497 1 d550727d497.htm HC CAPITAL TRUST HC Capital Trust
Table of Contents

Supplement to Prospectus

HC Advisors Shares

Dated November 1, 2012

HC Capital Trust

The date of this Supplement is June 10, 2013

The Real Estate Securities Portfolio: Effective immediately, The Real Estate Securities Portfolio is closed to new investors.

The Commodity Returns Strategy Portfolio: Effective June 10, 2013, The Commodity Returns Strategy Portfolio’s classification changed from non-diversified to diversified. All references to the Portfolio are changed accordingly.

International Equity Portfolio and Institutional International Equity Portfolio:

1. The following replaces the first paragraph under the “Artisan Partners Limited Partnership” section of the “Specialist Manager Guide” on page 127 of the Prospectus:

Artisan Partners Limited Partnership (“Artisan”) serves as a Specialist Manager for The International Equity and The Institutional International Equity Portfolios. Artisan, the principal office of which is located at 875 E. Wisconsin Avenue, Suite 800, Milwaukee, WI 53202, has provided investment management services for international equity assets since 1995. As of June 30, 2012, Artisan managed total assets in excess of $64 billion, of which approximately $37 billion consisted of mutual fund assets. Artisan Partners is a limited partnership organized under the laws of Delaware. Artisan Partners is managed by its general partner, Artisan Investments GP LLC, a Delaware limited liability company wholly-owned by Artisan Partners Holdings LP (Artisan Partners Holdings). Artisan Partners Holdings is a limited partnership organized under the laws of Delaware whose sole general partner is Artisan Partners Asset Management Inc., a Delaware Corporation. Artisan Partners was founded in March 2009 and succeeded to the investment management business of Artisan Partners Holdings during 2009. Artisan Partners Holdings was founded in December 1994 and began providing investment management services in March 1995.

The International Equity Portfolio: (From the Supplement filed on April 25, 2013)

 

1. The following replaces the section of the Prospectus pertaining to Causeway Capital Management LLC under the “Portfolio Managers” section on page 40 of the Prospectus:

Causeway: Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng and Kevin Durkin have co-managed that portion of the Portfolio allocated to Causeway since December, 2006 and Conor Muldoon has co-managed that portion of the Portfolio allocated to Causeway since September, 2010. Foster Corwith and Alessandro Valentini have co-managed the portion of the Portfolio allocated to Causeway since April 2013.

The Institutional International Equity Portfolio: (From the Supplement filed on April 25, 2013)

 

1. The following replaces the section of the Prospectus pertaining to Causeway Capital Management LLC under the “Portfolio Managers” section on page 44 of the Prospectus:

Causeway: Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng and Kevin Durkin have co-managed that portion of the Portfolio allocated to Causeway since November, 2009 and Conor Muldoon has co-managed that portion of the Portfolio allocated to Causeway since September, 2010. Foster Corwith and Alessandro Valentini have co-managed the portion of the Portfolio allocated to Causeway since April 2013.

The International Equity Portfolio and The Institutional International Equity Portfolio: (From the Supplement filed on April 25, 2013)

1. The following replaces the third paragraph under the “Causeway Capital Management LLC” section of the “Specialist Manager Guide” on page 130 of the Prospectus:

Day-to-day management of those assets of The International Equity and Institutional International Equity Portfolios allocated to Causeway is the responsibility of Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng, Kevin Durkin, Conor

 

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Muldoon, Foster Corwith and Alessando Valentini. Ms. Ketterer, Mr. Hartford, Mr. Doyle, Mr. Eng, and Mr. Durkin have been investment professionals with Causeway since 2001, Mr. Muldoon has been an investment professional with Causeway since 2003 and Messrs Corwith and Valentini have been investment professionals with the firm since 2006. Ms. Ketterer and Mr. Hartford were co-founders of Causeway in 2001, and serve as the firm’s chief executive officer and president, respectively. Ms. Ketterer and Mr. Hartford previously served as co-heads of the International and Global Value Equity Team of the Hotchkis and Wiley division of Merrill Lynch Investment Managers, L.P. (“Hotchkis and Wiley”). Messrs. Doyle, Eng, and Durkin, directors of Causeway, were also associated with the Hotchkis and Wiley International and Global Value Equity Team prior to joining Causeway in 2001. Mr. Muldoon, a director of Causeway, previously served as an investment consultant for Fidelity Investments as a liaison between institutional clients and investment managers within Fidelity. Mr. Corwith, a director and fundamental portfolio manager, previously served as a research associate at Deutsche Asset Management where he was responsible for researching consumer staple companies. Mr. Valentini, a director and fundamental portfolio manager, previously worked at Thornburg Investment Management, where he conducted fundamental research focusing on the European telecommunication and Canadian oil sectors.

The Real Estate Securities Portfolio:

Upon the recommendation of the Adviser, the Board of Trustees of HC Capital Trust has approved a modification of the Principal Investment Strategies of the Portfolio to allow the Portfolio to implement its real estate securities strategies by investing primarily in shares of other real estate-oriented investment companies, such as exchange-traded funds (“ETFs”). Accordingly, the following changes to the disclosure related to the Real Estate Securities Portfolio are effective April 26, 2013:

1. The following replaces the “Fees and Expenses” section on page 26 of the Prospectus:

Fees and Expenses

The fee tables below describe the fees and expenses that you may pay if you buy and hold HC Advisors Shares of the Portfolio.

Shareholder Fees

(fees paid directly from your investment)

 

Maximum Sales Charges

     None   

Maximum Redemption Fee

     None   

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.05

Other Expenses

     0.08

Distribution and/or Service (12b-1) Fees

     0.25

Acquired Fund Fees and Expense

     0.18

Total Annual Portfolio Operating Expenses

     0.56

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 57   

3 Years

   $ 179   

5 Years

   $ 313   

10 Years

   $     701   

 

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2. The following supplements the “Principal Investment Strategies” disclosure on page 26 of the Prospectus:

The Portfolio may implement its principal investment strategy by investing up to 100% of its assets in exchange-traded funds, that themselves invest in real estate-related securities.

3. The following supplements the “Principal Investment Risks” disclosure on page 27 of the Prospectus:

 

 

Investment in Other Investment Companies Risk – As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares of investment companies, shareholders bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the other investment companies.

 

 

Exchange-Traded Funds Risk – An investment by the Portfolio in ETFs generally presents the same primary risks as an investment in other investment companies. In addition, an ETF may be subject to the following: (1) a discount of the ETF’s shares to its net asset value; (2) failure to develop or maintain an active trading market for the ETF’s shares; (3) the listing exchange halting trading of the ETF’s shares; (4) failure of the ETF’s shares to track the referenced asset; and (5) holding troubled securities in the referenced index or basket of investments.

4. The following replaces the “Investment Adviser” and “Investment Subadvisor” sections on page 30 of the Prospectus:

Investment Adviser

HC Capital Solutions is the Portfolio’s investment adviser with responsibility for the management of the Portfolio’s assets, including all investments in other investment companies.

Portfolio Manager:

Thomas Cowhey, CFA has managed the Portfolio since April, 2013.

