 3,264 | | |
| — | | |
| — | | |
| — | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Corporate Income Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Global Fixed Income Portfolio | |
| — | | |
| — | | |
| — | | |
| — | |
| Capital Allocator Portfolio | |
| 303,170 | | |
| — | | |
| — | | |
| — | |
The aggregate amount of transactions during the fiscal year
ended December 31, 2012 in securities effected on an agency basis through a broker for, among other things, research services,
and the commissions and concessions related to such transactions were as follows:
| Portfolio | |
Transaction Amount | |
Commissions and Concessions |
| Equity Concentrated Portfolio | |
$ | 204,525,007 | | |
$ | 99,715 | |
| Strategic Equity Portfolio | |
| 96,656,720 | | |
| 56,766 | |
| Mid Cap Portfolio | |
| 290,877,641 | | |
| 173,405 | |
| Small-Mid Cap Portfolio | |
| 512,123,136 | | |
| 321,898 | |
| Global Listed Infrastructure Portfolio | |
| 75,560,516 | | |
| 99,160 | |
| International Equity Portfolio | |
| 111,482,946 | | |
| 137,356 | |
| International Equity Select Portfolio | |
| 8,805,951 | | |
| 9,616 | |
| International Strategic Portfolio | |
| 1,282,212,715 | | |
| 1,602,331 | |
| International Small Cap Portfolio | |
| 59,392,071 | | |
| 67,994 | |
| Emerging Markets Portfolio | |
| 6,653,323,077 | | |
| 12,165,108 | |
| Developing Markets Portfolio | |
| 543,080,690 | | |
| 827,885 | |
| Emerging Markets Blend Portfolio | |
| 273,911,665 | | |
| 376,620 | |
| Emerging Markets Multi-Strategy Portfolio | |
| 97,677,379 | | |
| 117,869 | |
| Emerging Markets Debt Portfolio | |
| — | | |
| — | |
| Realty Income Portfolio | |
| 98,784,985 | | |
| 157,921 | |
| Realty Equity Portfolio | |
| 96,948,917 | | |
| 84,769 | |
| Global Realty Portfolio | |
| 4,266,158 | | |
| 3,264 | |
| Short Duration Fixed Income Portfolio | |
| — | | |
| — | |
| Corporate Income Portfolio | |
| — | | |
| — | |
| Global Fixed Income Portfolio | |
| — | | |
| — | |
| Capital Allocator Portfolio | |
| 665,511,626 | | |
| 303,170 | |
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).
Allocations of Limited Offerings (All Portfolios, except
Emerging Markets Debt, Explorer Total Return, Short Duration Fixed Income, Corporate Income and Global Fixed Income Portfolios)
Under the Investment Manager’s trade allocation procedures applicable
to domestic and foreign initial and secondary public offerings and Rule 144A transactions (collectively herein a “Limited
Offering”), the Investment Manager will generally allocate Limited Offering 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 Limited
Offering 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 Limited Offering shares to provide a full allocation to each account. The Investment Manager’s
allocation procedures are designed to allocate Limited Offering 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, Kaiser Foundation Hospitals 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.
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.
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.
Certain Portfolios are managed by allocation between or among
investment strategies managed by the Investment Manager. Quarterly performance of the investment strategies comprising these Portfolios’
investments is available to Portfolio shareholders on request by calling (800) 823-6300.
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.
Securities dealers and other institutions effecting transactions
in Portfolio shares for the accounts of their clients may charge their clients direct fees in connection with such transactions.
The Fund and the Distributor reserve the right to reject any purchase order. All funds will be invested in full and fractional
shares. Stock certificates will not be issued.
Each Portfolio may, in its discretion, accept securities in
payment for shares of the Portfolio. Securities may be accepted in payment for shares only if the securities are, in the judgment
of the 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.
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 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 other than Short Duration
Fixed Income 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.
