|
|
|
Securities Act File No. 33-40682 |
|
Investment Company Act File No. 811-06312 |
|
|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
|
|
|
|
|
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
x |
|
|
|
|
|
|
|
Post-Effective Amendment No. 82 |
x |
|
|
|
|
|
|
and |
|
|
|
|
|
|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |
x |
|
|
|
|
|
|
|
Amendment No. 82 |
x |
|
|
|
|
|
|
(Check appropriate box or boxes) |
|
|
|
|
|
|
|
THE LAZARD FUNDS, INC. |
|
|
|
||
|
|
(Exact Name of Registrant as Specified in Charter) |
|
|
|
|
|
|
|
(212) 632-6000 |
|
|
|
|
|
|
|
(Registrant’s Telephone Number, including Area Code) |
|
|
|
|
|
|
|
30 Rockefeller Plaza, New York, New York 10112 |
|
|
|
|
|
|
|
(Address of Principal Executive: Number, Street, City, State, Zip Code) |
|
|
|
|
|
|
|
Nathan A. Paul, Esq. |
|
|
|
|
|
|
|
Copy to: |
|
|
|
|
|
|
It is proposed that this filing will become effective (check appropriate box) |
|
|
|
|
o |
immediately upon filing pursuant to paragraph (b) |
|
x |
on December 31, 2013 pursuant to paragraph (b) |
|
o |
60 days after filing pursuant to paragraph (a)(1) |
|
o |
on (DATE) pursuant to paragraph (a)(1) |
|
o |
75 days after filing pursuant to paragraph (a)(2) |
|
o |
on (DATE) pursuant to paragraph (a)(2) of Rule 485. |
|
If appropriate, check the following box: |
|
|
o |
this post-effective amendment designates a new effective date for a previously filed post-effective amendment. |
Lazard Funds Prospectus
December 31, 2013
|
|
|
|
|
|
|
Shares |
||||||
Institutional |
Open |
R6 |
||||
Global Equity |
|
|
|
|
|
|
Lazard Global Equity Select Portfolio |
GESIX |
GESOX |
RLGEX |
|||
The Securities and Exchange Commission has not approved or disapproved the shares described in this Prospectus or determined whether this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Lazard Funds Table of Contents p
2
Carefully review this important section for
2
information on the Portfolio’s investment
objective, fees and past performance and a
summary of the Portfolio’s principal investment
strategies and risks.
5
Additional Information About Principal Investment Strategies
and
Review this section for additional information
on the Portfolio’s principal investment
strategies and risks.
6
Review this section for details on the people and
6
organizations who oversee the Portfolio.
6
6
6
6
7
Review this section for details on how shares
7
are valued, how to purchase, sell and exchange
8
shares, related charges and payments of
10
dividends and distributions.
11
12
13
13
15
Review this section for recent financial information.
Where to learn more about the Portfolio. Prospectus1
Lazard Funds Summary Section p Lazard Global Equity Select Portfolio Investment Objective The Portfolio seeks long-term capital appreciation. Fees and Expenses This table describes the fees and expenses that you may pay if you buy and hold shares of the Portfolio, a series of The Lazard Funds, Inc. (the “Fund”).
Institutional
Open
R6 Shareholder Fees (fees paid directly from your investment) 1.00%
1.00%
1.00%
Annual Portfolio Operating Expenses (expenses that you pay each year as a
Management Fees
.85%
.85%
.85%
Distribution and Service (12b-1) Fees
None
.25%
None
Other Expenses*
.29%
.34%
.29%
Total Annual Portfolio Operating Expenses
1.14%
1.44%
1.14% Fee Waiver and Expense Reimbursement** .04%
.04% .09% Total Annual Portfolio Operating Expenses After Fee Waiver and Expense Reimbursement** 1.10%
1.40% 1.05%
*
“Other Expenses” are based on estimated amounts for the current fiscal year.
** Reflects a contractual agreement by Lazard Asset Management LLC (the “Investment Manager”) to waive its fee and, if necessary, reimburse the Portfolio through December 31, 2015, to the extent Total Annual Portfolio Operating Expenses exceed 1.10%, 1.40% and 1.05% of the average daily net assets of the Portfolio’s Institutional Shares, Open Shares and R6 Shares, respectively, exclusive of taxes,
brokerage, interest on borrowings, fees and expenses of “Acquired Funds” and extraordinary expenses, and excluding shareholder redemption fees or other transaction fees. This agreement can only be amended by agreement of the Fund, upon approval by the Fund’s Board of Directors (the “Board”), and the Investment Manager to lower the net amount shown and will terminate automatically in the event of
termination of the Investment Management Agreement between the Investment Manager and the Fund, on behalf of the Portfolio.
Example This Example is intended to help you compare the cost of investing in the Portfolio with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Portfolio for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same, giving effect to
the fee waiver and expense reimbursement arrangement described above. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
3 Years Institutional Shares
$
112
$
354 Open Shares
$
143
$
447 R6 Shares
$
107
$
344 Portfolio Turnover The Portfolio pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Portfolio shares are held in a taxable account. These costs, which are not reflected
in annual portfolio operating expenses or in the Example, affect the Portfolio’s performance. Because the Portfolio had not commenced investment operations prior to the date of this Prospectus, no portfolio turnover information is presented. 2Prospectus
Shares
Shares
Shares
Maximum Redemption Fee (as a % of amount redeemed,
on shares owned for 30 days or less)
percentage of the value of your investment)
Principal Investment Strategies The Portfolio invests primarily in equity securities, principally common stocks, of companies that the Investment Manager believes are undervalued based on their earnings, cash flow or asset values. In managing the Portfolio, the Investment Manager utilizes a flexible investment approach and engages in
bottom-up, fundamental security analysis and selection. The Portfolio may invest in securities across the capitalization spectrum. Under normal circumstances, the Portfolio invests at least 80% of its assets in equity securities. In addition, under normal market conditions, the Portfolio invests significantly (at least 40%—unless market conditions are not deemed favorable by the Investment Manager, in which case the Portfolio would invest at
least 30%) in non-US companies. The Investment Manager will allocate the Portfolio’s assets among various regions and countries, including the United States (but in no less than three different countries). The Portfolio’s investments in non-US companies may include companies whose principal business
activities are located in emerging market countries. Principal Investment Risks The value of your investment in the Portfolio will fluctuate, which means you could lose money. Market Risk. Market risks, including political, regulatory, market and economic developments, and developments that impact specific economic sectors, industries or segments of the market, can affect the value of the Portfolio’s investments. In addition, turbulence in financial markets and reduced liquidity in
equity, credit and/or fixed income markets may negatively affect many issuers, which could adversely affect the Portfolio. Issuer Risk. The value of a security may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods or services, as well as the historical and prospective earnings of the issuer and the value of its assets. Non-US Securities Risk. The Portfolio’s performance will be influenced by political, social and economic factors affecting the non-US countries and companies in which the Portfolio invests. Non-US securities carry special risks, such as exposure to less developed or less efficient trading markets, political
instability, a lack of company information, differing auditing and legal standards, and, potentially, less liquidity. Emerging Market Risk. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed countries. The securities markets of emerging market countries have historically been extremely volatile. However, capital
markets worldwide have experienced unprecedented volatility in recent years, causing significant declines in valuation and liquidity in certain emerging markets. These market conditions may continue or worsen. Significant devaluation of emerging market currencies against the US dollar may occur subsequent
to acquisition of investments denominated in emerging market currencies. Foreign Currency Risk. Investments denominated in currencies other than US dollars may experience a decline in value, in US dollar terms, due solely to fluctuations in currency exchange rates. The Investment Manager does not intend to actively hedge the Portfolio’s foreign currency exposure. Non-Diversification Risk. Although the Portfolio is classified as “diversified” under the Investment Company Act of 1940, as amended, it may invest in a smaller number of issuers than other, more diversified investment portfolios. The Portfolio’s net asset value (“NAV”) may be more vulnerable to changes in
the market value of a single issuer or group of issuers and may be relatively more susceptible to adverse effects from any single corporate, industry, economic, market, political or regulatory occurrence than if the Portfolio’s investments consisted of securities issued by a larger number of issuers. Value Investing Risk. The Portfolio invests in stocks believed by the Investment Manager to be undervalued, but that may not realize their perceived value for extended periods of time or may never realize their perceived value. The stocks in which the Portfolio invests may respond differently to market and
other developments than other types of stocks. Large Cap Companies Risk. The securities of large cap companies may underperform other segments of the market because such companies may be less responsive to competitive challenges and opportunities and may be unable to attain high growth rates during periods of economic expansion. Small and Mid Cap Companies Risk. Small and mid cap companies carry additional risks because their earnings tend to be less predictable, their share prices more Prospectus3
volatile and their securities less liquid than larger, more established companies. The shares of small and mid cap companies tend to trade less frequently than those of larger companies, which can have an adverse effect on the pricing of these securities and on the ability to sell these securities when the
Investment Manager deems it appropriate. Performance Bar Chart and Table Because the Portfolio had not commenced investment operations prior to the date of this Prospectus, no performance returns are presented. Annual performance returns provide some indication of the risks of investing in the Portfolio by showing changes in performance from year to year. Comparison of Portfolio
performance to an appropriate index indicates how the Portfolio’s average annual returns compare with those of a broad measure of market performance. After the Portfolio commences investment operations, performance information will be available at www.LazardNet.com or by calling (800) 823-6300. The
Portfolio’s past performance (before and after taxes) is not necessarily an indication of how the Portfolio will perform in the future. Management Investment Manager Lazard Asset Management LLC Portfolio Manager/Analysts Andrew Lacey, portfolio manager/analyst on various of the Investment Manager’s US Equity and Global Equity teams, has been with the Portfolio since December 2013. Ronald Temple, portfolio manager/analyst on various of the Investment Manager’s US Equity teams and the Global Equity Select team, has been with the Portfolio since December 2013. Martin Flood, portfolio manager/analyst on various of the Investment Manager’s US Equity teams and the Global Equity Select team, has been with the Portfolio since December 2013. Louis Florentin-Lee, portfolio manager/analyst on the Investment Manager’s Global Equity Select team, has been with the Portfolio since December 2013. Patrick Ryan, portfolio manager/analyst on various of the Investment Manager’s Global Equity teams, has been with the Portfolio since December 2013. Purchase and Sale of Portfolio Shares The initial investment minimums are: Institutional Shares
$
100,000 Open Shares*
$
2,500 R6 Shares**
$
1,000,000
*
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. ** There is no minimum investment amount for R6 Shares purchased by certain types of employee benefit plans and individuals considered to be affiliates of the Fund or the Investment Manager, discretionary accounts with the Investment Manager and affiliated and non-affiliated registered investment companies. The subsequent investment minimum for Institutional Shares and Open Shares is $50. Portfolio shares are redeemable through the Fund’s transfer agent, Boston Financial Data Services, Inc. (the “Transfer Agent”), on any business day by telephone, mail or overnight delivery. Clients of financial intermediaries may be subject to the intermediaries’ procedures. Tax Information All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, and long-term capital gains are generally taxable as such, whether you receive the distribution in cash or reinvest it in additional shares. Financial Intermediary Compensation Payments to Broker-Dealers and Other Financial Intermediaries If you purchase shares of the Portfolio through a broker-dealer or other financial intermediary (such as a bank), the Portfolio and/or the Investment Manager and its affiliates may pay the intermediary for the sale of Portfolio shares and related services (except for R6 Shares, for which neither the Fund nor the