Investment Subadvisor

Wellington Management Company LLP (“Wellington Management”) and SSgA FM are the Specialist Managers for the Portfolio with responsibility for the management of the Portfolio’s assets that are invested directly in real estate securities.

Wellington Management: Bradford D. Stoesser has managed the Portfolio since September, 2010.

SSgA FM: John Tucker, CFA and Michael Feehily, CFA have not yet begun providing portfolio management services to the Portfolio.

5. The following supplements the “More Information About Fund Investments and Risks” disclosure related to the Real Estate Securities Portfolio on page 91 of the Prospectus:

The Portfolio may implement its investment strategy by investing in exchange traded investment companies, known as “ETFs,” that themselves invest in the equity and debt securities issued by real estate-related companies including real estate investment trusts (REITs). For more information on ETFs, see “Investments in Other Investment Companies” on page 114 of this Prospectus.

6. The following supplements the “Investments in Other Investment Companies” disclosure on page 114 of the Prospectus:

Additionally, the Real Estate Securities Portfolio may invest up to 100% of its assets in ETFs that invest in the securities of real estate related companies in reliance on provisions of the Investment Company Act that permit such investments so long as the investing fund, together with any affiliates, does not own more than 3% of the outstanding voting securities of the acquired fund. Under these provisions, the Real Estate Securities Portfolio is required to vote all proxies of the funds it owns in the same proportion as the vote of all other holders of such securities.

7. The following supplements the “Advisory Services – HC Capital Solutions” disclosure on page 115 of the Prospectus:

Mr. Thomas Cowhey, CFA acts as a portfolio manager for the Real Estate Securities Portfolio. Mr. Cowhey is the Chief Investment Strategist for the Advisor and has been with the Advisor since 2000.

 

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The Short-Term Municipal Bond Portfolio: (From the Supplement filed on April 18, 2013)

2. The following replaces the section of the Prospectus under the “Portfolio Managers” section on page 73 of the Prospectus:

Breckinridge: Peter Coffin, David Madigan, and Martha Field Hodgman have co-managed the Portfolio since March, 2006. Susan Mooney and Matthew Buscone have co-managed the Portfolio since February, 2007 and July, 2008, respectively. Ji Young has managed the Portfolio since March 2013.

The Intermediate Term Municipal Bond II Portfolio: (From the Supplement filed on April 18, 2013)

 

  1. The following replaces the section of the Prospectus under the “Portfolio Managers” section on page 81 of the Prospectus:

Breckinridge: Peter Coffin, David Madigan, Martha Field Hodgman, Susan Mooney and Matthew Buscone have co-managed the Portfolio since March, 2010 and Ji Young has managed the Portfolio since March 2013.

The Short-Term Municipal Bond Portfolio and The Intermediate Term Municipal Bond II Portfolio: (From the Supplement filed on April 18, 2013)

The following replaces the third and fourth paragraphs under the “Breckinridge Capital Advisors, Inc” section of the “Specialist Manager Guide” on page 129 of the Prospectus:

The portfolio management team is led by a team of investment professionals at Breckinridge, including the following individuals who are jointly and primarily responsible for making day-to-day investment decisions: Peter B. Coffin, President of Breckinridge since 1993, David Madigan, Chief Investment Officer at Breckinridge since 2003, Martha Field Hodgman, Executive Vice President at Breckinridge since 2001, Susan Mooney, Senior Vice President of Breckinridge since 2007, Matthew Buscone, Vice President, at Breckinridge since 2002 and Ji Young, Portfolio Manager since March 2012.

Prior to founding Breckinridge, Mr. Coffin was a Senior Vice-President and portfolio manager with Massachusetts Financial Services, where he was also a member of the firm’s Fixed Income Policy Committee. From 1996 to 2002, Mr. Madigan was Executive Vice-President at Thomson Financial. He has also served as a portfolio manager at Banker’s Trust and Prudential Insurance (managing single state municipal bond funds), as well as Chief Municipal Strategist for Merrill Lynch. From 1993 to 2001, Ms. Hodgman served as a Vice President in the Fixed Income Management Group of Loomis Sayles & Co. L.P. She has also been a portfolio manager for John Hancock Advisors, Inc. (managing state-specific tax exempt mutual funds) and an analyst for the Credit Policy Committee of Putnam Investments. From 2003-2007 Ms. Mooney was Director of Fixed Income and principal at Freedom Capital Management, LLC, where she managed institutional fixed income assets for pension funds, corporations and endowments. Prior to that position she was Managing Director at Harbor Capital. Mr. Buscone has been a Portfolio Manager since 2008 after having served as a trader at Breckinridge from 2002-2008. From 1992-2002 he was a Trader and Portfolio Manager for both taxable and tax-exempt portfolios at David L. Babson and Mellon Private Asset Management. Ms. Young joined Breckinridge in October 2008 as a member of the Credit Research Team and transitioned to Portfolio Management in March 2012. Prior to joining Breckinridge she was a credit analyst within the Public Finance Group at Assured Guaranty.

The Fixed Income Opportunity Portfolio: (From the Supplement filed on March 5, 2013) Effective immediately, Michael Rieger will no longer serve as a portfolio manager for The Fixed Income Opportunity Portfolio managed by Seix Investment Advisors, LLC (“Seix”).

 

  2. The following replaces the section of the Prospectus with respect to Seix under the “Portfolio Managers” section on page 57 of the Prospectus:

Seix: Michael Kirkpatrick and Brian Nold have managed the portion of the Portfolio allocated to Seix since November, 2007 and Vincent Flanagan has managed the Portfolio since February, 2013.

 

  3. The following replaces the third paragraph under “Seix Investment Advisors LLC” of the “Specialist Manager Guide” on page 135 of the Prospectus:

Day-to-day high yield investment decisions for The Fixed Income Opportunity Portfolio are the responsibility of Michael Kirkpatrick, Brian Nold and Vincent Flanagan. Michael Kirkpatrick, Senior Portfolio Manager and Senior High Yield Research

 

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Analyst, focuses principally on the Flagship High Yield Portfolios in addition to a High Yield Unconstrained strategy. Prior to joining Seix in 2002, Mr. Kirkpatrick was a Senior Analyst at Oppenheimer Funds, Inc. covering the Telecommunications and Cable industries. Mr. Nold, Senior Portfolio Manager and Senior High Yield Research Analyst, focuses on a High Yield Unconstrained strategy in addition to the Flagship High Yield Portfolios. Before joining Seix in 2003, he was a High Yield Analyst at Morgan Stanley in Global High Yield Research. Vincent Flanagan, Portfolio Manager and Senior High Yield Research Analyst, is primarily focused on bank loans. Prior to joining Seix in 2006, Mr. Flanagan was the director of research for Assurant, Inc.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 69 of the Prospectus:

Mellon Capital: Mr. David C. Kwan, Ms. Zandra Zelaya and Mr. Gregg Lee have co-managed the Portfolio since December, 2012.