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, 2012, 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 Distribution and Servicing
Plan For Fiscal Year
Ended December 31, 2012 |
| | |
| | |
| Equity Concentrated Portfolio | |
$ | 1,046 | |
| Strategic Equity Portfolio | |
| 22,091 | |
| Mid Cap Portfolio | |
| 115,695 | |
| Small-Mid Cap Portfolio | |
| 46,353 | |
| Global Listed Infrastructure Portfolio | |
| 27,209 | |
| International Equity Portfolio | |
| 51,896 | |
| International Equity Select Portfolio | |
| 6,587 | |
| International Strategic Portfolio | |
| 442,039 | |
| International Small Cap Portfolio | |
| 44,239 | |
| Emerging Markets Portfolio | |
| 6,701,565 | |
| Developing Markets Portfolio | |
| 196,950 | |
| Emerging Markets Blend Portfolio | |
| 76,088 | |
| Emerging Markets Multi-Strategy Portfolio | |
| 1,643 | |
| Emerging Markets Debt Portfolio | |
| 1,942 | |
| Realty Income Portfolio | |
| 53,994 | |
| Realty Equity Portfolio | |
| 92,985 | |
| Global Realty Portfolio | |
| 4,096 | |
| Short Duration Fixed Income Portfolio | |
| 93 | |
| Corporate Income Portfolio | |
| 11,552 | |
| Global Fixed Income Portfolio | |
| 66 | |
| Capital Allocator Portfolio | |
| 10,986 | |
Payments by the Investment Manager or Distributor
The Investment Manager or the Distributor may provide additional
cash payments out of its own resources to financial intermediaries that sell shares and/or provide other services. Such payments
are in addition to any fees paid by the Fund under Rule 12b-1. These additional payments may be paid to intermediaries that provide
shareholder servicing and administration and/or marketing and related administrative support; opportunities to participate in conferences
and educational workshops, meetings and events; and/or access to and information about sales meetings and conferences and sales
representatives, financial advisors or management personnel of the intermediary. Cash compensation also may be paid to financial
intermediaries in connection with consideration or inclusion of the Fund for or on a “recommended” or similar list, including
a preferred or select sales list, or in other programs. In some cases, these payments may create an incentive for a financial intermediary
or its representatives to recommend or sell Fund shares. Shareholders or potential shareholders should contact their financial
intermediary representative for details about any payments the representative or the financial intermediary may receive in connection
with the sale of Fund shares or the provision of services to the Fund.
From time to time, the Investment Manager or the Distributor
also may provide cash or non-cash compensation to financial intermediaries or their representatives in the form of occasional gifts
or meals, event tickets or other entertainment; support for due diligence trips; educational conference sponsorship; support for
recognition programs; and other forms of cash or non-cash compensation permissible under applicable broker-dealer regulations.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare as a dividend on the outstanding
shares of Emerging Markets Debt Portfolio, Explorer Total Return Portfolio, Short Duration Fixed Income Portfolio, Corporate Income
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.
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 other Portfolios
generally will be declared and paid at least annually, and may be declared and paid more frequently.
Dividends for each Class of a Portfolio will be
calculated at the same time and in the same manner and will be of the same amount, except that certain expenses will be borne
exclusively by one Class and not by the other, such as fees payable under the Distribution and Servicing Plan. Open Shares
will receive lower per share dividends than Institutional Shares because of the higher expenses borne by Open Shares.
Investment income for a Portfolio includes, among other things, dividends and interest income, accretion of market and
original issue discount and amortization of premium, as applicable.
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.
TAXATION
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, except to the extent specifically addressed herein,
to discuss state and local tax matters affecting a Portfolio or its shareholders. 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 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), US 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 US 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 and (ii) that derives at least 90% of its gross income from certain enumerated passive income sources described
in Section 7704(d) of the Code, but does not include a partnership that derives 90% of its gross income from sources described
in Section 851(b)(2)(A) of the Code. 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 US 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 gross 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 US federal income tax purposes. The treatment of particular MLPs for US federal income tax purposes will
affect the extent to which a Portfolio can invest in MLPs. The US federal income tax consequences of a Portfolio’s investments
in “PFICs” and “regular” partnerships are discussed in greater detail below.
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.
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 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 highest prescribed
corporate income tax rate, 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.
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 may be eligible for a 20% preferential maximum tax rate in respect of “qualified dividend
income” 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 underdistributed 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, regardless of whether you receive your distributions in cash or have them reinvested in additional Portfolio shares.
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 gain,”
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 gains are generally taxable to individuals at a maximum rate
of 20%, with lower rates potentially applicable to taxpayers depending on their income levels. 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 taking into account available net capital
loss carryforwards, if any. 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 Regulated Investment Company Modernization Act of 2010) 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.