Investment Manager or its affiliates provide any distribution, shareholder or participant servicing, account maintenance, sub-accounting, sub-transfer agency, administrative, recordkeeping or reporting, transaction processing, support or similar payments, or “revenue sharing” payments, in connection with
investments in, or conversions into, R6 Shares). These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Portfolio over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information. 4Prospectus
Lazard Funds Additional Information About Principal Investment Strategies and Principal Investment Risks p The Fund consists of twenty-five separate Portfolios, one of which is described in this Prospectus. Because you could lose money by investing in the Portfolio, be sure to read all risk disclosures carefully before investing. The Portfolio has adopted a policy to invest at least 80% of its assets in specified securities appropriate to its name and to provide its shareholders with at least 60 days’ prior notice of any change with respect to this policy. The Portfolio’s investment objective may only be changed with the approval of the
Portfolio’s shareholders. Additional Information About Principal Investment Strategies The following information supplements, and should be read together with, the information about the Portfolio’s principal investment strategies contained in the “Summary Section.” The Portfolio invests primarily in equity securities, including common stocks, American Depositary Receipts and shares (“ADRs”) and Global Depositary Receipts and shares, preferred stocks and convertible securities, of companies that the Investment Manager believes are undervalued based on their earnings,
cash flow or asset values. The Portfolio considers a company to be a non-US company if: (i) the company is organized under the laws of a country other than the US or maintains its principal place of business in a country other than the US; (ii) the securities of such company are traded principally on a non-US market; or (iii) during the
most recent fiscal year of the company, the company derived at least 50% of its revenues or profits from goods produced or sold, investments made, or services performed in countries other than the US or that has at least 50% of its assets in countries other than the US. Under adverse market conditions, the Portfolio could pursue a defensive strategy by investing some or all of its assets in money market securities to seek to avoid or mitigate losses. Additional Information About Principal Investment Risks The following information supplements, and should be read together with, the information about the Portfolio’s principal investment risks contained in the “Summary Section.” Securities Selection Risk. Securities and other investments selected by the Investment Manager for the Portfolio may not perform to expectations. This could result in the Portfolio’s underperformance compared to other funds with similar investment objectives or strategies. Temporary Defensive Strategy Risk. 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, US Government securities,
repurchase agreements, bank obligations and commercial paper and other short-term obligations. In pursuing a temporary defensive strategy, a Portfolio may forgo potentially more profitable investment strategies and, as a result, may not achieve its stated investment objective. You should be aware that the Portfolio:
•
is not a bank deposit • is not guaranteed, endorsed or insured by any bank, financial institution or government entity, such as the Federal Deposit Insurance Corporation • is not guaranteed to achieve its stated goal Prospectus5
Lazard Funds Fund Management p Lazard Asset Management LLC, 30 Rockefeller Plaza, New York, New York 10112-6300, serves as the Investment Manager of the Portfolio. The Investment Manager provides day-to-day management of the Portfolio’s investments and assists in the overall management of the Fund’s affairs. The Investment
Manager and its global affiliates provide investment management services to client discretionary accounts with assets totaling approximately $176 billion as of September 30, 2013. Its clients are both individuals and institutions, some of whose accounts have investment policies similar to those of the Portfolio. The Fund has agreed to pay the Investment Manager an investment management fee at the annual rate of .85% of the Portfolio’s average daily net assets. The investment management fee is accrued daily and paid monthly. A discussion regarding the basis for the approval of the investment management agreement between the Fund, on behalf of the Portfolio, and the Investment Manager will be available in the Fund’s annual report to shareholders for the year ended December 31, 2013. The Investment Manager manages the Portfolio on a team basis. The team is involved in all levels of the investment process. This team approach allows for every portfolio manager to benefit from the views of his or her peers. The portfolio management team is comprised of multiple team members. Although
their roles and the contributions they make may differ, each member of the team participates in the management of the Portfolio. Members of the portfolio management team discuss the Portfolio, including making investment recommendations, overall portfolio composition, and the like. Research analysts
perform fundamental research on issuers (based on, for example, sectors or geographic regions) in which the Portfolio may invest. Andrew D. Lacey, Ronald Temple, Martin Flood, Louis Florentin-Lee and Patrick Ryan have been primarily responsible for the day-to-day management of the assets of the Portfolio since December 2013. Biographical Information of Principal Portfolio Managers Martin Flood, a
Director of the Investment Manager, is a portfolio manager/analyst on various of the Investment Manager’s US Equity
teams and the Global Equity Select team. Prior to joining the Investment Manager in 1996, Mr. Flood was a Senior Accountant with
Arthur Andersen LLP. He began working in the investment field in 1993. Louis Florentin-Lee, a Director of the Investment Manager, is a portfolio manager/analyst on the Investment Manager’s Global Equity Select team. He joined the Investment Manager in 2004, and has been working in the investment field since 1996. Andrew D. Lacey, a Deputy Chairman of the Investment Manager, is responsible for oversight of US and Global strategies. He also is a portfolio manager/analyst on various of the Investment Manager’s US Equity and Global Equity teams. Mr. Lacey joined the Investment Manager in 1996, and has been
working in the investment field since 1995. Patrick Ryan, a Managing Director of the Investment Manager, is a portfolio manager/analyst on various of the Investment Manager’s Global Equity teams. He joined the Investment Manager in 1994 and has been working in the investment field since 1989. Ronald Temple, a Managing Director of the Investment Manager, is a portfolio manager/analyst on various of the Investment Manager’s US Equity teams and the Global Equity Select team. He also is a Co-Director of Research and has primary research coverage of the financials sector. Mr. Temple joined the
Investment Manager in 2001 and has been working in the investment field since 1991. Additional information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of shares of the Portfolio is contained in the Fund’s Statement of Additional Information (“SAI”). State Street Bank and Trust Company (“State Street”), located at One Lincoln Street, Boston, Massachusetts 02111, serves as the Portfolio’s administrator. Lazard Asset Management Securities LLC (the “Distributor”) acts as distributor for the Fund’s shares. State Street acts as custodian of the Portfolio’s investments. State Street may enter into subcustodial arrangements on behalf of the Portfolio for the holding of non-US securities. 6Prospectus
Lazard Funds Shareholder Information p Portfolio shares are sold and redeemed, without a sales charge, on a continuous basis at the NAV next determined after an order in proper form is received by the Transfer Agent or another authorized entity. The Fund determines the NAV of the Portfolio’s share Classes as of the close of regular session trading on the New York Stock Exchange (the “NYSE”) (normally 4:00 p.m. Eastern time) on each day the NYSE is open for trading. The Fund values securities for which market quotations are readily available at
market value. Securities and other assets for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures approved by the Board. Calculation of NAV may not take place contemporaneously with the determination of the prices of portfolio assets used in such calculation. If a significant event materially affecting the value of securities occurs between the close of the exchange or market on which the security is principally traded and the
time when NAV is calculated, or when current market quotations otherwise are determined not to be readily available or reliable, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board. Fair valuing of non-US equity securities may be
determined with the assistance of a pricing service, using correlations between the movement of prices of such securities and indices of US securities and other appropriate indicators, such as closing market prices of relevant ADRs or futures contracts. The effect of using fair value pricing is that the NAV will
reflect the affected securities’ values as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to price securities may result in a value that is different from the most recent closing price of a security and from the prices used
by other investment companies to calculate their portfolios’ NAVs. Non-US securities may trade on days when the Portfolio is not open for business, thus affecting the value of the Portfolio’s assets on days when Portfolio shareholders may not be able to buy or sell Portfolio shares. Eligibility to Purchase R6 Shares The Portfolio does not currently offer R6 Shares. R6 Shares are not subject to any service or distribution fees. Neither the Fund nor the Investment Manager or its affiliates will provide any distribution, shareholder or participant servicing, account maintenance, sub-accounting, sub-transfer agency, administrative,
recordkeeping or reporting, transaction processing, support or similar payments, or “revenue sharing” payments, in connection with investments in, or conversions into, R6 Shares (collectively, "Service Payments"). R6 Shares may be purchased by: “Employee Benefit Plans,” which shall include:
•
retirement plan level, retirement plan administrator level or omnibus accounts; • retirement plans—employer-sponsored 401(k) and 403(b), 457, Keogh, profit sharing, money purchase, defined benefit/defined contribution, target benefit and Taft-Hartley plans; • non-qualified deferred compensation plans; and • post-employment benefit plans, including retiree health benefit plans. Employee Benefit Plans, Board members and other individuals considered to be affiliates of the Fund or the Investment Manager, and discretionary accounts with the Investment Manager, as well as affiliated and non-affiliated registered investment companies may purchase R6 Shares with no investment
minimum. Certain other types of plans, and institutional or other investors, may be eligible to purchase R6 Shares, subject to the minimum investment amount set forth below, including, but not limited to:
•
529 plans; • endowments and foundations; • states, counties or cities or their instrumentalities; • insurance companies, trust companies and bank trust departments; and • certain other institutional investors. Except as specifically provided above, R6 Shares may not be purchased by:
•
individual investors and/or retail accounts including accounts purchasing through wrap programs; • IRAs and Coverdells; • SEPs, SIMPLEs and SARSEPs; and • individual 401(k) and 403(b) plans. Prospectus7
Minimum Investment All purchases made by check should be in US Dollars and made payable to “The Lazard Funds, Inc.” Third party checks will not be accepted. The Fund will not accept cash or cash equivalents (such as currency, money orders or travelers checks) for the purchase of Fund shares. Please note the following
minimums in effect for initial investments: Institutional Shares
$
100,000 Open Shares*
$
2,500 R6 Shares**
$
1,000,000
*
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. ** There is no minimum investment amount for R6 Shares purchased by Employee Benefit Plans and certain other eligible investors as described above. The subsequent investment minimum for Institutional Shares and Open Shares is $50. The minimum investment requirements may be waived or lowered for investments effected through banks and other institutions that have entered into arrangements with the Fund or the Distributor; for investments effected on a group basis by certain other entities and their employees, such as pursuant to a
payroll deduction plan and asset-based or wrap programs; and for employees of the Investment Manager and their families. Please consult your financial intermediary for information about minimum investment requirements. The Fund reserves the right to change or waive the minimum initial, and subsequent,
investment requirements at any time. Through the Transfer Agent: Shareholders who do not execute trades through a broker-dealer or other financial intermediary should submit their purchase requests to the Transfer Agent by telephone or mail, as follows: Initial Purchase By Mail
1.