The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 52 of the Prospectus:

Mellon Capital: Mr. David C. Kwan and Ms. Zandra Zelaya have co-managed the Portfolio since December, 2010 and Mr. Gregg Lee has managed the Portfolio since December, 2012.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio and The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

The following replaces the “Mellon Capital Management Corporation” section of the “Specialist Manager Guide” on page 134 of the Prospectus:

Mellon Capital Management Corporation (“Mellon Capital”) serves as a Specialist Manager for The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio. Mellon Capital, which was organized as a Delaware corporation in 1983, is headquartered at 50 Fremont Street, Suite 3900, San Francisco, CA 94105. Mellon Capital is a wholly-owned indirect subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”).

For its services to The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.12%. Effective September 1, 2012, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.06%. For its services to The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio, Mellon Capital receives a fee based on the average daily net asset value of that portion of the assets of the Portfolio managed by it, at an annual rate of 0.06%. During the fiscal year ended June 30, 2012 Mellon received fees of 0.12% of the average daily net assets for each portion of The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio allocated to Mellon.

Day-to-day investment decisions for the portions of The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio allocated to Mellon Capital are the responsibility of David C. Kwan, CFA, Ms. Zandra Zelaya, CFA and Mr. Gregg Lee, CFA. Mr. Kwan is a Managing Director, Fixed Income Management of Mellon Capital with 22 years of investment experience at the firm. He earned both a B.S. and an M.B.A. at the University of California at Berkeley. Ms. Zelaya is a Director of Fixed Income Management of Mellon Capital with 17 years of investment experience and 15 years at the firm. She earned a B.S. at California State University at Haward. Mr. Gregg Lee is a Vice President, Senior Portfolio Manager at Mellon Capital with 23 years of investment experience and 23 year at the firm. He earned a B.S. at the University of California at Davis.

As of June 30, 2012, Mellon Capital had assets under management totaling approximately $240 billion, which includes overlay strategies.

 

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The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on January 8, 2013) Effective January 8, 2013, the investment advisory relationship between the Trust and BlackRock Financial Management, Inc. (“BlackRock”) with respect to The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio has been terminated. Any and all references to BlackRock are hereby removed.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on December 11, 2012) At a meeting, held on December 4, 2012, the Board of Trustees (the “Board”) for HC Capital Trust (the “Trust”) approved the engagement of Mellon Capital Management Corporation (“Mellon Capital”) as an additional investment advisory organization (“Specialist Manager”) to manage a portion of the assets of The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio of the Trust.

1. The following replaces the “Annual Operating Expenses” section on page 66 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees

     0.11

Distribution and/or Service (12b-1)Fees

     0.25

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.44

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 45   

3 Years

   $ 141   

5 Years

   $ 246   

10 Years

   $     555   

2. The following supplements the “Principal Investment Risks” section on page 67 of the Prospectus:

 

 

Multi-Manager Risk – The risk that the Trust may be unable to (a) identify and retain Specialist Managers who achieve superior investment records relative to other similar investments, (b) pair Specialist Managers that have complementary investment styles, or (c) effectively allocate Portfolio assets among Specialist Managers to enhance the return and reduce the volatility that would typically be expected of any one management style. A multi-manager Portfolio may, under certain circumstances, incur trading costs that might not occur in a Portfolio that is served by a single Specialist Manager.

3. The following replaces the “Investment Subadvisers” section on page 69 of the Prospectus:

Blackrock and Mellon Capital are the Specialist Managers for the Portfolio.

4. The following supplements the “Specialist Managers” section under “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” on page 103 of the Prospectus:

 

The Mellon Capital Investment Selection Process    Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

 

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5. The following replaces the paragraph with respect to “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” under “More Information About Fund Investments and Risks” on page 117 of the Prospectus:

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio – The Portfolio is managed by two Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock and 100% Mellon Capital.

The Core Fixed Income Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 49 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.17

Distribution and/or Service (12b-1)Fees

     0.25

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.50

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 51   

3 Years

   $ 160   

5 Years

   $ 280   

10 Years

   $     628   

2. The following supplements the “Specialist Managers” section under “The Core Fixed Income Portfolio” on page 99 of the Prospectus:

 

The Mellon Capital Investment Selection Process   

Mellon Capital currently manages assets for the Portfolio using two separate and distinct strategies.

 

With respect to the portion of the Portfolio invested in investment grade mortgage-backed and asset-backed securities, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Government Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the government sector.

 

With respect to the portion of the Portfolio invested in securities issued or fully guaranteed by the U.S. Government, Federal Agencies or sponsored agencies, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

 

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3. The following replaces the paragraph with respect to “The Core Fixed Income Portfolio” under “More Information About Fund Investments and Risks” on page 117 of the Prospectus:

The Core Fixed Income Portfolio – The Portfolio is managed by three Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock, 66% Mellon Capital and 34% Seix.

The Fixed Income Opportunity Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 53 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.31

Distribution and/or Service (12b-1) Fees

     0.25

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.64

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 65   

3 Years

   $ 205   

5 Years

   $ 357   

10 Years

   $     798   

2. The following replaces the second paragraph under “Seix Investment Advisors LLC” in the Specialist Manager Guide on page135 of the Prospectus:

For its services to The Fixed Income Opportunity Portfolio Seix receives a fee, based on the average daily net asset value of the assets of the Portfolio under its management at an annual rate of 0.40% for the first $100 million of the Combined Assets (as defined below), 0.25% on the next $200 million of the Combined Assets, and 0.20% on the balance of the Combined Assets. For the purpose of computing Seix’s fee for The Fixed Income Opportunity Portfolio, the term “Combined Assets” shall mean the sum of (i) the net assets of the Portfolio; and (ii) the net assets of each other Hirtle Callaghan account to which Seix provides similar services. During the fiscal year ended June 30, 2012 Seix received a fee of 0.42% of the average daily net assets of that portion of The Fixed Income Opportunity Portfolio allocated to Seix.

PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.

 

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Supplement to Prospectus

HC Strategic Shares

Dated November 1, 2012

HC Capital Trust

The date of this Supplement is June 10, 2013

The Real Estate Securities Portfolio: Effective immediately, The Real Estate Securities Portfolio is closed to new investors.

The Commodity Returns Strategy Portfolio: Effective June 10, 2013, The Commodity Returns Strategy Portfolio’s classification changed from non-diversified to diversified. All references to the Portfolio are changed accordingly.

International Equity Portfolio and Institutional International Equity Portfolio:

1. The following replaces the first paragraph under the “Artisan Partners Limited Partnership” section of the “Specialist Manager Guide” on page 127 of the Prospectus:

Artisan Partners Limited Partnership (“Artisan”) serves as a Specialist Manager for The International Equity and The Institutional International Equity Portfolios. Artisan, the principal office of which is located at 875 E. Wisconsin Avenue, Suite 800, Milwaukee, WI 53202, has provided investment management services for international equity assets since 1995. As of June 30, 2012, Artisan managed total assets in excess of $64 billion, of which approximately $37 billion consisted of mutual fund assets. Artisan Partners is a limited partnership organized under the laws of Delaware. Artisan Partners is managed by its general partner, Artisan Investments GP LLC, a Delaware limited liability company wholly-owned by Artisan Partners Holdings LP (Artisan Partners Holdings). Artisan Partners Holdings is a limited partnership organized under the laws of Delaware whose sole general partner is Artisan Partners Asset Management Inc., a Delaware Corporation. Artisan Partners was founded in March 2009 and succeeded to the investment management business of Artisan Partners Holdings during 2009. Artisan Partners Holdings was founded in December 1994 and began providing investment management services in March 1995.