In certain cases, 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 US individual shareholders may be eligible for the same preferential tax rates applicable to long-term capital
gain to the extent that the Portfolio’s income consists of dividends paid by US 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 (“PFIC,” discussed below). 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 US corporate shareholders may be eligible for the dividends received deduction to the extent that the
Portfolio’s income consists of dividends paid by US 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 Concentrated, 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.
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.
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 US individuals, estates and trusts. The tax applies to the lesser of (i) such net
investment income (or, in the case of an estate or trust, its undistributed net investment income), and (ii) the excess, if any,
of such person’s “modified adjusted gross income” (or, in the case of an estate or trust, its “adjusted gross income”)
over 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 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 the applicable regulations in light of their individual circumstances.
The Portfolios (or their administrative agent) are required
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 by a shareholder, the Portfolios
will use the average cost method with respect to that shareholder. 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 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 US federal income tax purposes. A Portfolio that owns shares of
a PFIC may be subject to US federal income 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 a loss for a taxable
year, the loss 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-US Taxes
Investment income that may be received by a Portfolio from sources
within foreign countries may be subject to foreign withholding and other taxes. 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 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.
It is anticipated that each of Global Listed Infrastructure,
International Equity, International Equity Select, International Strategic, International Small Cap, Emerging Markets, Emerging
Markets Core, Developing Markets, Emerging Markets Blend, Emerging Markets Multi-Strategy, Emerging Markets Debt, Explorer Total
Return, Global 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.
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.
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 preferential rates 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 may 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-US 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 will 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 US federal income or excise tax.
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 real estate mortgage investment
conduits (“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 Corporate
Income 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 US 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 certain
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 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 Treasury a percentage of the taxable distributions and redemption proceeds paid to a shareholder who fails 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 US federal income tax liability, provided the appropriate information is furnished to
the IRS.
Foreign (Non-US) Shareholders
US 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, each as defined in the Code (a
“foreign shareholder”), depends on whether the income of the Portfolio is “effectively connected” with a US
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 US trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will generally be subject to US 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 US tax, except in limited circumstances. In the case of a foreign shareholder, a Portfolio may be
required to withhold US income tax on distributions of net capital gain unless the foreign shareholder certifies his or her non-US
status under penalties of perjury or otherwise establishes an exemption (generally by providing a US Tax Form W-8BEN).
For taxable years of a Portfolio beginning before January 1,
2014, properly-reported dividends are generally exempt from US withholding tax where they (i) are paid in respect of the Portfolio’s
“qualified net interest income” (generally, the Portfolio’s US 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 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-US 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 “US 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 2014, 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 US 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 US 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 US real property interests or capital gain dividends from REITs,
but is, instead, treated as receiving an ordinary distribution subject to US 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 US 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 US 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 US shareholder. A corporation is a “US real property holding corporation” if the fair market value of
its US 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 2014 upon a disposition of shares of a Portfolio will not be subject to US 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 US 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 US
income tax at the graduated rates applicable to US 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 US 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 US source dividends or interest (all such payments, “withholdable payments”), which are made to a “foreign
financial institution,” which term may include certain non-US shareholders of a Portfolio or certain Portfolio investments,
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 Treasury or his/her delegate or the terms of an applicable intergovernmental agreement, 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 or investments 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, and shareholders of a Portfolio will be
required to waive the application of any non-US laws which, but for such waiver, would prevent the Portfolio or any other person
or entity from reporting information in respect of United States accounts in accordance with the applicable provisions of the HIRE
Act or any agreement described in Section 1471(b) of the Code (and, if necessary to effectuate the information reporting contemplated
by the HIRE Act, such shareholders will be required to obtain similar waivers from their direct and indirect owners). While the
withholding tax provisions of the HIRE Act were to have been fully effective beginning in 2013, the Treasury and the IRS have provided
for a phased-in implementation of these withholding provisions beginning in 2014.
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. 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.
All non-US shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an investment in 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. Prospective
investors should consult their own tax advisors 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, non-US taxes.
Shareholders should consult their own tax advisors regarding
the state, local and non-US tax consequences of an investment in shares and the particular tax consequences to them of an investment
in a Portfolio.