Complete a Purchase Application. Indicate the services to be used. 2. Send the Purchase Application and a check for at least the minimum investment amount (if applicable) payable to “The Lazard Funds, Inc.” to: regular mail overnight delivery By Wire Your bank may charge you a fee for this service.
1.
Call (800) 986-3455 toll-free from any state and provide the following:
the Portfolio(s) and Class of shares to be invested in • name(s) in which shares are to be registered • address • social security or tax identification number • dividend payment election • amount to be wired • name of the wiring bank, and • name and telephone number of the person to be contacted in connection with the order. 8Prospectus
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
•
An account number will then be assigned.
2.
Instruct the wiring bank to transmit the specified amount in federal funds, giving the wiring bank the account name(s) and assigned account number, to State Street:
ABA #: 011000028 3. Complete a Purchase Application. Indicate the services to be used. Mail the Purchase Application to the address set forth in Item 2 under “Initial Purchase–By Mail” above. Additional Purchases By Mail
Make a check payable to “The Lazard Funds, Inc.” Write the shareholder’s account number on the check. 2. Mail the check and the detachable stub from the Statement of Account (or a letter providing the account number) to the address set forth in Item 2 under “Initial Purchase–By Mail” above. By Wire Instruct the wiring bank to transmit the specified amount in federal funds to State Street, as instructed in Item 2 under “Initial Purchase–By Wire” above. By ACH Shareholders may purchase additional shares of the Portfolio by automated clearing house (“ACH”). To set up the ACH purchases option, call (800) 986-3455. ACH is similar to making Automatic Investments (described below under “Shareholder Information—Investor Services—Automatic Investments”), except that
shareholders may choose the date on which to make the purchase. The Fund will need a voided check or deposit slip before shareholders may purchase by ACH. By Exchange Shareholders may purchase additional shares of the Portfolio by exchange from another Portfolio, as described below under “Shareholder Information—Investor Services—Exchange Privilege.” Purchases through the Automatic Investment Plan Investors may participate in the Automatic Investment Plan by making subsequent investments in the Portfolio through automatic deductions from a designated bank account at regular intervals selected by the investor. The Automatic Investment Plan enables an investor to make regularly scheduled investments
and may provide investors with a convenient way to invest for long-term financial goals. To enroll in the Automatic Investment Plan, call (800) 986-3455. Individual Retirement Accounts The Fund may be used as an investment for IRAs. Completion of a Lazard Funds IRA application is required. For a Direct IRA Account (an account other than an IRA rollover) a $5 establishment fee and a $15 annual maintenance and custody fee is payable to State Street for each IRA Fund account; in
addition, a $10 termination fee will be charged and paid to State Street when the account is closed. For more information on IRAs, call (800) 986-3455. Market Timing/Excessive Trading The Portfolio is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term market movements. Excessive trading, market timing or other abusive trading practices may disrupt investment management strategies and harm performance and
may create increased transaction and administrative costs that must be borne by the Portfolio and its shareholders, including those not engaged in such activity. In addition, such activity may dilute the value of Portfolio shares held by long-term investors. The Board has approved policies and procedures with
respect to frequent purchases and redemptions of Portfolio shares that are intended to discourage and prevent these practices, including regular monitoring of trading activity in Portfolio shares. The Fund will not knowingly accommodate excessive trading, market timing or other abusive trading practices. The Fund routinely reviews Portfolio share transactions and seeks to identify and deter abusive trading practices. The Fund monitors for transactions that may be harmful to the Portfolio, either on an individual basis or as part of a pattern of abusive trading practices. The Portfolio reserves the right to refuse,
with or without notice, any Prospectus9
State Street Bank and Trust Company
Boston, Massachusetts
Custody and Shareholder Services Division
DDA 9905-2375
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
Shareholder’s Name and Account Number
1.
(Open Shares
only)
(Minimum $50)
(Open Shares and Institutional Shares only)
purchase or exchange request that could adversely affect the Portfolio, its operations or its shareholders, including those requests from any individual or group who, in the Fund’s view, is likely to engage in excessive trading, market timing or other abusive trading practices, and where a particular account appears
to be engaged in abusive trading practices, the Fund will seek to restrict future purchases of Portfolio shares by that account or may temporarily or permanently terminate the availability of the exchange privilege, or reject in whole or part any exchange request, with respect to such investor’s account. When an
exchange request in respect of Portfolio shares is rejected, such shares may be redeemed from the Portfolio on request of the investor. The Fund may deem a shareholder to be engaged in abusive trading practices without advance notice and based on information unrelated to the specific trades in the
shareholder’s account. For instance, the Fund may determine that the shareholder’s account is linked to another account that was previously restricted or a third party intermediary may provide information to the Fund with respect to a particular account that is of concern to the Fund. Accounts under common
ownership, control or perceived affiliation may be considered together for purposes of determining a pattern of excessive trading practices. An investor who makes more than six exchanges per Portfolio during any twelve-month period, or who makes exchanges that appear to coincide with a market timing
strategy, may be deemed to be engaged in excessive trading. In certain cases, the Fund may deem a single “roundtrip” trade or exchange (redeeming or exchanging the Portfolio’s shares followed by purchasing or exchanging into shares of that Portfolio) as a violation of the Fund’s policy against abusive trading
practices. The Fund’s actions may not be subject to appeal. The Portfolio deducts a 1.00% redemption fee on sales of shares owned for 30 days or less (not charged on shares acquired through reinvestment of dividends or distributions), except that no redemption fee will be charged with respect to shares purchased through certain omnibus account and other service arrangements
established by certain brokers and other financial intermediaries and approved by the Distributor and under certain other circumstances. See “Shareholder Information—How to Sell Shares—Redemption Fee” below. Redemption fees are only one way for the Fund to deter abusive trading practices. To discourage attempts to arbitrage pricing of international securities (among other reasons), the Board has adopted policies and procedures providing that if events materially affecting the value of securities occur between the
close of the exchange or market on which the security is principally traded and the time when the Portfolio’s NAV is calculated, such securities will be valued at their fair value as determined by, or in accordance with procedures approved by, the Board. See “Shareholder Information—General.” The codes of
ethics of the Fund, the Investment Manager and the Distributor in respect of personal trading contain limitations on trading in Portfolio shares. As described below, the Fund may take up to seven days to pay redemption proceeds. This may occur when, among other circumstances, the investor redeeming shares is engaged in excessive trading or if the redemption request otherwise would be disruptive to efficient portfolio management or would
otherwise adversely affect the Portfolio. All of the policies described in this section apply uniformly to all Portfolio accounts. However, while the Fund and the Investment Manager will take reasonable steps to prevent trading practices deemed to be harmful to the Portfolio by monitoring Portfolio share trading activity, they may not be able to
prevent or identify such trading. If the Fund is not able to prevent abusive trading practices, such trading may disrupt investment strategies, harm performance and increase costs to all Portfolio investors, including those not engaged in such activity. The Fund’s policy on abusive trading practices does not apply
to automatic investment or automatic exchange privileges. Securities trading in non-US markets are particularly susceptible to time zone arbitrage. As a result, the Portfolio may be at greater risk for market timing than funds that invest in securities trading in US markets. Distribution and Servicing Arrangements The Portfolio offers Institutional Shares, Open Shares and R6 Shares, which have different investment minimums and different expense ratios. The Fund has adopted a plan under rule 12b-1 (the “12b-1 plan”) that allows the Portfolio to pay the Distributor a fee, at the annual rate of 0.25% of the value of the
average daily net assets of the Portfolio’s Open Shares, for distribution and services provided to holders of Open Shares. Because these fees are paid out of the Portfolio’s assets on an on-going basis, over time these recurring fees will increase the cost of 10Prospectus
your investment and may cost you more than paying other types of sales charges. Institutional Shares and R6 Shares do not pay a rule 12b-1 fee. Third parties may receive payments pursuant to the 12b-1 plan. The Investment Manager or the Distributor may provide additional cash payments out of its own resources to financial intermediaries that sell shares and/or provide marketing, shareholder servicing, account administration or other services with respect to Open Shares and Institutional Shares. Such payments are
in addition to any fees paid by the Fund under rule 12b-1. The receipt of such payments pursuant to the 12b-1 plan or from the Investment Manager or Distributor could create an incentive for the third parties to offer the Portfolio instead of other mutual funds where such payments are not received. Further
information is contained in the SAI, and you should consult your financial intermediary for further details. General Checks for sale proceeds ordinarily will be mailed within seven days. Where the shares to be sold have been purchased by check or through the Automatic Investment Plan, the sale proceeds, net of any applicable redemption fee, will be transmitted to you promptly upon bank clearance of your purchase check,
which may take up to 10 calendar days. Redemption requests also may be satisfied, in whole or in part, through a redemption-in-kind (a payment in portfolio securities instead of cash). Redemption Fee The Portfolio will impose a redemption fee equal to 1.00% of the NAV of Portfolio shares acquired by purchase or exchange and redeemed or exchanged within 30 days after such shares were acquired. This fee will be calculated based on the shares’ NAV at redemption and deducted from the redemption
proceeds. The fee will be retained by the Portfolio and used primarily to offset the transaction costs that short-term trading imposes on the Portfolio and its remaining shareholders. The redemption fee will not apply to shares acquired through the reinvestment of dividends or distributions. For purposes of
calculating the 30-day holding period, the Fund will first redeem shares acquired through the reinvestment of dividends or distributions and then will employ the “first in, first out” method, which assumes that the shares redeemed or exchanged are the ones held the longest. The Fund, in its discretion, may waive or reverse the redemption fee for Portfolio shares redeemed or exchanged: (1) through systematic, rebalancing or asset allocation programs, in which beneficial owners of Portfolio shares or participants in Employee Benefit Plans owning Portfolio shares do not exercise
investment discretion, that have been approved by the Distributor; (2) in connection with the Fund’s Systematic Withdrawal Plan, described below; (3) by a fund-of-funds; (4) involuntarily, such as a redemption resulting from failure to maintain a minimum investment or due to a Portfolio merger or liquidation;
(5) in connection with a conversion from one share class to another share class of the same Portfolio; (6) in the event of shareholder death or post-purchase disability; (7) to return an excess contribution in an IRA or qualified plan account; (8) in connection with required minimum distributions from an IRA or
qualified plan account; (9) in programs with financial intermediaries that include on their platforms qualified default investment alternatives for participant-directed individual account plans (with respect to which Department of Labor regulations restrict the imposition of redemption fees and similar fees) and
where adequate systems designed to deter abusive trading practices are in place; (10) by certain accounts under situations deemed appropriate by the Fund, including where the capability to charge a fee does not exist or is not practical and where adequate systems designed to deter abusive trading practices are
in place; or (11) in the event of transactions documented as inadvertent or prompted by bona fide emergencies or other exigent circumstances. In certain situations, a financial intermediary, wrap sponsor or other omnibus account holder may apply the Portfolio’s redemption fees to the accounts of their
underlying shareholders. If this is the case, the Portfolio will rely in part on the account holder to monitor and assess the redemption fee on the underlying shareholder accounts in accordance with this Prospectus. The redemption fee may be waived, modified or terminated at any time, or from time to time,
without advance notice. Selling Shares Through the Transfer Agent: Shareholders who do not execute trades through a broker-dealer or other financial intermediary should submit their sale requests to the Transfer Agent by telephone or mail, as follows: Prospectus11
By Telephone A shareholder may redeem shares by calling the Transfer Agent. To redeem shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such redemption or a signed letter requesting that the telephone redemption privilege
be added to the account. To place a redemption request, or to have the telephone redemption privilege added to your account, please call the Transfer Agent’s toll-free number, (800) 986-3455. In order to confirm that telephone instructions for redemptions are genuine, the Fund has established reasonable
procedures to be employed by the Fund and the Transfer Agent, including the requirement that a form of personal identification be provided. By Mail
1.