The International Equity Portfolio: (From the Supplement filed on April 25, 2013)

 

1. The following replaces the section of the Prospectus pertaining to Causeway Capital Management LLC under the “Portfolio Managers” section on page 39 of the Prospectus:

Causeway: Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng and Kevin Durkin have co-managed that portion of the Portfolio allocated to Causeway since December, 2006 and Conor Muldoon has co-managed that portion of the Portfolio allocated to Causeway since September, 2010. Foster Corwith and Alessandro Valentini have co-managed the portion of the Portfolio allocated to Causeway since April 2013.

The Institutional International Equity Portfolio: (From the Supplement filed on April 25, 2013)

 

1. The following replaces the section of the Prospectus pertaining to Causeway Capital Management LLC under the “Portfolio Managers” section on page 43 of the Prospectus:

Causeway: Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng and Kevin Durkin have co-managed that portion of the Portfolio allocated to Causeway since November, 2009 and Conor Muldoon has co-managed that portion of the Portfolio allocated to Causeway since September, 2010. Foster Corwith and Alessandro Valentini have co-managed the portion of the Portfolio allocated to Causeway since April 2013.

The International Equity Portfolio and The Institutional International Equity Portfolio: (From the Supplement filed on April 25, 2013)

1. The following replaces the third paragraph under the “Causeway Capital Management LLC” section of the “Specialist Manager Guide” on page 130 of the Prospectus:

Day-to-day management of those assets of The International Equity and Institutional International Equity Portfolios allocated to Causeway is the responsibility of Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng, Kevin Durkin, Conor

 

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Muldoon, Foster Corwith and Alessando Valentini. Ms. Ketterer, Mr. Hartford, Mr. Doyle, Mr. Eng, and Mr. Durkin have been investment professionals with Causeway since 2001, Mr. Muldoon has been an investment professional with Causeway since 2003 and Messrs Corwith and Valentini have been investment professionals with the firm since 2006. Ms. Ketterer and Mr. Hartford were co-founders of Causeway in 2001, and serve as the firm’s chief executive officer and president, respectively. Ms. Ketterer and Mr. Hartford previously served as co-heads of the International and Global Value Equity Team of the Hotchkis and Wiley division of Merrill Lynch Investment Managers, L.P. (“Hotchkis and Wiley”). Messrs. Doyle, Eng, and Durkin, directors of Causeway, were also associated with the Hotchkis and Wiley International and Global Value Equity Team prior to joining Causeway in 2001. Mr. Muldoon, a director of Causeway, previously served as an investment consultant for Fidelity Investments as a liaison between institutional clients and investment managers within Fidelity. Mr. Corwith, a director and fundamental portfolio manager, previously served as a research associate at Deutsche Asset Management where he was responsible for researching consumer staple companies. Mr. Valentini, a director and fundamental portfolio manager, previously worked at Thornburg Investment Management, where he conducted fundamental research focusing on the European telecommunication and Canadian oil sectors.

The Real Estate Securities Portfolio: (From the Supplement filed on April 18, 2013)

Upon the recommendation of the Adviser, the Board of Trustees of HC Capital Trust has approved a modification of the Principal Investment Strategies of the Portfolio to allow the Portfolio to implement its real estate securities strategies by investing primarily in shares of other real estate-oriented investment companies, such as exchange-traded funds (“ETFs”). Accordingly, the following changes to the disclosure related to the Real Estate Securities Portfolio are effective April 26, 2013:

1. The following replaces the “Fees and Expenses” section on page 26 of the Prospectus:

Fees and Expenses

The fee tables below describe the fees and expenses that you may pay if you buy and hold HC Strategic Shares of the Portfolio.

Shareholder Fees

(fees paid directly from your investment)

 

Maximum Sales Charges

     None   

Maximum Redemption Fee

     None   

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.05

Other Expenses

     0.08

Acquired Fund Fees and Expense

     0.18

Total Annual Portfolio Operating Expenses

     0.31

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 32   

3 Years

   $ 100   

5 Years

   $ 174   

10 Years

   $     393   

 

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2. The following supplements the “Principal Investment Strategies” disclosure on page 26 of the Prospectus:

The Portfolio may implement its principal investment strategy by investing up to 100% of its assets in exchange-traded funds, that themselves invest in real estate-related securities.

3. The following supplements the “Principal Investment Risks” disclosure on page 27 of the Prospectus:

 

 

Investment in Other Investment Companies Risk – As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares of investment companies, shareholders bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the other investment companies.

 

 

Exchange-Traded Funds Risk – An investment by the Portfolio in ETFs generally presents the same primary risks as an investment in other investment companies. In addition, an ETF may be subject to the following: (1) a discount of the ETF’s shares to its net asset value; (2) failure to develop or maintain an active trading market for the ETF’s shares; (3) the listing exchange halting trading of the ETF’s shares; (4) failure of the ETF’s shares to track the referenced asset; and (5) holding troubled securities in the referenced index or basket of investments.

4. The following replaces the “Investment Adviser” and “Investment Subadvisor” sections on page 30 of the Prospectus:

Investment Adviser

HC Capital Solutions is the Portfolio’s investment adviser with responsibility for the management of the Portfolio’s assets, including all investments in other investment companies.

Portfolio Manager:

Thomas Cowhey, CFA has managed the Portfolio since April, 2013.

Investment Subadvisor

Wellington Management Company LLP (“Wellington Management”) and SSgA FM are the Specialist Managers for the Portfolio with responsibility for the management of the Portfolio’s assets that are invested directly in real estate securities.

Wellington Management: Bradford D. Stoesser has managed the Portfolio since September, 2010.

SSgA FM: John Tucker, CFA and Michael Feehily, CFA have not yet begun providing portfolio management services to the Portfolio.

5. The following supplements the “More Information About Fund Investments and Risks” disclosure related to the Real Estate Securities Portfolio on page 90 of the Prospectus:

The Portfolio may implement its investment strategy by investing in exchange traded investment companies, known as “ETFs,” that themselves invest in the equity and debt securities issued by real estate-related companies including real estate investment trusts (REITs). For more information on ETFs, see “Investments in Other Investment Companies” on page 113 of this Prospectus.

6. The following supplements the “Investments in Other Investment Companies” disclosure on page 113 of the Prospectus:

Additionally, the Real Estate Securities Portfolio may invest up to 100% of its assets in ETFs that invest in the securities of real estate related companies in reliance on provisions of the Investment Company Act that permit such investments so long as the investing fund, together with any affiliates, does not own more than 3% of the outstanding voting securities of the acquired fund. Under these provisions, the Real Estate Securities Portfolio is required to vote all proxies of the funds it owns in the same proportion as the vote of all other holders of such securities.