ADDITIONAL INFORMATION
ABOUT THE FUND AND PORTFOLIOS
As of April 10, 2013 (except as otherwise noted), 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
Institutional Shares Outstanding |
| |
|
|
| Equity Concentrated Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
29% |
| |
|
|
Equitable Trust Company
4400 Harding Road, Suite 310
Nashville, TN 37205-2314 |
|
23% |
| |
|
|
JP Morgan
14201 Dallas Parkway, 13th Floor
Dallas, TX 75254-2916 |
|
22% |
| |
|
|
National Financial Services Corp.
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003 |
|
18% |
| |
|
|
SEI Private Trust Company
One Freedom Valley Drive
Oaks, PA 19456-9989 |
|
6% |
| |
|
|
| Strategic Equity Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
35% |
Lazard Capital Markets LLC
Iron Workers Local 40361
30 Rockefeller Plaza, 60th Floor
New York, NY 10112 |
|
15% |
| |
|
|
Lazard Capital Markets LLC
Lazard Frères & Co. LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112 |
|
8% |
| |
|
|
| Mid Cap Portfolio |
|
|
| |
|
|
State Street Bank as Trustee for Olin Corporation Contribution
Employee Ownership Plan
105 Rosemont Avenue
Westwood, MA 02090 |
|
33% |
| |
|
|
JP Morgan Chase as TTEE
For Hayes Lemmerz International Inc. Retirement Savings Plan
11500 Outlook Street
Leawood, KS 66211-1804 |
|
17% |
| |
|
|
Lazard Capital Markets LLC
Lazard Frères & Co. LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112 |
|
14% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484 |
|
10% |
| |
|
|
| Small-Mid Cap Portfolio |
|
|
| |
|
|
Mac & Co.
P.O. Box 3198
525 William Penn Place
Pittsburgh, PA 15230-3198 |
|
47% |
| |
|
|
Alaska Retirement Management Board
State Street Bank & Trust Co.
2 Avenue de Lafayette
Boston, MA 02111-1724 |
|
24% |
| |
|
|
Lazard Capital Markets LLC
Gentleness LLC
Arthur R G Solmssen Jr. |
|
5% |
| |
|
|
| Global Listed Infrastructure Portfolio |
|
|
| |
|
|
Genworth Financial Trust Company
3200 North Central Avenue, Floor 7
Phoenix, AZ 85012 |
|
45% |
National Financial Services Corp.
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281 |
|
18% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
14% |
| |
|
|
| International Equity Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
28% |
| |
|
|
Wells Fargo Bank
P.O. Box 1533
Minneapolis, MN 55480-1533 |
|
9% |
| |
|
|
Lazard Capital Markets LLC
Somerville Retirement System
50 Evergreen Avenue
Somerville, MA 02145 |
|
8% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
8% |
| |
|
|
Lazard Capital Markets LLC
The Baycrest Centre Foundation
3600 Bathurst Street
North York, Ontario |
|
7% |
| |
|
|
Ellard & Co.
P.O. Box 3199
Church Street Station
New York, NY 10008-3199 |
|
6% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484 |
|
5% |
| |
|
|
| International Equity Select Portfolio |
|
|
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
69% |
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484 |
|
11% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
6% |
| |
|
|
| International Strategic Portfolio |
|
|
| |
|
|
National Financial Services Corp.
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281 |
|
15% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
11% |
| |
|
|
Lazard Capital Markets LLC
Market Street International
30 Rockefeller Plaza, 60th Floor
New York, NY 10112 |
|
7% |
| |
|
|
Southern Nevada Culinary & Bartenders Pension Trust
9121 West Russell Road, Suite 219
Las Vegas, NV 89148-1239 |
|
6% |
| |
|
|
| International Small Cap Portfolio |
|
|
| |
|
|
Wells Fargo Bank
P.O. Box 1533
Minneapolis, MN 55480 |
|
51% |
| |
|
|
National Financial Services Corp.
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281 |
|
23% |
| |
|
|
Lazard Capital Markets LLC
Pension Plan for the Employees of Marine Atlantic Inc.