Write a letter of instruction to the Fund. Indicate the dollar amount or number of shares to be sold, the Portfolio and Class, the shareholder’s account number, and social security or taxpayer identification number. 2. Sign the letter in exactly the same way the account is registered. If there is more than one owner of the account, all must sign. 3. If shares to be sold have a value of $50,000 or more,
the signature(s) must be guaranteed by a domestic bank, savings and loan institution, domestic credit union, member bank of
the Federal Reserve System, broker-dealer, registered securities association or clearing agency, or other participant in a
signature guarantee program. Signature guarantees by a notary public are not acceptable. Further documentation may
be requested to evidence the authority of the person or entity making the redemption request. In addition, all redemption
requests that include instructions for redemption proceeds to be sent somewhere other than the address on file must be signature
guaranteed. 4. Send the letter to the Transfer Agent at the following address: regular mail overnight delivery Automatic Reinvestment Plan allows your dividends and capital gain distributions to be reinvested in additional shares of your Portfolio or another Portfolio. Automatic Investment Plan allows you to purchase Open Shares through automatic deductions from a designated bank account. Systematic Withdrawal Plan allows you to receive payments at regularly scheduled intervals if your account holds at least $10,000 in Portfolio shares at the time plan participation begins. The maximum regular withdrawal amount for monthly withdrawals is 1% of the value of your Portfolio shares at the time
plan participation begins. Exchange Privilege allows you to exchange shares of one Portfolio that have been held for seven days or more for shares of the same Class of another Portfolio in an identically registered account. Shares will be exchanged at the next determined NAV, subject to any applicable redemption fee. There is no other
cost associated with this service. All exchanges are subject to the minimum initial investment requirements. A shareholder may exchange shares by writing or calling the Transfer Agent. To exchange shares by telephone, the shareholder must have properly completed and submitted to the Transfer Agent either a Purchase Application authorizing such exchanges or a signed letter requesting that the exchange privilege
be added to the account. The Transfer Agent’s toll-free number for exchanges is (800) 986-3455. In order to confirm that telephone instructions for exchanges are genuine, the Fund has established reasonable procedures to be employed by the Fund and the Transfer Agent, including the requirement that a
form of personal identification be provided. The Fund reserves the right to limit the number of times shares may be exchanged between Portfolios, to reject any telephone exchange order, or to otherwise modify or 12Prospectus
The Lazard Funds, Inc.
P.O. Box 8514
Boston, Massachusetts 02266-8514
Attention: (Name of Portfolio and Class of Shares)
The Lazard Funds, Inc.
30 Dan Road
Canton, Massachusetts 02021-2809
discontinue the exchange privilege at any time. If an exchange request is refused, the Fund will take no other action with respect to the shares until it receives further instructions from the investor. See “Shareholder Information—How to Buy Shares—Market Timing/ Excessive Trading” for more information about
restrictions on exchanges. In addition to the policies described above, the Fund reserves the right to:
•
redeem an account, with notice, if the value of the account falls below $1,000 due to redemptions • convert Institutional Shares or R6 Shares held by a shareholder whose account is less than $100,000 to Open Shares, upon written notice to the shareholder • suspend redemptions or postpone payments when the NYSE is closed for any reason other than its usual weekend or holiday closings or when trading is restricted by the Securities and Exchange Commission (the “SEC”) • change or waive the required minimum investment amounts • delay sending out redemption proceeds for up to seven days (this usually applies to very large redemptions received without notice, excessive trading, or during unusual market conditions) • make a redemption-in-kind (a payment in portfolio securities instead of in cash) if it is determined that a redemption is too large and/or may cause harm to the Portfolio and its shareholders Also in addition to the policies described above, the Fund may refuse or restrict purchase or exchange requests for Portfolio shares by any person or group if, in the judgment of the Fund’s management:
•
the Portfolio would be unable to invest the money effectively in accordance with its investment objective and policies or could otherwise be adversely affected • the Portfolio receives or anticipates receiving simultaneous orders that may significantly affect the Portfolio (e.g., amounts equal to 1% or more of the Portfolio’s total assets) The Fund also reserves the right to close the Portfolio to investors at any time. Account Policies, Dividends and Taxes Account Statements You will receive quarterly statements detailing your account activity. All investors will also receive an annual statement detailing the tax characteristics of any dividends and distributions that you have received in your account. You will also receive confirmations of each trade executed in your account. To reduce expenses, only one copy of the most recent annual and semi-annual reports of the Fund may be mailed to your household, even if you have more than one account with the Fund. Call (800) 542-1061 if you need additional copies of annual or semi-annual reports. Call the Transfer Agent at the
telephone number listed on the back cover if you need account information. Dividends and Distributions Income dividends are anticipated to be paid annually. Net capital gains, if any, are normally distributed annually, but may be distributed more frequently. Annual year end distribution estimates for 2013 are available at www.LazardNet.com or by calling (800) 823-6300. Dividends and distributions of the Portfolio will be reinvested in additional shares of the same Class of the Portfolio at the NAV on the ex-dividend date, and credited to the shareholder’s account on the payment date or, at the shareholder’s election, paid in cash. Each share Class of the Portfolio will generate
a different dividend because each has different expenses. Dividend checks and account statements will be mailed approximately two business days after the payment date. Tax Information Please be aware that the following tax information is general and refers to the provisions of the Internal Revenue Code of 1986, as amended, which are in effect as of the date of this Prospectus. You should consult a tax adviser about the status of your distributions from your Portfolio. All dividends and short-term capital gains distributions are generally taxable to you as ordinary income, and long- Prospectus13
term capital gains are generally taxable as such, whether you receive the distribution in cash or reinvest it in additional shares. An exchange of the Portfolio’s shares for shares of another Portfolio will be treated as a sale of the Portfolio’s shares, and any gain on the transaction may be subject to income taxes. Keep in mind that distributions may be taxable to you at different rates which depend on the length of time the Portfolio held the applicable investment, not the length of time that you held your Portfolio shares. The tax status of any distribution is the same regardless of how long you have been in the
Portfolio and whether you reinvest your distributions or take them in cash. High portfolio turnover and more volatile markets can result in taxable distributions to shareholders, regardless of whether their shares increased in value. When you do sell your Portfolio shares, you will have a taxable capital gain or loss,
unless such shares were held in an IRA or other tax-deferred account. Federal law requires the Portfolio to withhold taxes on distributions paid to shareholders who:
•
fail to provide a social security number or taxpayer identification number • fail to certify that their social security number or taxpayer identification number is correct • fail to certify, or otherwise establish in accordance with applicable law, that they are exempt from withholding 14Prospectus
Lazard Funds Financial Highlights p Financial Highlights No financial highlights are presented for the Portfolio because it had not commenced investment operations prior to the date of this Prospectus. Prospectus15
For more information about the Portfolio, the following documents are available, free of charge, upon request: Annual and Semi-Annual Reports (Reports): The Fund’s annual and semi-annual reports to shareholders contain additional information on the Portfolio’s investments. In the annual report, you will find a broad discussion of the market conditions and investment strategies that significantly affected the Portfolio’s performance during its last fiscal year. Statement of Additional Information (SAI): The SAI provides more detailed information about the Portfolio, including their operations and investment policies. It is incorporated by reference and is legally considered a part of this Prospectus. Disclosure of Portfolio Holdings: The Portfolio will publicly disclose its portfolio holdings on a calendar quarter-end basis on its website accessible from http://www.lazardnet.com/lam/us/lazardfunds.shtml, approximately 14 days after such quarter end. The information will remain accessible until the Fund files a report on Form N-Q or Form N-CSR for the period that includes the date as of which the information was current. A description of the Fund’s policies and procedures with respect to the disclosure of the Portfolio’s portfolio holdings is available in the Fund’s SAI. You can get a free copy of the Reports and the SAI at http://www.LazardNet.com, or request the Reports and the SAI and other information and discuss your questions about the Portfolio, by contacting the Fund at: The Lazard Funds, Inc. You also can review the Reports and the SAI at the Public Reference Room of the SEC in Washington, D.C. For information, call (202) 551-8090. You can get text-only copies:
•
After paying a duplicating fee, by writing the Public Reference Branch of the SEC, 100 F Street NE, Room 1580, Washington, D.C. 20549-1520, or by e-mail request to publicinfo@sec.gov.