7. The following supplements the “Advisory Services – HC Capital Solutions” disclosure on page 114 of the Prospectus:

Mr. Thomas Cowhey, CFA acts as a portfolio manager for the Real Estate Securities Portfolio. Mr. Cowhey is the Chief Investment Strategist for the Advisor and has been with the Advisor since 2000.

 

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The Short-Term Municipal Bond Portfolio: (From the Supplement filed on April 18, 2013)

 

  2. The following replaces the section of the Prospectus under the “Portfolio Managers” section on page 72 of the Prospectus:

Breckinridge: Peter Coffin, David Madigan, and Martha Field Hodgman have co-managed the Portfolio since March, 2006. Susan Mooney and Matthew Buscone have co-managed the Portfolio since February, 2007 and July, 2008, respectively. Ji Young has managed the Portfolio since March 2013.

The Intermediate Term Municipal Bond II Portfolio: (From the Supplement filed on April 18, 2013)

 

  1. The following replaces the section of the Prospectus under the “Portfolio Managers” section on page 80 of the Prospectus:

Breckinridge: Peter Coffin, David Madigan, Martha Field Hodgman, Susan Mooney and Matthew Buscone have co-managed the Portfolio since March, 2010 and Ji Young has managed the Portfolio since March 2013.

The Short-Term Municipal Bond Portfolio and The Intermediate Term Municipal Bond II Portfolio: (From the Supplement filed on April 18, 2013)

The following replaces the third and fourth paragraphs under the “Breckinridge Capital Advisors, Inc” section of the “Specialist Manager Guide” on page 129 of the Prospectus:

The portfolio management team is led by a team of investment professionals at Breckinridge, including the following individuals who are jointly and primarily responsible for making day-to-day investment decisions: Peter B. Coffin, President of Breckinridge since 1993, David Madigan, Chief Investment Officer at Breckinridge since 2003, Martha Field Hodgman, Executive Vice President at Breckinridge since 2001, Susan Mooney, Senior Vice President of Breckinridge since 2007, Matthew Buscone, Vice President, at Breckinridge since 2002 and Ji Young, Portfolio Manager since March 2012.

Prior to founding Breckinridge, Mr. Coffin was a Senior Vice-President and portfolio manager with Massachusetts Financial Services, where he was also a member of the firm’s Fixed Income Policy Committee. From 1996 to 2002, Mr. Madigan was Executive Vice-President at Thomson Financial. He has also served as a portfolio manager at Banker’s Trust and Prudential Insurance (managing single state municipal bond funds), as well as Chief Municipal Strategist for Merrill Lynch. From 1993 to 2001, Ms. Hodgman served as a Vice President in the Fixed Income Management Group of Loomis Sayles & Co. L.P. She has also been a portfolio manager for John Hancock Advisors, Inc. (managing state-specific tax exempt mutual funds) and an analyst for the Credit Policy Committee of Putnam Investments. From 2003-2007 Ms. Mooney was Director of Fixed Income and principal at Freedom Capital Management, LLC, where she managed institutional fixed income assets for pension funds, corporations and endowments. Prior to that position she was Managing Director at Harbor Capital. Mr. Buscone has been a Portfolio Manager since 2008 after having served as a trader at Breckinridge from 2002-2008. From 1992-2002 he was a Trader and Portfolio Manager for both taxable and tax-exempt portfolios at David L. Babson and Mellon Private Asset Management. Ms. Young joined Breckinridge in October 2008 as a member of the Credit Research Team and transitioned to Portfolio Management in March 2012. Prior to joining Breckinridge she was a credit analyst within the Public Finance Group at Assured Guaranty.

The Fixed Income Opportunity Portfolio: (From the Supplement filed on March 5, 2013) Effective immediately, Michael Rieger will no longer serve as a portfolio manager for The Fixed Income Opportunity Portfolio managed by Seix Investment Advisors, LLC (“Seix”).

 

  3. The following replaces the section of the Prospectus with respect to Seix under the “Portfolio Managers” section on page 56 of the Prospectus:

Seix: Michael Kirkpatrick and Brian Nold have managed the portion of the Portfolio allocated to Seix since November, 2007 and Vincent Flanagan has managed the Portfolio since February, 2013.

 

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  4. The following replaces the third paragraph under “Seix Investment Advisors LLC” of the “Specialist Manager Guide” on page 135 of the Prospectus:

Day-to-day high yield investment decisions for The Fixed Income Opportunity Portfolio are the responsibility of Michael Kirkpatrick, Brian Nold and Vincent Flanagan. Michael Kirkpatrick, Senior Portfolio Manager and Senior High Yield Research Analyst, focuses principally on the Flagship High Yield Portfolios in addition to a High Yield Unconstrained strategy. Prior to joining Seix in 2002, Mr. Kirkpatrick was a Senior Analyst at Oppenheimer Funds, Inc. covering the Telecommunications and Cable industries. Mr. Nold, Senior Portfolio Manager and Senior High Yield Research Analyst, focuses on a High Yield Unconstrained strategy in addition to the Flagship High Yield Portfolios. Before joining Seix in 2003, he was a High Yield Analyst at Morgan Stanley in Global High Yield Research. Vincent Flanagan, Portfolio Manager and Senior High Yield Research Analyst, is primarily focused on bank loans. Prior to joining Seix in 2006, Mr. Flanagan was the director of research for Assurant, Inc.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 68 of the Prospectus:

Mellon Capital: Mr. David C. Kwan, Ms. Zandra Zelaya, Mr. Lowell J. Bennett and Mr. Gregg Lee have co-managed the Portfolio since December, 2012.

The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 51 of the Prospectus:

Mellon Capital: Mr. David C. Kwan, Ms. Zandra Zelaya, and Mr. Lowell J. Bennett have co-managed the Portfolio since December, 2010 and Mr. Gregg Lee has managed the Portfolio since December, 2012.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio and The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

The following replaces the “Mellon Capital Management Corporation” section of the “Specialist Manager Guide” on page 134 of the Prospectus:

Mellon Capital Management Corporation (“Mellon Capital”) serves as a Specialist Manager for The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio. Mellon Capital, which was organized as a Delaware corporation in 1983, is headquartered at 50 Fremont Street, Suite 3900, San Francisco, CA 94105. Mellon Capital is a wholly-owned indirect subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”).

For its services to The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.12%. Effective September 1, 2012, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.06%. For its services to The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio, Mellon Capital receives a fee based on the average daily net asset value of that portion of the assets of the Portfolio managed by it, at an annual rate of 0.06%. During the fiscal year ended June 30, 2012 Mellon received fees of 0.12% of the average daily net assets for each portion of The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio allocated to Mellon.

Day-to-day investment decisions for the portions of The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio allocated to Mellon Capital are the responsibility of David C. Kwan, CFA Ms. Zandra Zelaya, CFA, and Mr. Gregg Lee, CFA. Mr. Kwan is a Managing Director, Fixed Income Management of Mellon Capital with 22 years of investment experience at the firm. He earned both a B.S. and an M.B.A. at the University of California at Berkeley. Ms. Zelaya is a Director of Fixed Income Management of Mellon Capital with 17 years of investment experience and 15 years at the firm. She earned a B.S. at California State University at Haward. Mr. Gregg Lee is a Vice President, Senior Portfolio Manager at Mellon Capital with 23 years of investment experience and 23 year at the firm. He earned a B.S. at the University of California at Davis.