10 Marine Drive
Marine Atlantic Port Aux Basques NL AOM ICO |
|
17% |
| |
|
|
| Emerging Markets Portfolio |
|
|
| |
|
|
National Financial Services Corp.
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281 |
|
19% |
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
11% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
10% |
| |
|
|
First Clearing, LLC
FBO Its Customers
2801 Market Street
St. Louis, MO 63103-2523 |
|
7% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484 |
|
7% |
| |
|
|
| Developing Markets Portfolio |
|
|
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
24% |
| |
|
|
Edward D Jones & Co.
201 Progress Parkway
Maryland Heights, MO 63043-3009 |
|
16% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484 |
|
10% |
| |
|
|
National Financial Services, LLC
FBO Its Customers
One World Financial Center
200 Liberty Street, 5th Floor
New York, NY 10281 |
|
9% |
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
|
8% |
| |
|
|
LPL Financial
9785 Towne Centre Drive
San Diego, CA 92121-1968 |
|
7% |
| |
|
|
Mori & Co.
911 Main Street, Suite 201
Kansas City, MO 64105-5304 |
|
5% |
| Emerging Markets Blend Portfolio |
|
|
| |
|
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003 |
|
31% |
| |
|
|
Charles Schwab & Co.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
25% |
| |
|
|
First Clearing, LLC
FBO Its Customers
2801 Market Street
St. Louis, MO 63103-2523 |
|
8% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
5% |
| |
|
|
Sterne Agee & Leach Inc.
2 Perimeter Park South, Suite 100W
Birmingham, AL 35243-3298 |
|
5% |
| |
|
|
Wells Fargo Bank
FBO University of Co. Hosp DB
P.O. Box 1533
Minneapolis, MN 55480-1533 |
|
5% |
| |
|
|
| Emerging Markets Multi-Strategy Portfolio |
|
|
| |
|
|
Mac & Co.
P.O. Box 3198
525 William Penn Place
Pittsburgh, PA 15230-3198 |
|
17% |
| |
|
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003 |
|
13% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
12% |
| |
|
|
Linercourse & Co.
As Custodian for Hamilton Healthcare Systems Inc.
1200 Crown Colony Drive
Quincy, MA 02169-0938 |
|
11% |
Lazard Capital Markets LLC
Gentleness LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
11% |
| |
|
|
TD Ameritrade Trust Company
P.O. Box 17748
Denver, CO 80217-0748 |
|
8% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
6% |
| |
|
|
| Emerging Markets Debt Portfolio |
|
|
| |
|
|
Wells Fargo Bank NA FBO
P.O. Box 1533
Minneapolis, MN 55480-1533 |
|
38% |
| |
|
|
Windstream Master Trust
4001 North Rodney Parham Road
Little Rock, AZ 72212-2459 |
|
13% |
| |
|
|
Wells Fargo Bank
P.O. Box 1533
Minneapolis, MN 55480-1533 |
|
12% |
| |
|
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003 |
|
9% |
| |
|
|
WI Cook Foundation Inc.
801 Seventh Avenue
Fort Worth, TX 76104-2733 |
|
7% |
| |
|
|
| Realty Income Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
19% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
17% |
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003 |
|
14% |
| |
|
|
Lazard Capital Markets LLC
Lazard Asset Management LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
12% |
| |
|
|
| Realty Equity Portfolio |
|
|
| |
|
|
Lazard Capital Markets LLC
Lazard Asset Management LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
32% |
| |
|
|
Raymond James & Assoc., Inc.
FBO Ahmad H. Abdul-Baki & Katherine Abdul-Baki TTEE
Abdul-Baki Family Revocable Trust
McLean, VA
|
|
9% |
| Global Realty Portfolio (as of October 18, 2013) |
|
|
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
|
99% |
| |
|
|
| Short Duration Fixed Income Portfolio (as of June 14, 2013) |
|
|
| |
|
|
Lazard Capital Markets LLC
IJM Limited Partnership
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
6% |
| |
|
|
Lazard Capital Markets LLC
The Carol Corby Waller Revocable Living Trust
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
6% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
5% |
| |
|
|
Lazard Capital Markets LLC
Marsha Davidson
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
5% |
| |
|
|
| Corporate Income Portfolio (as of June 14, 2013) |
|
|
| |
|
|
Mac & Co.
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230 |
|
14% |
Mac & Co.