•
Free from the SEC’s website at http://www.sec.gov. Investment Company Act file no. 811-06312 Investment Manager Transfer Agent and Dividend Disbursing Agent No person has been authorized to give any information or to make any representations not contained in this Prospectus, and information or representations not contained herein must not be relied upon as having been authorized by the Fund or the Distributor. This Prospectus does not constitute an offer of any security other than the registered securities to
which it relates or an offer to any person in any jurisdiction where such offer would be unlawful. Lazard Asset Management LLC • 30 Rockefeller Plaza • New York, NY 10112 • www.lazardnet.com THE LAZARD FUNDS, INC. Institutional Shares Open Shares R6 Shares US Equity Lazard US Equity Concentrated Portfolio LEVIX LEVOX RLUEX Lazard US Strategic Equity Portfolio LZUSX LZUOX RLUSX Lazard US Mid Cap Equity Portfolio LZMIX LZMOX RLMCX Lazard US Small-Mid Cap Equity Portfolio LZSCX LZCOX RLSMX Global Equity Lazard Global Equity Select Portfolio GESIX GESOX RLGEX Lazard Global Listed Infrastructure Portfolio GLIFX GLFOX RLGLX International Equity Lazard International Equity Portfolio LZIEX LZIOX RLIEX Lazard International Equity Select Portfolio LZSIX LZESX RLIQX Lazard International Strategic Equity Portfolio LISIX LISOX RLITX Lazard International Small Cap Equity Portfolio LZISX LZSMX RLICX Emerging Markets Lazard Emerging Markets Core Equity Portfolio ECEIX ECEOX RLEOX Lazard Emerging Markets Equity Portfolio LZEMX LZOEX RLEMX Lazard Developing Markets Equity Portfolio LDMIX LDMOX RLDMX Lazard Emerging Markets Equity Blend Portfolio EMBIX EMBOX RLEBX Lazard Emerging Markets Multi-Strategy Portfolio EMMIX EMMOX RLMSX Lazard Emerging Markets Debt Portfolio LEDIX LEDOX RLEDX Lazard Explorer Total Return Portfolio LETIX LETOX RLETX Institutional Shares Open Shares R6 Shares Real Estate1 Lazard US Realty Income Portfolio LRIIX LRIOX RLRIX Lazard US Realty Equity Portfolio LREIX LREOX RLREX Lazard Global Realty Equity Portfolio LITIX LITOX RLGRX US Fixed Income Lazard US Short Duration Fixed Income Portfolio UMNIX UMNOX RLSDX Lazard US Corporate Income Portfolio LZHYX LZHOX RLCIX Global Fixed Income Lazard Global Fixed Income Portfolio LZGIX LZGOX RLGFX Targeted Volatility Lazard Multi-Asset Targeted Volatility Portfolio N/A N/A N/A Tactical Asset Allocation Lazard Capital Allocator Opportunistic Strategies Portfolio LCAIX LCAOX RLCPX Each Portfolio
currently offers Institutional Shares and Open Shares, and certain Portfolios
offer R6 shares. Each share class is identical except as to minimum investment
requirements; eligibility requirements for R6 Shares; the services offered to,
and expenses borne by, each Class; and the availability of Service Payments (as
defined in the Prospectus). 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. 1 Realty Income Portfolio, Realty Equity Portfolio and
Global Realty Portfolio are referred to collectively as the “Realty
Portfolios.” (ii) TABLE OF CONTENTS Page 1 30 34 51 52 57 58 59 61 62 71 88 89 94 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 2 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 3 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. 4 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. 5 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 6 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. 7 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, 8 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 residential
mortgage-related securities representing participation interests in
pools of one- to four-family residential mortgage loans issued or guaranteed 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. 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. In September
2008, the US Treasury and the Federal Housing Finance Agency (“FHFA”) announced
that FNMA and FHLMC had been placed in conservatorship. Since that time, FNMA
and FHLMC have received significant capital support through Treasury preferred
stock purchases, as well as Treasury and Federal Reserve purchases of their mortgage
backed securities. The FHFA and the US Treasury (through its agreement to
purchase FNMA and 9 In addition,
the problems faced by FNMA and FHLMC, resulting in their being placed into
federal conservatorship and receiving significant US Government support, have
sparked serious debate among federal policy makers regarding the continued role
of the US Government in providing liquidity for mortgage loans. The Obama
Administration produced a report to Congress on February 11, 2011, outlining a
proposal to wind down FNMA and FHLMC by increasing their guarantee fees,
reducing their conforming loan limits (the maximum amount of each loan they are
authorized to purchase), and continuing progressive limits on the size of their
investment portfolio. In December 2011, Congress enacted the Temporary Payroll
Tax Cut Continuation Act of 2011 which, among other provisions, requires that
FNMA and FHLMC increase their single-family guaranty fees by at least 10 basis
points and remit this increase to the Treasury with respect to all loans
acquired by FNMA or FHLMC on or after April 1, 2012 and before January 1, 2022.
Serious discussions among policymakers continue, however, as to whether FNMA
and FHLMC should be nationalized, privatized, restructured or eliminated
altogether. In July 2013, the House Financial Services Committee approved the
Protect American Taxpayers and Homeowners Act of 2013. The bill, if enacted,
would require FHFA to place FNMA and FHLMC into receivership within five years
and repeal their corporate charters at that time, which would effectively strip
them of the authority to conduct any new business. The bill would also place
restrictions on FNMA’s and FHLMC’s activities prior to being placed into
receivership and may result in FNMA and FHLMC further increasing their
guarantee fees. FNMA and FHLMC also are the subject of several continuing legal
actions and investigations 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. Importantly,
the future of FNMA and FHLMC is in serious question as the US Government
considers multiple options. 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 10 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. 11 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 12 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. 13 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. 14 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. 15 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 16 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 17 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. 18 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 19 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. 20 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. 21 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 22 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. 23 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 24 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. 25 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, 26 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. 27 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. 28 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. 29 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. For purposes
of the Emerging Markets Multi-Strategy Portfolio’s policy in (ix) and the
Emerging Markets Debt Portfolio’s policy in (x) 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, 30 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 Equity Select, 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
Equity Select, 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 Equity Select, 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 Equity Select, 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 31 contracts,
futures contracts, including those relating to indices, and options on
futures contracts or indices, and Equity Concentrated, Strategic Equity, Mid
Cap, Global Equity Select, 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 Equity Select, 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 Equity Select, 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 Equity Select, 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 Equity Select, 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. 32 * * * 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 33 determined
by the Board to be liquid, non-negotiable time deposits, over-the-counter
options, and repurchase agreements providing for settlement in more than
seven days after notice. Board’s Oversight Role; Board Composition and Structure The Board’s
role in management of the Fund is oversight. As is the case with virtually all
investment companies (as distinguished from operating companies), service
providers to the Fund, primarily the Investment Manager and its affiliates,
have responsibility for the day-to-day management of the Portfolios, which
includes responsibility for risk management (including management of investment
performance and investment risk, valuation risk, issuer and counterparty credit
risk, compliance risk and operational risk). As part of its oversight, the
Board, or its committees or delegates, interacts with and receives reports from
senior personnel of service providers, including senior investment personnel of
the Investment Manager, the Fund’s and the Investment Manager’s Chief
Compliance Officer and portfolio management personnel with responsibility for
management of the Portfolios. The Board’s Audit Committee (which consists of
all of the Independent Directors) 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. 34 Name (Age) Position(s) with the Fund Principal Occupation(s) and Other Public Non-Interested Directors: Kenneth S.
Davidson (68) Director 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) Nancy A.
Eckl (50) Director 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) Leon M.
Pollack (72) Director Private Investor Richard
Reiss, Jr. (69) Director Georgica Advisors LLC, an investment
manager, Chairman (1997 –
present) O’Charley’s, Inc., a restaurant chain, Director (1984 – 2012) Robert M.
Solmson (65) Director 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 Investment Manager, Deputy Chairman and Head of Global Marketing
(2004 – present) Ashish
Bhutani (53) Director 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. 35 (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 36 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. • 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) Position(s) with the Fund Principal Occupation(s) During the Past Nathan A.
Paul (40) Vice
President and Secretary Managing Director and General Counsel of
the Investment Manager Stephen St.
Clair (54) Treasurer Vice President of the Investment Manager Brian D.
Simon (51) Chief
Compliance Officer (January 2009) and Assistant Secretary Managing Director (since February 2011,
previously Director) of the Investment Manager and Chief Compliance Officer
(since January 2009) of the Investment Manager and the Fund 37 Name (Age) Position(s) with the Fund Principal Occupation(s) During the Past Tamar
Goldstein (38) Assistant
Secretary Senior Vice President (since February 2012,
previously Vice President and Counsel) of the Investment Manager Cesar A.
Trelles (38) Assistant
Treasurer 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. 38 Portfolio Ashish Charles L. Kenneth S. Nancy A. Leon M. Richard Robert M. Equity Concentrated
Portfolio None None None $1 - $10,000 None None None Strategic Equity Portfolio None Over $100,000 None $1 - $10,000 None None None Mid Cap Portfolio None None None $1 - $10,000 None None None Small-Mid Cap Portfolio None None None None None None None Global Listed
Infrastructure Portfolio Over $100,000 Over $100,000 None None None None None International Equity
Portfolio None None None $1 - $10,000 None None None International Equity Select
Portfolio None None None None None None None International Strategic
Portfolio Over $100,000 None None None None None None International Small Cap
Portfolio None None None None None None None Emerging Markets Portfolio None Over $100,000 None $10,001 - $50,000 None None None Developing Markets
Portfolio None $50,001-$100,000 None None None None None Emerging Markets Blend
Portfolio Over $100,000 Over $100,000 None None None None None Emerging Markets
Multi-Strategy Portfolio None Over $100,000 None None None None None Emerging Markets Debt
Portfolio None Over $100,000 None None None None None Realty Income Portfolio None None None None None None None Realty Equity Portfolio None None None None None None None Global Realty Portfolio None None None None None None None Short Duration Fixed Income
Portfolio None Over $100,000 None None None None None Corporate Income Portfolio None Over $100,000 None None None None None Capital Allocator Portfolio Over $100,000 Over $100,000 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 39 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, generally, 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 Total Compensation from Ashish
Bhutani None None Charles L.
Carroll None None Kenneth S.
Davidson $113,842 $165,000 Nancy A.