As of June 30, 2012, Mellon Capital had assets under management totaling approximately $240 billion, which includes overlay strategies.

 

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The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on January 8, 2013) Effective January 8, 2013, the investment advisory relationship between the Trust and BlackRock Financial Management, Inc. (“BlackRock”) with respect to The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio has been terminated. Any and all references to BlackRock are hereby removed.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on December 11, 2012) At a meeting, held on December 4, 2012, the Board of Trustees (the “Board”) for HC Capital Trust (the “Trust”) approved the engagement of Mellon Capital Management Corporation (“Mellon Capital”) as an additional investment advisory organization (“Specialist Manager”) to manage a portion of the assets of The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio of the Trust.

1. The following replaces the “Annual Operating Expenses” section on page 65 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees

     0.11

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.19

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 19   

3 Years

   $ 61   

5 Years

   $ 107   

10 Years

   $     243   

2. The following supplements the “Principal Investment Risks” section on page 66 of the Prospectus:

 

 

Multi-Manager Risk – The risk that the Trust may be unable to (a) identify and retain Specialist Managers who achieve superior investment records relative to other similar investments, (b) pair Specialist Managers that have complementary investment styles, or (c) effectively allocate Portfolio assets among Specialist Managers to enhance the return and reduce the volatility that would typically be expected of any one management style. A multi-manager Portfolio may, under certain circumstances, incur trading costs that might not occur in a Portfolio that is served by a single Specialist Manager.

3. The following replaces the “Investment Subadvisers” section on page 68 of the Prospectus:

Blackrock and Mellon Capital are the Specialist Managers for the Portfolio.

4. The following supplements the “Specialist Managers” section under “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” on page 102 of the Prospectus:

 

The Mellon Capital Investment Selection Process    Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

 

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5. The following replaces the paragraph with respect to “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” under “More Information About Fund Investments and Risks” on page 116 of the Prospectus:

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio – The Portfolio is managed by two Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock and 100% Mellon Capital.

The Core Fixed Income Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 48 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.17

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.25

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 26   

3 Years

   $ 80   

5 Years

   $ 141   

10 Years

   $     318   

2. The following supplements the “Specialist Managers” section under “The Core Fixed Income Portfolio” on page 98 of the Prospectus:

 

The Mellon Capital Investment Selection Process   

Mellon Capital currently manages assets for the Portfolio using two separate and distinct strategies.

 

With respect to the portion of the Portfolio invested in investment grade mortgage-backed and asset-backed securities, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Government Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the government sector.

 

With respect to the portion of the Portfolio invested in securities issued or fully guaranteed by the U.S. Government, Federal Agencies or sponsored agencies, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

 

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3. The following replaces the paragraph with respect to “The Core Fixed Income Portfolio” under “More Information About Fund Investments and Risks” on page 116 of the Prospectus:

The Core Fixed Income Portfolio – The Portfolio is managed by three Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock, 66% Mellon Capital and 34% Seix.

The Fixed Income Opportunity Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 52 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.31

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.39

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 40   

3 Years

   $ 125   

5 Years

   $ 219   

10 Years

   $     493   

2. The following replaces the second paragraph under “Seix Investment Advisors LLC” in the Specialist Manager Guide on page135 of the Prospectus:

For its services to The Fixed Income Opportunity Portfolio Seix receives a fee, based on the average daily net asset value of the assets of the Portfolio under its management at an annual rate of 0.40% for the first $100 million of the Combined Assets (as defined below), 0.25% on the next $200 million of the Combined Assets, and 0.20% on the balance of the Combined Assets. For the purpose of computing Seix’s fee for The Fixed Income Opportunity Portfolio, the term “Combined Assets” shall mean the sum of (i) the net assets of the Portfolio; and (ii) the net assets of each other Hirtle Callaghan account to which Seix provides similar services. During the fiscal year ended June 30, 2012 Seix received a fee of 0.42% of the average daily net assets of that portion of The Fixed Income Opportunity Portfolio allocated to Seix.

PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.

 

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Supplement to Prospectus

Institutional Portfolios

HC Strategic Shares

Dated November 1, 2012

HC Capital Trust

The date of this Supplement is June 10, 2013

The Real Estate Securities Portfolio: Effective immediately, The Real Estate Securities Portfolio is closed to new investors.

The Commodity Returns Strategy Portfolio: Effective June 10, 2013, The Commodity Returns Strategy Portfolio’s classification changed from non-diversified to diversified. All references to the Portfolio are changed accordingly.

Institutional International Equity Portfolio:

1. The following replaces the first paragraph under the “Artisan Partners Limited Partnership” section of the “Specialist Manager Guide” on page 90 of the Prospectus:

Artisan Partners Limited Partnership (“Artisan”) serves as a Specialist Manager for The International Equity and The Institutional International Equity Portfolios. Artisan, the principal office of which is located at 875 E. Wisconsin Avenue, Suite 800, Milwaukee, WI 53202, has provided investment management services for international equity assets since 1995. As of June 30, 2012, Artisan managed total assets in excess of $64 billion, of which approximately $37 billion consisted of mutual fund assets. Artisan Partners is a limited partnership organized under the laws of Delaware. Artisan Partners is managed by its general partner, Artisan Investments GP LLC, a Delaware limited liability company wholly-owned by Artisan Partners Holdings LP (Artisan Partners Holdings). Artisan Partners Holdings is a limited partnership organized under the laws of Delaware whose sole general partner is Artisan Partners Asset Management Inc., a Delaware Corporation. Artisan Partners was founded in March 2009 and succeeded to the investment management business of Artisan Partners Holdings during 2009. Artisan Partners Holdings was founded in December 1994 and began providing investment management services in March 1995.

The Institutional International Equity Portfolio: (From the Supplement filed on April 25, 2013)

 

1. The following replaces the section of the Prospectus pertaining to Causeway Capital Management LLC under the “Portfolio Managers” section on page 28 of the Prospectus:

Causeway: Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng and Kevin Durkin have co-managed that portion of the Portfolio allocated to Causeway since November, 2009 and Conor Muldoon has co-managed that portion of the Portfolio allocated to Causeway since September, 2010. Foster Corwith and Alessandro Valentini have co-managed the portion of the Portfolio allocated to Causeway since April 2013.