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230 |
|
10% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
8% |
| |
|
|
Mac & Co.
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230 |
|
5% |
| |
|
|
| Global Fixed Income Portfolio |
|
|
| |
|
|
Lazard Capital Markets LLC
Estate Albert J. Hettinger III
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
17% |
| |
|
|
Lazard Capital Markets LLC
Lazard Group LLC
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
8% |
| |
|
|
| Capital Allocator Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
13% |
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
|
6% |
| Name and Address |
|
Percentage of Total
Open Shares Outstanding |
| |
|
|
| Equity Concentrated Portfolio |
|
|
| |
|
|
Counsel Trust DBA MATC
FBO ETC Corporation 401(k) Profit Sharing Plan
1251 Waterfront Place, Suite 525
Pittsburgh, PA 15222-4228 |
|
37% |
| |
|
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
|
|
32% |
|
TD Ameritrade Inc.
FBO Its Clients
P.O. Box 2226
Omaha, NE 68103-2226
|
|
10% |
| |
|
|
| Strategic Equity Portfolio |
|
|
| |
|
|
Priac as Trustee/Custodian
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103 |
|
66% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246 |
|
14% |
| |
|
|
Lazard Capital Markets LLC
Peter B. Milburn & Joyce Singer
30 Rockefeller Plaza, 60th Floor
New York, NY 10112 |
|
6% |
| |
|
|
| Mid Cap Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
31% |
| |
|
|
ING Life Insurance and Annuity Company
151 Farmington Avenue, TN41
Hartford, CT 06156 |
|
23% |
| |
|
|
Reliance Trust Company
8515 East Orchard Road 2T2
Greenwood Village, CO 80111-5002 |
|
12% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246 |
|
5% |
| |
|
|
| Small-Mid Cap Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
16% |
| |
|
|
Nationwide Life Insurance, NWVA
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 |
|
14% |
Prudential Retirement Insurance & Annuity Co.
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103 |
|
10% |
| |
|
|
Nationwide Life Insurance, QVPA
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 |
|
8% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484 |
|
5% |
| |
|
|
| Global Listed Infrastructure Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
51% |
| |
|
|
TD Ameritrade Inc.
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103 |
|
25% |
| |
|
|
| International Equity Portfolio |
|
|
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246 |
|
25% |
| |
|
|
Charles Atwood Company
136 E. Michigan Avenue, Suite 1201
Kalamazoo, MI 49007 |
|
15% |
| |
|
|
Prudential Retirement Insurance & Annuity Co.
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103 |
|
12% |
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
11% |
| |
|
|
Charles Schwab & Co., Inc.
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
8% |
| International Equity Select Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
29% |
| |
|
|
LAFOBA & Co.
50 Commerce Drive
Grayslake, IL 60030-1600 |
|
11% |
| |
|
|
First Clearing, LLC
FBO Its Customers
10750 Wheat First Drive
Glen Allen, VA 23060 |
|
9% |
| |
|
|
William Blair & Co. LLC
Gizmo Partners LP
222 West Adams Street
Chicago, IL 60606-5312 |
|
9% |
| |
|
|
William Blair & Co. LLC
Jonathan and Natalie Stein
222 West Adams Street
Chicago, IL 60606-5312 |
|
6% |
| |
|
|
Lazard Capital Markets LLC
Frances Trust
30 Rockefeller Plaza, 60th Floor
New York, NY 10112-0015 |
|
6% |
| |
|
|
Nationwide Trust Co.
FBO IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 |
|
5%
|
| |
|
|
| International Strategic Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
33% |
| |
|
|
Genworth Financial Trust Co.
3200 North Central Avenue
Phoenix, AZ 85012 |
|
25% |
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002
|
|
17% |
TD Ameritrade Inc.
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103-2226 |
|
6% |
| |
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
|
|
5% |
| |
|
|
| International Small Cap Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
65% |
| |
|
|
Nationwide Trust Co.
FBO IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029 |
|
10% |
| |
|
|
| Emerging Markets Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
30% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
9% |
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002
|
|
6% |
| |
|
|
| Developing Markets Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
45% |
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
14% |
| |
|
|
Morgan Stanley Smith Barney
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311 |
|
13% |
| |
|
|
| Emerging Markets Blend Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
34% |
| |
|
|
TD Ameritrade Inc.