Eckl $113,842 $165,000 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: 40 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 Other Pooled Investment 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) 41 Portfolio Manager Registered Investment Other Pooled Investment Other Accounts 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) Louis
Florentin-Lee** 2 (222.3 million) 3 (72.5 million) 35 (1.9 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# 1 (19.7 million) 2 (145.6 million) 217 (2.3 billion) Alex Ingham# 3 (88.9 million) 6 (287.8 million) 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 1 (1.2 billion) 1 (3.4 million) 46 (4.0 billion) Stephen
Marra 6 (2.4 billion) 1 (17.6 million) 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) Patrick
Ryan** 3 (325.2 million) 6 (596.9 million) 43 (1.9 billion) 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 42 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. 43 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 Equity Select Portfolio MSCI All Country World 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- Global Fixed Income Portfolio Barclays Capital Global Aggregate Bond Index Targeted Volatility Portfolio 50/50 MSCI World Index and Barclays Capital Global
Aggregate 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: 44 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 Equity Select Portfolio** Martin Flood None Louis Florentin-Lee None Andrew D. Lacey None Patrick Ryan None Ronald Temple None 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 45 Portfolio/Portfolio Manager Market Value of Shares* John R. Reinsberg $100,001-$500,000 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 $100,001-$500,000 Eulogio Ramos $50,001-$100,000 John R. Senesac, Jr. $10,001-$50,000 George Grimbilas None David R. Cleary 46 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 December 31, 2013. *** 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. 47 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 Fee
Payable For Fiscal Fee
Payable For Fiscal 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 Reduction
in Reduction
in 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 48 Portfolio Reduction
in Reduction
in Reduction
in Emerging Markets Multi-Strategy Portfolio — 293,815 230,588 Emerging Markets Debt Portfolio — 229,341 66,877 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 Net
Fee Paid For Net
Fee Paid For 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 49 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 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 50 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. 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. 51 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. 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 31, 2012. The portfolio turnover in the Global Listed Infrastructure Portfolio
was 52 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 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 53 Portfolio Broker/Dealer Value
on December 31, 2012 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 Amount
of Percentage
of Percentage
of Total 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 — — — 54 Portfolio Total
Brokerage Amount
of Percentage
of Percentage
of Total Emerging Markets
Blend Portfolio 82,122 — — — Capital
Allocator Portfolio 273,454 — — — Year Ended December 31, 2011 Portfolio Total
Brokerage Amount
of Percentage
of Percentage
of Total 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 Amount
of Percentage
of Percentage
of Total Equity
Concentrated Portfolio $ 99,715 — — — Strategic Equity
Portfolio 56,766 — — — Mid Cap
Portfolio 173,405 — — — 55 Portfolio Total
Brokerage Amount
of Percentage
of Percentage
of Total 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 56 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. 57 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 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. 58 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 59 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 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 60 Payments by the Investment Manager or Distributor for
Institutional and Open Shares 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 Service
Payments (as defined in the Prospectus), including 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. 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 and R6 Shares
because of the higher expenses borne by Open Shares. Any
differences between the expenses of Institutional Shares and R6 Shares will
result in corresponding differences in the per share dividends paid to
Institutional Shares and R6 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 61 reinvested in additional shares. No interest will accrue on amounts
represented by uncashed distribution or redemption checks. The following is only a general summary of some of the important
federal income tax considerations generally affecting each Portfolio and its
shareholders. No attempt is made to present a complete explanation of the
federal tax treatment of each Portfolio’s activities or, 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. 62 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. 63 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 64 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. 65 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. 66 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, 67 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. 68 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). 69 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 70 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 Name and Address Percentage
of Total Equity
Concentrated Portfolio Charles Schwab &
Co., Inc. 42% Equitable Trust Company 28% 71 National Financial Services Corp. 22% Pershing LLC 7% Strategic
Equity Portfolio Pershing LLC 39% National Financial Services Corp. 29% JPMorgan Chase as Trustee FBO 12% Mac & Co. 11% Mid
Cap Portfolio State Street Bank as
Trustee for Olin Corporation Contribution 44% Pershing LLC 31% Merrill Lynch, Pierce, Fenner & Smith
Incorporated 10% National Financial Services Corp. 6% 72 Small-Mid
Cap Portfolio Mac & Co. 47% Pershing LLC 10% Alaska Retirement Management Board 5% Global
Listed Infrastructure Portfolio National Financial
Services Corp. 20% Saxon & Co. 18% Charles Schwab & Co., Inc. 17% Genworth Financial Trust Company 10% Pershing LLC 6% International
Equity Portfolio Charles Schwab &
Co., Inc. 10% Pershing LLC 9% Merrill Lynch, Pierce, Fenner & Smith
Incorporated 8% 73 National Financial Services Crop. 7% International
Equity Select Portfolio Morgan Stanley Smith
Barney 69% Merrill Lynch, Pierce, Fenner & Smith
Incorporated 9% National Financial Services Corp. 9% International
Strategic Portfolio National Financial
Services Corp. 11% Charles Schwab & Co., Inc. 11% International
Small Cap Portfolio Wells Fargo Bank 36% Pershing LLC 31% National Financial Services Corp. 26% 74 Emerging
Markets Core Portfolio Lazard Asset Management
LLC 100% Emerging Markets Portfolio National Financial Services Corp. 19% Charles Schwab & Co., Inc. 11% Morgan Stanley Smith Barney 9% First Clearing, LLC 7% Merrill Lynch, Pierce, Fenner & Smith
Incorporated 6% Developing Markets Portfolio Morgan Stanley Smith Barney 22% Edward D Jones & Co. 18% Pershing LLC 12% Merrill Lynch, Pierce, Fenner & Smith
Incorporated 11% 75 National Financial Services, LLC 11% Charles Schwab & Co. 5% Emerging
Markets Blend Portfolio National Financial
Services Corp. 18% Charles Schwab & Co. 16% Pershing LLC 6% First Clearing, LLC 5% Emerging Markets Multi-Strategy
Portfolio Mac & Co. 31% National Financial Services Corp. 25% Pershing LLC 12% Charles Schwab & Co., Inc. 11% TD Ameritrade Trust Company 8% 76 Morgan Stanley Smith Barney 6% Emerging Markets Debt Portfolio Wells Fargo Bank, N.A. 35% Mac & Co. 17% Windstream Master Trust 13% Volvo Group Retirement Trust 9% National Financial Services Corp. 7% Realty Income Portfolio Pershing LLC 30% Charles Schwab & Co., Inc. 23% Morgan Stanley Smith Barney 20% National Financial Services Corp. 15% Maril & Co. 5% 77 Realty Equity Portfolio Pershing LLC 26% National Financial Services Corp. 10% Raymond James & Assoc., Inc. 7% Global Realty Portfolio Pershing LLC 99% Short
Duration Fixed Income Portfolio Pershing LLC 38% Publishers Clearing
House LLC 17% Lazard Freres & Company LLC 17% Bank of America, N.A 16% Wells Fargo Bank, N.A. 6% Corporate Income Portfolio Pershing LLC 24% Mac & Co. 14% 78 Mac & Co. 10% Charles Schwab & Co., Inc. 8% Mac & Co. 6% National Financial
Services Corp. 5% Global
Fixed Income Portfolio Pershing LLC 89% National Financial
Services Corp. 9% Capital
Allocator Portfolio Pershing LLC 74% Charles Schwab &
Co., Inc. 13% Name
and Address Percentage of Total Equity
Concentrated Portfolio Charles Schwab &
Co., Inc. 40% 79 Charles Schwab Bank
Cust. 29% TD Ameritrade Inc. 5% Strategic
Equity Portfolio Charles Schwab &
Co., Inc. 49% Priac as
Trustee/Custodian 21% Merrill Lynch, Pierce,
Fenner & Smith Incorporated 16% Pershing LLC 7% Mid Cap Portfolio Charles Schwab & Co., Inc. 28% ING Life Insurance and Annuity Company 20% Reliance Trust Company 15% NFS LLC 6% 80 Small-Mid
Cap Portfolio Charles Schwab &
Co., Inc. 21% Nationwide Life Insurance, NWVA 17% Prudential Retirement Insurance & Annuity Co. 9% Nationwide Life Insurance, QVPA 9% Merrill Lynch, Pierce,
Fenner & Smith Incorporated 7% Global Listed Infrastructure
Portfolio Charles Schwab & Co., Inc. 45% TD Ameritrade Inc. 16% International Equity Portfolio Merrill Lynch, Pierce, Fenner & Smith
Incorporated 24% UBS WM USA 20% Charles Atwood Company 13% 81 Charles Schwab & Co., Inc. 7% International Equity Select
Portfolio Charles Schwab & Co., Inc. 27% First Clearing, LLC 11% NFS LLC 11% LAFOBA & Co. 10% William Blair & Co. LLC 9% William Blair & Co. LLC 5% Pershing LLC 5% International Strategic Portfolio Charles Schwab & Co., Inc. 44% Genworth Financial Trust Co. 16% Pershing LLC 12% 82 Merrill Lynch, Pierce, Fenner & Smith
Incorporated 7% International
Small Cap Portfolio Charles Schwab &
Co., Inc. 71% Emerging Markets Core Equity
Portfolio Lazard Asset Management LLC 99% Emerging Markets Portfolio Charles Schwab & Co., Inc. 27% Morgan Stanley Smith Barney 9% Pershing LLC 6% Developing Markets Portfolio Morgan Stanley Smith Barney 29% Charles Schwab & Co., Inc. 17% UBS WM USA 9% 83 Pershing LLC 5% Emerging Markets Blend Portfolio Charles Schwab & Co., Inc. 14% TD Ameritrade Inc. 8% Emerging Markets Multi-Strategy
Portfolio UBS WM USA 54% Charles Schwab &
Co., Inc. 12% Emerging Markets Debt Portfolio UBS WM USA 19% Charles Schwab & Co., Inc. 8% Realty Income Portfolio Charles Schwab & Co., Inc. 43% LPL Financial 9% Pershing LLC 9% 84 Realty
Equity Portfolio UBS WM USA 16% Charles Schwab & Co., Inc. 14% Pershing LLC 6% Global Realty Portfolio Pershing LLC 34% NFS LLC 20% Charles Schwab & Co., Inc. 13% UBS WM USA 8% Corporate Income Portfolio Pershing LLC 17% State Street Bank & Trust Company 16% Merrill Lynch, Pierce,
Fenner & Smith Incorporated 16% Charles Schwab & Co., Inc. 12% 85 MG Trust Company 8% Thomas J. Cogdill and Patricia W. Cogdill TTES 8% TD Ameritrade Inc. 5% Global Fixed Income Portfolio Charles Schwab & Co., Inc. 100% Capital Allocator Portfolio Charles Schwab &
Co., Inc. 24% National Financial Services LLC 10% Pershing LLC 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. 86 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, 87 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. 88 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 days—including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term rating addresses
the put feature, in addition to the usual long-term rating. Medium-term notes
are assigned long-term ratings. Long-Term Issue Credit
Ratings. Issue credit ratings are based, in varying degrees,
on S&P’s analysis of the following considerations: • likelihood of payment—capacity and
willingness of the obligor to meet its financial commitment on an obligation
in accordance with the terms of the obligation; • nature of and provisions of the obligation; and • protection afforded by, and relative position of,
the obligation in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws affecting creditors’
rights. Issue ratings are an assessment of default risk, but
may incorporate an assessment of relative seniority or ultimate recovery in the
event of default. Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy, as noted above. (Such
differentiation may apply when an entity has both senior and subordinated
obligations, secured and unsecured obligations, or operating company and
holding company obligations.) An obligation rated “AAA”
has the highest rating assigned by S&P. The obligor’s capacity to meet its
financial commitment on the obligation is extremely strong. An obligation rated “AA”
differs from the highest-rated obligations only to a small degree. The obligor’s
capacity to meet its financial commitment on the obligation is very strong. An obligation rated “A”
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher-rated categories. However,
the obligor’s capacity to meet its financial commitment on the obligation is
still strong. An obligation rated “BBB”
exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation. 89 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. 90 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 schedule—the larger the
final maturity relative to other maturities, the more likely it will be
treated as a note; and • source of payment—the more dependent the issue is on
the market for its refinancing, the more likely it will be treated as a note. Note rating symbols are as follows: SP-1 Strong
capacity to pay principal and interest. An issue determined to possess a very
strong capacity to pay debt service is given a plus (+) designation. SP-2 Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. SP-3 Speculative
capacity to pay principal and interest. 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. 91 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. MIG 2 This designation denotes strong credit quality.
Margins of protection are ample, although not as large as in the preceding
group. MIG 3 This designation denotes acceptable credit quality.
Liquidity and cash flow protection may be narrow, and market access for
refinancing is likely to be less well-established. 92 SG This designation denotes speculative-grade credit
quality. Debt instruments in this category may lack sufficient margins of
protection. Demand
Obligation Ratings. In the case of variable rate demand
obligations (“VRDOs”), a two-component rating is assigned; a long- or
short-term debt rating and a demand obligation rating. The first element represents
Moody’s evaluation of the degree of risk associated with scheduled principal
and interest payments. The second element represents Moody’s evaluation of the
degree of risk associated with the ability to receive purchase price upon
demand (“demand feature”), using a variation of the MIG rating scale, the
Variable Municipal Investment Grade or VMIG rating. When either the long- or short-term aspect of a VRDO
is not rated, that piece is designated NR, e.g.,
Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function of each issue’s
specific structural or credit features. VMIG 1 This designation denotes superior credit quality.