2. The following replaces the third paragraph under the “Causeway Capital Management LLC” section of the “Specialist Manager Guide” on page 92 of the Prospectus:

Day-to-day management of those assets of The International Equity and Institutional International Equity Portfolios allocated to Causeway is the responsibility of Sarah H. Ketterer, Harry W. Hartford, James A. Doyle, Jonathan P. Eng, Kevin Durkin, Conor Muldoon, Foster Corwith and Alessando Valentini. Ms. Ketterer, Mr. Hartford, Mr. Doyle, Mr. Eng, and Mr. Durkin have been investment professionals with Causeway since 2001, Mr. Muldoon has been an investment professional with Causeway since 2003 and Messrs Corwith and Valentini have been investment professionals with the firm since 2006. Ms. Ketterer and Mr. Hartford were co-founders of Causeway in 2001, and serve as the firm’s chief executive officer and president, respectively. Ms. Ketterer and Mr. Hartford previously served as co-heads of the International and Global Value Equity Team of the Hotchkis and Wiley division of Merrill Lynch Investment Managers, L.P. (“Hotchkis and Wiley”). Messrs. Doyle, Eng, and Durkin, directors of Causeway, were also associated with the Hotchkis and Wiley International and Global Value Equity Team prior to joining Causeway in 2001. Mr. Muldoon, a director of Causeway, previously served as an investment consultant for Fidelity Investments as a liaison between institutional clients and investment managers within Fidelity. Mr. Corwith, a director and fundamental portfolio manager, previously served as a research associate at Deutsche Asset Management where he was

 

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responsible for researching consumer staple companies. Mr. Valentini, a director and fundamental portfolio manager, previously worked at Thornburg Investment Management, where he conducted fundamental research focusing on the European telecommunication and Canadian oil sectors.

The Real Estate Securities Portfolio: (From the Supplement filed on April 18, 2013)

Upon the recommendation of the Adviser, the Board of Trustees of HC Capital Trust has approved a modification of the Principal Investment Strategies of the Portfolio to allow the Portfolio to implement its real estate securities strategies by investing primarily in shares of other real estate-oriented investment companies, such as exchange-traded funds (“ETFs”). Accordingly, the following changes to the disclosure related to the Real Estate Securities Portfolio are effective April 26, 2013:

1. The following replaces the “Fees and Expenses” section on page 14 of the Prospectus:

Fees and Expenses

The fee tables below describe the fees and expenses that you may pay if you buy and hold HC Strategic Shares of the Portfolio.

Shareholder Fees

(fees paid directly from your investment)

 

Maximum Sales Charges

     None   

Maximum Redemption Fee

     None   

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.05

Other Expenses

     0.08

Acquired Fund Fees and Expense

     0.18

Total Annual Portfolio Operating Expenses

     0.31

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 32   

3 Years

   $ 100   

5 Years

   $ 174   

10 Years

   $     393   

2. The following supplements the “Principal Investment Strategies” disclosure on page 14 of the Prospectus:

The Portfolio may implement its principal investment strategy by investing up to 100% of its assets in exchange-traded funds, that themselves invest in real estate-related securities.

3. The following supplements the “Principal Investment Risks” disclosure on page 15 of the Prospectus:

 

   

Investment in Other Investment Companies Risk – As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares of investment companies, shareholders bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the other investment companies.

 

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Exchange-Traded Funds Risk – An investment by the Portfolio in ETFs generally presents the same primary risks as an investment in other investment companies. In addition, an ETF may be subject to the following: (1) a discount of the ETF’s shares to its net asset value; (2) failure to develop or maintain an active trading market for the ETF’s shares; (3) the listing exchange halting trading of the ETF’s shares; (4) failure of the ETF’s shares to track the referenced asset; and (5) holding troubled securities in the referenced index or basket of investments.

4. The following replaces the “Investment Adviser” and “Investment Subadvisor” sections on page 18 of the Prospectus:

Investment Adviser

HC Capital Solutions is the Portfolio’s investment adviser with responsibility for the management of the Portfolio’s assets, including all investments in other investment companies.

Portfolio Manager:

Thomas Cowhey, CFA has managed the Portfolio since April, 2013.

Investment Subadvisor

Wellington Management Company LLP (“Wellington Management”) and SSgA FM are the Specialist Managers for the Portfolio with responsibility for the management of the Portfolio’s assets that are invested directly in real estate securities.

Wellington Management: Bradford D. Stoesser has managed the Portfolio since September, 2010.

SSgA FM: John Tucker, CFA and Michael Feehily, CFA have not yet begun providing portfolio management services to the Portfolio.

5. The following supplements the “More Information About Fund Investments and Risks” disclosure related to the Real Estate Securities Portfolio on page 59 of the Prospectus:

The Portfolio may implement its investment strategy by investing in exchange traded investment companies, known as “ETFs,” that themselves invest in the equity and debt securities issued by real estate-related companies including real estate investment trusts (REITs). For more information on ETFs, see “Investments in Other Investment Companies” on page 79 of this Prospectus.

6. The following supplements the “Investments in Other Investment Companies” disclosure on page 79 of the Prospectus:

Additionally, the Real Estate Securities Portfolio may invest up to 100% of its assets in ETFs that invest in the securities of real estate related companies in reliance on provisions of the Investment Company Act that permit such investments so long as the investing fund, together with any affiliates, does not own more than 3% of the outstanding voting securities of the acquired fund. Under these provisions, the Real Estate Securities Portfolio is required to vote all proxies of the funds it owns in the same proportion as the vote of all other holders of such securities.

7. The following supplements the “Advisory Services – HC Capital Solutions” disclosure on page 79 of the Prospectus:

Mr. Thomas Cowhey, CFA acts as a portfolio manager for the Real Estate Securities Portfolio. Mr. Cowhey is the Chief Investment Strategist for the Advisor and has been with the Advisor since 2000.

The Fixed Income Opportunity Portfolio: (From the Supplement filed on March 5, 2013) Effective immediately, Michael Rieger will no longer serve as a portfolio manager for The Fixed Income Opportunity Portfolio managed by Seix Investment Advisors, LLC (“Seix”).

 

  1. The following replaces the section of the Prospectus with respect to Seix under the “Portfolio Managers” section on page 41 of the Prospectus:

Seix: Michael Kirkpatrick and Brian Nold have managed the portion of the Portfolio allocated to Seix since November, 2007 and Vincent Flanagan has managed the Portfolio since February, 2013.

 

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  2. The following replaces the third paragraph under “Seix Investment Advisors LLC” of the “Specialist Manager Guide” on page 97 of the Prospectus:

Day-to-day high yield investment decisions for The Fixed Income Opportunity Portfolio are the responsibility of Michael Kirkpatrick, Brian Nold and Vincent Flanagan. Michael Kirkpatrick, Senior Portfolio Manager and Senior High Yield Research Analyst, focuses principally on the Flagship High Yield Portfolios in addition to a High Yield Unconstrained strategy. Prior to joining Seix in 2002, Mr. Kirkpatrick was a Senior Analyst at Oppenheimer Funds, Inc. covering the Telecommunications and Cable industries. Mr. Nold, Senior Portfolio Manager and Senior High Yield Research Analyst, focuses on a High Yield Unconstrained strategy in addition to the Flagship High Yield Portfolios. Before joining Seix in 2003, he was a High Yield Analyst at Morgan Stanley in Global High Yield Research. Vincent Flanagan, Portfolio Manager and Senior High Yield Research Analyst, is primarily focused on bank loans. Prior to joining Seix in 2006, Mr. Flanagan was the director of research for Assurant, Inc.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 53 of the Prospectus:

Mellon Capital: Mr. David C. Kwan, Ms. Zandra Zelaya and Mr. Gregg Lee have co-managed the Portfolio since December, 2012.