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103-2226 |
|
17% |
| |
|
|
Mitra & Co.
11270 West Park Place, Suite 400
Milwaukee, WI 53224-3638 |
|
7% |
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
6% |
| |
|
|
| Emerging Markets Multi-Strategy Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
25% |
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
23% |
| |
|
|
NFS LLC
FBO Robert A. Walton
Mountain Brook, AL
|
|
6% |
| |
|
|
| Emerging Markets Debt Portfolio |
|
|
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
|
|
39% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
8% |
| Realty Income Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
47% |
| |
|
|
LPL Financial
9875 Towne Centre Drive
San Diego, CA 92121-1968 |
|
9% |
| |
|
|
| Realty Equity Portfolio |
|
|
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
18% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
12% |
| |
|
|
| Global Realty Portfolio (as of October 18, 2013) |
|
|
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
|
31% |
| |
|
|
NFS LLC
FEBO Jay P. Leupp
Hillsborough, CA |
|
21% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
13% |
| |
|
|
UBS WM USA
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761 |
|
8% |
| |
|
|
| Corporate Income Portfolio (as of June 14, 2013) |
|
|
| |
|
|
TD Ameritrade Inc.
FEBO Its Customers
P.O. Box 2226
Omaha, NE 68103-2226 |
|
24% |
| |
|
|
State Street Bank & Trust Company
Custodian for the IRA of FBO Richard J. Urowsky
c/o Sullivan and Cromwell
125 Broad Street
New York, NY 10004-2400 |
|
13% |
Merrill Lynch, Pierce, Fenner & Smith Incorporated
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246 |
|
12% |
| |
|
|
Lazard Capital Markets LLC
OCF Foundation Inc.
30 Rockefeller Plaza
New York, NY 10112-0015 |
|
8% |
| |
|
|
MG Trust Company
FBO Smith & Downey, PA 401(k) Plan
700 17th Street, Suite 300
Denver, CO 80202-3531 |
|
8% |
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
|
|
7% |
| |
|
|
Thomas J. Cogdill and Patricia W. Cogdill TTES
Cogdill Family Trust dtd 8/6/03
Huntsville, AL |
|
6% |
| |
|
|
| Global Fixed Income Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
100% |
| |
|
|
| Capital Allocator Portfolio |
|
|
| |
|
|
Charles Schwab & Co., Inc.
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905 |
|
18% |
| |
|
|
Pershing LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
|
14% |
| |
|
|
National Financial Services LLC
FEBO Rick E. Pierchalski
BPU Investment Management Inc.
One Oxford Centre
301 Grant Street, Suite 3300
Pittsburgh, PA 15219 |
|
8% |
| |
|
|
National Financial Services LLC
FEBO Elwyn Inc. Ret. Plan
111 Elwyn Road
Elwyn, PA 19063-4622 |
|
7% |
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 a majority 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 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 US 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 US 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 Realty Equity
Portfolio, which compare their performance to the Dow Jones US 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, 1375 Broadway, New York, New York 10018, is the independent registered public accounting firm for the Fund.
APPENDIX A
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 US, for example,
that means obligations with an original maturity of no more than 365 days¾including
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 payment¾capacity 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 |
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|
| · |
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.
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.
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
US 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 schedule¾the larger the final maturity relative to other maturities, the more likely it will be treated as a note; and |
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|
| · |
source of payment¾the 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.
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. |
US Municipal Short-Term Debt and Demand
Obligation Ratings.
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 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.
| 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. |
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|
| MIG 2 |
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
APPENDIX B
PROXY VOTING POLICY
LAZARD ASSET MANAGEMENT LLC
Proxy Voting
Policy:
As a fiduciary, Lazard Asset Management LLC (the “Investment
Manager”) is obligated to vote proxies in the best interests of its clients. The Investment Manager has adopted a written
policy (the “Policy”) that is designed to ensure that it satisfies its fiduciary obligation. The Investment Manager
has developed a structure to attempt to ensure that proxy voting is conducted in an appropriate manner, consistent with clients’
best interests, and within the framework of the Policy.