Excellent protection is afforded by the superior short-term credit strength
of the liquidity provider and structural and legal protections that ensure
the timely payment of purchase price upon demand. VMIG 2 This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the
liquidity provider and structural and legal protections that ensure the
timely payment of purchase price upon demand. VMIG 3 This designation denotes acceptable credit quality.
Adequate protection is afforded by the satisfactory short-term credit
strength of the liquidity provider and structural and legal protections that
ensure the timely payment of purchase price upon demand. SG This designation denotes speculative-grade credit
quality. Demand features rated in this category may be supported by a
liquidity provider that does not have an investment grade short-term rating
or may lack the structural and/or legal protections necessary to ensure the
timely payment of purchase price upon demand. 93 PROXY
VOTING POLICY LAZARD
ASSET MANAGEMENT LLC 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. 94 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. 95 THE LAZARD FUNDS, INC. ITEM 28. EXHIBITS. (a) Articles of Incorporation, Articles of Amendment and
Articles Supplementary(1), (2), (3), (6), (7), (8), (9), (10), (11), (12),
(13), (14), (15), (16), (17), (18), (19), (20), (21) (b) By-Laws(8) (d)(1) Investment Management Agreement, as revised* (d)(2) Expense Limitation Agreement, as revised (21) (e) Distribution Agreement, as revised(7) (g) Amended and Restated Custodian Contract(1) (h)(1) Revised Transfer Agency and Service Agreement(1) (h)(2) Amendment to Revised Transfer Agency and Service
Agreement(1) (h)(3) Administration Agreement(4) (i) Opinion and Consent of Counsel(5) (j) Consent of Independent Registered Public Accounting
Firm* (m)(1) Distribution and Servicing Plan, as revised* (m)(2) Form of Financial Intermediary Agreement(18) (n) 18f-3 Plan, as revised (21) (p) Code of Ethics(16) Other Exhibits: (s) Powers of Attorney of Board Members(9) * Filed herewith. 1. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 28 filed with the Securities and Exchange
Commission (the “SEC”) on April 29, 2003. 2. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 22 filed with the SEC on December 29, 2000. 3. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 25 filed with the SEC on April 30, 2001. 4. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 8 filed with the SEC on October 13, 1995. 5. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 9 filed with the SEC on December 27, 1995. 6. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 31 filed with the SEC on December 3, 2004. 7. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 34 filed with the SEC on July 20, 2005. 8. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 38 filed with the SEC on February 27, 2006. 9. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 42 filed with the SEC on February 13, 2008. 10. Incorporated by reference from Registrant’s Post-Effective
Amendment No. 44 filed with the SEC on April 29, 2008. 11. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 48 filed with the SEC on September 24, 2008. 12. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 51 filed with the SEC on December 22, 2009. 13. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 53 filed with the SEC on April 9, 2010. 14. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 58 filed with the SEC on March 25, 2011. 15. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 62 filed with the SEC on August 12, 2011. 16. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 65 filed with the SEC on November 17, 2011. 17. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 67 filed with the SEC on April 27, 2012. 18. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 69 filed with the SEC on May 23, 2012. 19. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 74 filed with the SEC on June 25, 2013. 20. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 79 filed with the SEC on October 22, 2013. 21. Incorporated by reference from Registrant’s
Post-Effective Amendment No. 81 filed with the SEC on November 27, 2013. ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT. None. ITEM 30. INDEMNIFICATION. Reference is made to Article EIGHTH of Registrant’s
Articles of Incorporation filed as Exhibit (a) and to Section 2-418 of the
Maryland General Corporation Law. The application of these provisions is
limited by Article VI of Registrant’s By-Laws filed as Exhibit (b) and by the
following undertaking set forth in the rules promulgated by the SEC: Insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended, may be permitted to directors,
officers and controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in such
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Registrant will unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act
and will be governed by the final adjudication of such issue. Reference also is made to the Investment Management Agreement and the
Distribution Agreement filed as Exhibits (d) and (e), respectively. ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER. The descriptions of personnel of Lazard Asset
Management LLC (“LAM”) under the Captions “Fund Management” in the Prospectus
and “Management” in the Statement of Additional Information constituting Parts
A and B, respectively, of this Registration Statement are
incorporated by reference herein. The following is a list of the directors and
senior officers of the Investment Manager. None of the persons listed below has
had other business connections of a substantial nature during the past two
fiscal years. Title
/ Name Directors Kenneth M. Jacobs Alexander F. Stern Chief Executive
Officer and Director Ashish Bhutani Deputy Chairmen Charles Carroll Andrew Lacey John Reinsberg Chairman USA Robert P. DeConcini Senior Managing
Directors Andreas Hubner Robert Prugue Bill Smith Managing
Directors Jennifer Abate Aaron Barnfather Ardra Belitz Michael Bennett Christopher Blake Nicholas Bratt Charles Burgdorf Irene Cheng Rohit Chopra David Cleary Kenneth Colton Robert Connin Alan Custis Kun Deng James Donald Anthony Dote, Jr. Yury Dubrovsky Christian Eckert Robert Failla Michael Fry Jeffrey Gould Timothy Griffen Peter Hunsberger Jai Jacob Dwight Jacobsen Arif Joshi Yvette Klevan Werner Krämer Matthias Kruse Jay Leupp Mark Little Carmine Lizza Gerald B. Mazzari Thomas McManus Jonathan Morris Andrew Norris Kevin O’Hare Nathan A. Paul David Pizzimenti Michael Powers Ganesh Ramachandran Joe Ramos Shaka Rasheed Sean Reynolds Susan Roberts Patrick Ryan James Schachtel Ulrich Schweiger Brian Simon Denise Simon Manish Singhai Darrin Sokol Craig Straub Jeremy Taylor Ronald Temple Richard Tutino George Varino Louisa Vincent Kelly Ward Merida Welles Christopher Whitney David Willis ITEM 32. PRINCIPAL UNDERWRITERS. (a) Lazard Asset Management
Securities LLC, a Delaware limited liability company, is the principal
underwriter of the Registrant and also serves as the principal underwriter of
Lazard Retirement Series, Inc. (b) The following information is given regarding
directors and officers of Lazard Asset Management Securities LLC, whose
principal business address is 30 Rockefeller Plaza, New York, New York 10112. Name Position and Offices with Position and Offices with Charles L. Carroll Chief Executive Officer President and Director Brian D. Simon Chief Compliance Officer Chief Compliance Officer and Assistant Secretary Gerald B. Mazzari Chief Financial Officer and Chief Operating Officer None Nathan A. Paul Chief Legal Officer Secretary (c) Not applicable. ITEM 33. LOCATION OF ACCOUNTS AND RECORDS. The majority of the accounts, books and other
documents required to be maintained by Section 31(a) of the Investment Company
Act of 1940, as amended, and the rules thereunder are maintained as follows:
journals, ledgers, securities records and other original records are maintained
primarily at the offices of Registrant’s custodian, State Street Bank and Trust Company. All
other records so required to be maintained are maintained at the offices of
LAM, 30 Rockefeller Plaza, New York, New York 10112. ITEM 34. MANAGEMENT SERVICES. Not applicable. ITEM 35. UNDERTAKINGS. None. SIGNATURES Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant certifies that it
meets all the requirements for effectiveness of the Registration Statement
under Rule 485(b) of the Securities Act of 1933 and has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 18th day of December, 2013. THE LAZARD FUNDS, INC. By: /s/ Charles L. Carroll Charles L. Carroll, Chief Executive Officer Pursuant to the requirements of the Securities Act of
1933, this Amendment to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated. /s/ Charles L. Carroll President and Director December 18, 2013 Charles L. Carroll /s/ Stephen St. Clair Treasurer and Chief Financial Officer December 18, 2013 Stephen St. Clair /s/ Ashish Bhutani Director December 18, 2013 Ashish Bhutani /s/ Kenneth S. Davidson* Director December 18, 2013 Kenneth S. Davidson /s/ Nancy A. Eckl* Director December 18, 2013 Nancy A. Eckl /s/ Leon M. Pollack* Director December 18, 2013 Leon M. Pollack /s/ Richard Reiss, Jr.* Director December 18, 2013 Richard Reiss, Jr. /s/ Robert M. Solmson* Director December 18, 2013 Robert M. Solmson *By: /s/ Nathan A. Paul Attorney-in-fact,
Nathan A. Paul EXHIBIT INDEX (d)(1) Investment Management Agreement, as revised (j) Consent of Independent Registered Public Accounting
Firm (m)(1) Distribution and Servicing Plan, as revised
30 Rockefeller Plaza
New York, New York 10112-6300
Telephone: (800) 823-6300
http://www.LazardNet.com
Lazard
Asset Management LLC
30 Rockefeller Plaza
New
York, New York 10112-6300
Telephone: (800) 823-6300
Distributor
Lazard
Asset Management Securities LLC
30 Rockefeller Plaza
New
York, New York 10112-6300
Custodian
State
Street Bank and Trust Company
One Lincoln Street
Boston,
Massachusetts 02111
Boston
Financial Data Services, Inc.
P.O. Box 8514
Boston,
Massachusetts 02266-8514
Telephone: (800) 986-3455
Independent
Registered Public Accounting Firm
Anchin, Block & Anchin LLP
1375
Broadway
New York, NY 10018
http://www.anchin.com
Legal
Counsel
Stroock & Stroock & Lavan LLP
180
Maiden Lane
New York, New York 10038-4982
http://www.stroock.com
30 Rockefeller Plaza
New York, New York 10112-6300
(800) 823-6300
STATEMENT OF ADDITIONAL INFORMATION
December 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 Prospectuses of the Fund, dated November 29, 2013 (all Portfolios other
than Lazard Global Equity Select Portfolio) and December 31, 2013 (Lazard
Global Equity Select Portfolio only), as may be revised or supplemented from
time to time (the “Prospectus”), relating to the following twenty-five
portfolios (individually, a “Portfolio” and collectively, the “Portfolios”):
(“Equity Concentrated Portfolio”)
(“Strategic Equity Portfolio”)
(“Mid Cap Portfolio”)
(“Small-Mid Cap Portfolio”)
(“Global Equity Select Portfolio”)
(“Global Listed Infrastructure Portfolio”)
(“International Equity Portfolio”)
(“International Equity Select Portfolio”)
(“International Strategic Portfolio”)
(“International Small Cap Portfolio”)
(“Emerging Markets Core Portfolio”)
(“Emerging Markets Portfolio”)
(“Developing Markets Portfolio”)
(“Emerging Markets Blend Portfolio”)
(“Emerging Markets Multi-Strategy Portfolio”)
(“Emerging Markets Debt Portfolio”)
(“Explorer Total Return Portfolio”)
(“Realty Income Portfolio”)
(“Realty Equity Portfolio”)
(“Global Realty Portfolio”)
(“Short Duration Fixed Income Portfolio”)
(“Corporate Income Portfolio”)
(“Global Fixed Income Portfolio”)
(“Targeted Volatility Portfolio”)
(“Capital Allocator Portfolio”)
The Targeted Volatility Portfolio had not
commenced operations as of the date of this SAI and the Emerging Markets Core,
Explorer Total Return and Global Equity Select Portfolios had not commenced
operations as of December 31, 2012, so certain information in this SAI is not
provided for these Portfolios.
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, including FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Maes”),
are solely the obligations of FNMA and are not backed by or entitled to the
full faith and credit of the US Government. 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 US
Government or by any Federal Home Loan Bank and do not constitute a debt or
obligation of the US Government 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.
FHLMC
preferred stock) have imposed strict limits on the size of their mortgage
portfolios. While the mortgage-backed securities purchase programs ended in
2010, the Treasury continued its support for the entities’ capital as necessary
to prevent a negative net worth through at least 2012. 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). From the end of 2007 through the
third quarter of 2012, FNMA and FHLMC required Treasury support of
approximately $187.5 billion through draws under the preferred stock purchase
agreements. However, they have repaid approximately $131.5 billion in
dividends. FNMA and FHLMC ended the second quarter of 2013 with positive net
worth and, as a result, neither required a draw from the Treasury. While the
Treasury committed to offset negative equity at FNMA and FHLMC through its
preferred stock purchases through 2012, FHFA has made projections for those
purchases through 2015, predicting that cumulative Treasury draws (including
dividends) at the end of 2015 could range from $191 billion to $209 billion.
Nonetheless, no assurance can be given that the Federal Reserve or the Treasury
will ensure that FNMA and FHLMC remain successful in meeting their obligations
with respect to the debt and mortgage-backed securities that they issue.
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 Core Portfolio’s policy to invest at least 80% of its net assets in
equity securities that are economically tied to emerging markets countries,
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 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.
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 Equity
Select Portfolio—equity securities; (v) Global Listed Infrastructure Portfolio—equity
securities of infrastructure companies; (vi) International Equity,
International Equity Select and International Strategic Portfolios—equity
securities; (vii) International Small Cap Portfolio—equity securities of small
cap companies; (viii) Emerging Markets Core Portfolio—equity securities of
companies that are economically tied to emerging market countries; (ix)
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; (x)
Emerging Markets Multi-Strategy Portfolio—securities and other investments that
are economically tied to emerging market countries; (xi) Emerging Markets Debt
Portfolio—debt securities that are economically tied to emerging market
countries; (xii) 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; (xiii) 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; (xiv) Global Realty Portfolio—equity securities (including common,
convertible and preferred stocks) of Realty Companies, as well as certain
synthetic instruments relating to Realty Companies; (xv) Short Duration Fixed
Income Portfolio—fixed-income securities of US issuers; (xvi) 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 (xvii) 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.
Address(1)
(Since) and Term(2)
Company Directorships Held During the Past
Five Years(2)
(August 1995)
(April 2007)
(August 2006)
(May 1991)
(September 2004)
(June 2004)
(July 2005)
(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 31 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 are also board members of Lazard Alternative Strategies 1099 Fund, a closed-end
registered management investment company 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. 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.)
Address(1)
(Since) and Term(2)
Five Years
(April 2002)
(May 2003)
(November 2002)
Address(1)
(Since) and Term(2)
Five Years
(February 2009)
(December 2004)
Bhutani
Carroll
Davidson
Eckl
Pollack
Reiss, Jr.
Solmson
the Fund
the Lazard Fund Complex
Companies ($*)
Vehicles ($*)
($*)##
Companies ($*)
Vehicles ($*)
($*)##
Distressed High Yield Index
Bond Index
Year Ended
December 31, 2010
Year Ended
December 31, 2011
Year Ended
December 31, 2012
Fee For Fiscal
Year Ended
December 31, 2010
Fee For Fiscal
Year Ended
December 31, 2011
Fee For Fiscal
Year Ended
December 31, 2012
Fee For Fiscal
Year Ended
December 31, 2010
Fee For Fiscal
Year Ended
December 31, 2011
Fee For Fiscal
Year Ended
December 31, 2012
Fiscal Year Ended
December 31, 2010
Fiscal Year Ended
December 31, 2011
Fiscal Year Ended
December 31, 2012
(in $000s)
(in $000s)
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Brokerage
Transactions
Effected Through
Lazard
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Brokerage
Transactions
Effected Through
Lazard
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Brokerage
Transactions
Effected Through
Lazard
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Brokerage
Transactions
Effected Through
Lazard
Commissions
Paid
Brokerage
Commissions
Paid to Lazard
Total Brokerage
Commissions Paid
to Lazard
Brokerage
Transactions
Effected Through
Lazard
Plan For Fiscal Year
Ended December 31, 2012
As of November 20, 2013, 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:
Institutional Shares Outstanding
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
4400 Harding Road, Suite 310
Nashville, TN 37205-2314
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
1 Pershing Plaza
Jersey City, NJ 07399-0002
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
Bemis Investment Incentive Plan
11500 Outlook Street
Overland Parks, KS 66211-1804
Attn: Mutual Fund Ops
P.O. Box 3198
525 William Penn Place
Pittsburgh, PA 15230-3198
Employee Ownership Plan
105 Rosemont Avenue
Westwood, MA 02090
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
FBO Its Customers
499 Washington Boulevard
Jersey City, NY 07310-2010
P.O. Box 3198
525 William Penn Place
Pittsburgh, PA 15230-3198
1 Pershing Plaza
Jersey City, NJ 07399-0002
State Street Bank & Trust Co.
2 Avenue de Lafayette
Boston, MA 02111-1724
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281
P.O. Box 7780
Philadelphia, PA 19182-0001
FBO Its Customers
2ll Main Street
San Francisco, CA 94105-1905
3200 North Central Avenue, Floor 7
Phoenix, AZ 85012
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
2ll Main Street
San Francisco, CA 94105-1905
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
FBO Its Customers
499 Washington Boulevard, Floor 5
Jersey City, NJ 07310-2010
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
P.O. Box 1533
Minneapolis, MN 55480
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281
30 Rockefeller Plaza
New York, NY 10112-0015
FBO Its Customers
One World Financial Center
200 Liberty Street
New York, NY 10281
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FBO Its Customers
2801 Market Street
St. Louis, MO 63103-2523
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
201 Progress Parkway
Maryland Heights, MO 63043-3009
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
FBO Its Customers
One World Financial Center
200 Liberty Street, 5th Floor
New York, NY 10281
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
2801 Market Street
St. Louis, MO 63103-2523
P.O. Box 3198
525 William Penn Place
Pittsburgh, PA 15230-3198
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
P.O. Box 17748
Denver, CO 80217-0748
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
FBO Customers
P.O. Box 1533
Minneapolis, MN 55480-1533
525 William Penn Place
Pittsburgh, PA 15230-3198
4001 North Rodney Parham Road
Little Rock, AZ 72212-2459
7825 National Service Road
Greensboro, NC 27409-9667
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
c/o M&I Trust Co.
11270 West Park Place, Suite 400
Milwaukee, WI 53224-3638
1 Pershing Plaza
Jersey City, NJ 07399-0002
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
FBO Ahmad H. Abdul-Baki & Katherine Abdul-Baki TTEE
Abdul-Baki Family Revocable Trust
McLean, VA 22102-1433
1 Pershing Plaza
Jersey City, NJ 07399-0002
1 Pershing Plaza
Jersey City, NJ 07399-0002
382 Channel Drive
Port Washington, NY 11050-2297
30 Rockefeller Plaza, 19th Floor
New York, NY 10112-5599
As Cusodian FBO Customers
135 South LaSalle Street, Suite 1811
Chicago, IL 60603-4177
FBO Customers
P.O. Box 1533
Minneapolis, MN 55480-1533
1 Pershing Plaza
Jersey City, NJ 07399-0002
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA 15230
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
1 Pershing Plaza
Jersey City, NJ 07399-0002
One World Financial Center
200 Liberty Street
New York, NY 10281-1003
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
Open Shares Outstanding
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO ETC Corporation 401(k) Profit Sharing Plan
1251 Waterfront Place, Suite 525
Pittsburgh, PA 15222-4228
FBO Its Clients
P.O. Box 2226
Omaha, NE 68103-2226
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
151 Farmington Avenue, TN41
Hartford, CT 06156
8515 East Orchard Road 2T2
Greenwood Village, CO 80111-5002
FEBO State Street Bank & Trust Co.
Trustee Various Retirement Plans
440 Mamaroneck Avenue
Harrison, NY 10528-2418
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
FBO Various Retirement Plans
280 Trumbull Street
One Commercial Plaza
Hartford, CT 06103
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
136 E. Michigan Avenue, Suite 1201
Kalamazoo, MI 49007
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
10750 Wheat First Drive
Glen Allen, VA 23060
FEBO Wm V. Heaphy & Christine A. Heaphy
1 Eastport Court
Luthvle Timon, MD 21093-3803
50 Commerce Drive
Grayslake, IL 60030-1600
Gizmo Partners LP
222 West Adams Street
Chicago, IL 60606-5312
Jonathan and Natalie Stein
222 West Adams Street
Chicago, IL 60606-5312
1 Pershing Plaza
Jersey City, NJ 07399-0002
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
3200 North Central Avenue
Phoenix, AZ 85012
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
30 Rockefeller Plaza
New York, NY 10112-0015
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
1 Pershing Plaza
Jersey City, NJ 07399-0002
Harborside Financial Center
Plaza 2, Floor 3
Jersey City, NJ 07311
Special Custody Account
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
1 Pershing Plaza
Jersey City, NJ 07399-0002
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
P.O. Box 2226
Omaha, NE 68103-2226
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
9875 Towne Centre Drive
San Diego, CA 92121-1968
1 Pershing Plaza
Jersey City, NJ 07399-0002
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
1 Pershing Plaza
Jersey City, NJ 07399-0002
P.O. Box 2052
Jersey City, NJ 07303-2052
FEBO Jay P. Leupp
Hillsborough, CA
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
1000 Harbor Boulevard, Floor 5
Weehawken, NJ 07086-6761
1 Pershing Plaza
Jersey City, NJ 07303-2052
Custodian for the IRA of FBO Richard J. Urowsky
c/o Sullivan and Cromwell
125 Broad Street
New York, NY 10004-2400
FBO Its Customers
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Smith & Downey, PA 401(k) Plan
700 17th Street, Suite 300
Denver, CO 80202-3531
Cogdill Family Trust dtd 8/6/03
Huntsville, AL
FEBO Its Customers
P.O. Box 2226
Omaha, NE 68103-2226
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FBO Its Customers
211 Main Street
San Francisco, CA 94105-1905
FEBO Elwyn Inc. Ret. Plan
111 Elwyn Road
Elwyn, PA 19063-4622
1 Pershing Plaza
Jersey City, NJ 07399-0002
Anchin, Block & Anchin LLP, 1375 Broadway, New
York, New York 10018, is the independent registered public
accounting firm for the Fund.
Proxy Voting
PART C. OTHER INFORMATION
Underwriter
Registrant