The Investment Manager manages assets for a variety of clients,
including individuals, Taft-Hartley plans, governmental plans, foundations and endowments, corporations, investment companies and
other collective investment vehicles. Absent specific guidelines provided by a client, the Investment Manager’s policy is
to vote proxies on a given issue the same for all of its clients. The Policy is based on the view that, in its role as investment
adviser, the Investment Manager must vote proxies based on what it believes will maximize shareholder value as a long-term investor,
and that the votes it casts on behalf of all its clients are intended to accomplish that objective.
Procedures:
Administration and Implementation of Proxy Voting Process.
The Investment Manager’s proxy-voting process is administered by its Proxy Operations Department (“ProxyOps”),
which reports to the Investment Manager’s Chief Operating Officer. Oversight of the process is provided by the Investment
Manager’s Legal/Compliance Department and by a Proxy Committee consisting of senior officers of the Investment Manager. To
assist it in its proxy-voting responsibilities, the Investment Manager currently subscribes to several research and other proxy-related
services offered by Institutional Shareholder Services, Inc. (“ISS”), one of the world’s largest providers of
proxy-voting services. ISS provides the Investment Manager with its independent analysis and recommendation regarding virtually
every proxy proposal that the Investment Manager votes on behalf of its clients, with respect to both US and non-US securities.
The Investment Manager’s Proxy Committee has approved
specific proxy voting guidelines regarding the most common proxy proposals (the “Approved Guidelines”). These Approved
Guidelines provide that the Investment Manager should vote for or against the proposal, or that the proposal should be considered
on a case-by-case basis. The Investment Manager believes that its portfolio managers and global research analysts with knowledge
of the company (“Portfolio Management”) are in the best position to evaluate the impact that the outcome of a given
proposal will have on long-term shareholder value. Therefore, ProxyOps seeks Portfolio Management’s recommendation on all
proposals to be considered on a case-by-case basis. Portfolio Management is also given the opportunity to review all proposals
(other than routine proposals) where the Approved Guideline is to vote for or against, and, in compelling circumstances, to overrule
the Approved Guideline, subject to the Proxy Committee’s final determination. The Manager of ProxyOps may also consult with
the Investment Manager’s Chief Compliance Officer or the Proxy Committee concerning any proxy agenda or proposal.
Types of Proposals. Shareholders receive proxies involving
many different proposals. Many proposals are routine in nature, such as a non-controversial election of Directors or a change in
a company’s name. Other proposals are more complicated, such as items regarding corporate governance and shareholder rights,
changes to capital structure, stock option plans and other executive compensation issues, mergers and other significant transactions
and social or political issues. The Policy lists the Approved Guidelines for the most common proposals. New or unusual proposals
may be presented from time to time. Such proposals will be presented to Portfolio Management and discussed with the Proxy Committee
to determine how they should be voted, and an Approved Guideline will be adopted if appropriate.
Conflicts of Interest. The Policy recognizes that there
may be times when meeting agendas or proposals create the
appearance of a material conflict of interest for the Investment
Manager. Should the appearance of such a conflict exist, the Investment Manager will seek to alleviate the conflict by voting consistent
with an Approved Guideline (to vote for or against), or, in situations where the Approved Guideline is to vote case-by-case, with
the recommendation of an independent source, currently ISS. If the recommendations of the two services offered by ISS, the Proxy
Advisor Service and the Proxy Voter Service, are not the same, the Investment Manager will obtain a recommendation from a third
independent source that provides proxy voting advisory services, and will defer to the majority recommendation. If a third independent
source is not available, the Investment Manager will follow the recommendation of ISS’s Proxy Advisor Service.
Funds. Each Fund is required to file a Form N-PX by August
31 each year containing a complete proxy voting record of the Fund for the twelve-month period ended the previous June 30. The
Investment Manager’s Proxy Operations team is responsible for maintaining the data necessary to complete this form and to
work, in conjunction with ISS, to generate the required information and to file this form annually. In addition, in the Fund’s
annual and semi-annual report to shareholders and in its Statement of Additional Information (“SAI”), the Fund must
include a statement indicating how to obtain the proxy voting record of the Fund for the most recent twelve month period and that
such record is available without charge. It should also indicate that such information is available on the SEC’s website.
The Legal/Compliance Department is responsible for ensuring that such information is included in the annual and semi-annual reports
and in the SAI.