The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

1. The following supplements the “Portfolio Managers” section on page 36 of the Prospectus:

Mellon Capital: Mr. David C. Kwan and Ms. Zandra Zelaya have co-managed the Portfolio since December, 2010 and Mr. Gregg Lee has managed the Portfolio since December, 2012.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio and The Core Fixed Income Portfolio: (From the Supplement filed on March 5, 2013)

The following replaces the “Mellon Capital Management Corporation” section of the “Specialist Manager Guide” on page 96 of the Prospectus:

Mellon Capital Management Corporation (“Mellon Capital”) serves as a Specialist Manager for The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio. Mellon Capital, which was organized as a Delaware corporation in 1983, is headquartered at 50 Fremont Street, Suite 3900, San Francisco, CA 94105. Mellon Capital is a wholly-owned indirect subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”).

For its services to The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.12%. Effective September 1, 2012, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.06%. For its services to The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio, Mellon Capital receives a fee based on the average daily net asset value of that portion of the assets of the Portfolio managed by it, at an annual rate of 0.06%. During the fiscal year ended June 30, 2012 Mellon received fees of 0.12% of the average daily net assets for each portion of The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio allocated to Mellon.

Day-to-day investment decisions for the portions of The Core Fixed Income Portfolio, The U.S. Government Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio allocated to Mellon Capital are the responsibility of David C. Kwan, CFA, Ms. Zandra Zelaya, CFA and Mr. Gregg Lee, CFA. Mr. Kwan is a Managing Director, Fixed Income Management of Mellon Capital with 22 years of investment experience at the firm. He earned both a B.S. and an M.B.A. at the University of California at Berkeley. Ms. Zelaya is a Director of Fixed Income Management of Mellon Capital with 17 years of investment experience and 15 years at the firm. She earned a B.S. at California State University at Haward. Mr. Gregg Lee is a Vice President, Senior Portfolio Manager at Mellon Capital with 23 years of investment experience and 23 year at the firm. He earned a B.S. at the University of California at Davis.

 

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As of June 30, 2012, Mellon Capital had assets under management totaling approximately $240 billion, which includes overlay strategies.

The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on January 8, 2013) Effective January 8, 2013, the investment advisory relationship between the Trust and BlackRock Financial Management, Inc. (“BlackRock”) with respect to The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio has been terminated. Any and all references to BlackRock are hereby removed.

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio: (From the Supplement filed on December 11, 2012) At a meeting, held on December 4, 2012, the Board of Trustees (the “Board”) for HC Capital Trust (the “Trust”) approved the engagement of Mellon Capital Management Corporation (“Mellon Capital”) as an additional investment advisory organization (“Specialist Manager”) to manage a portion of the assets of The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio of the Trust.

1. The following replaces the “Annual Operating Expenses” section on page 50 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees

     0.11

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.19

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. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 19   

3 Years

   $ 61   

5 Years

   $ 107   

10 Years

   $     243   

2. The following supplements the “Principal Investment Risks” section on page 51 of the Prospectus:

 

   

Multi-Manager Risk – The risk that the Trust may be unable to (a) identify and retain Specialist Managers who achieve superior investment records relative to other similar investments, (b) pair Specialist Managers that have complementary investment styles, or (c) effectively allocate Portfolio assets among Specialist Managers to enhance the return and reduce the volatility that would typically be expected of any one management style. A multi-manager Portfolio may, under certain circumstances, incur trading costs that might not occur in a Portfolio that is served by a single Specialist Manager.

3. The following replaces the “Investment Subadvisers” section on page 53 of the Prospectus:

Blackrock and Mellon Capital are the Specialist Managers for the Portfolio.

4. The following supplements the “Specialist Managers” section under “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” on page 70 of the Prospectus:

 

The Mellon Capital Investment Selection Process    Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

 

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5. The following replaces the paragraph with respect to “The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio” under “More Information About Fund Investments and Risks” on page 81 of the Prospectus:

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio – The Portfolio is managed by two Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock and 100% Mellon Capital.

The Core Fixed Income Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 33 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.17

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.25

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 26   

3 Years

   $ 80   

5 Years

   $ 141   

10 Years

   $     318   

2. The following supplements the “Specialist Managers” section under “The Core Fixed Income Portfolio” on page 66 of the Prospectus:

 

The Mellon Capital Investment Selection Process   

Mellon Capital currently manages assets for the Portfolio using two separate and distinct strategies.

 

With respect to the portion of the Portfolio invested in investment grade mortgage-backed and asset-backed securities, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Government Index. It begins by identifying and isolating the major components and sectors and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the government sector.

 

With respect to the portion of the Portfolio invested in securities issued or fully guaranteed by the U.S. Government, Federal Agencies or sponsored agencies, Mellon Capital employs a disciplined approach which seeks to gain exposure to securities and sectors like those contained in the Barclays Capital US Securitized Index. It begins by identifying and isolating the major components and sectors

 

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   and assessing the key characteristics of the index. After analyzing these factors, Mellon Capital Management then invests in securities designed to gain exposure to these different sectors, and that have characteristics that are similar to those which are found in the index. In this process, they also focus on relative value and issue specific risk in order to efficiently and cost effectively gain exposure to the securitized sector.

3. The following replaces the paragraph with respect to “The Core Fixed Income Portfolio” under “More Information About Fund Investments and Risks” on page 81 of the Prospectus:

The Core Fixed Income Portfolio – The Portfolio is managed by three Specialist Managers, each of whom is compensated in accordance with a different fee schedule. Although asset allocations and fees payable to the Specialist Managers may vary, the figures assume an actual allocation of assets at June 30, 2012 of 0% BlackRock, 66% Mellon Capital and 34% Seix.

The Fixed Income Opportunity Portfolio:

1. The following replaces the “Annual Operating Expenses” section on page 37 of the Prospectus:

Annual Operating Expenses

(expenses that you pay each year as a percentage of the value of your investment)

 

Management Fees (based on asset allocations among Specialist Managers, see “Advisory Services – Specialist Managers”)

     0.31

Other Expenses

     0.08

Total Annual Portfolio Operating Expenses

     0.39

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 the reinvestment of all dividends and distributions in shares of the Portfolio and that your investment has a 5% return each year and that the Portfolio’s operating expenses remain the same. Although your actual cost may be higher or lower, based on these assumptions, your costs would be:

 

1 Year

   $ 40   

3 Years

   $ 125   

5 Years

   $ 219   

10 Years

   $     493   

2. The following replaces the second paragraph under “Seix Investment Advisors LLC” in the Specialist Manager Guide on page 97 of the Prospectus:

For its services to The Fixed Income Opportunity Portfolio Seix receives a fee, based on the average daily net asset value of the assets of the Portfolio under its management at an annual rate of 0.40% for the first $100 million of the Combined Assets (as defined below), 0.25% on the next $200 million of the Combined Assets, and 0.20% on the balance of the Combined Assets. For the purpose of computing Seix’s fee for The Fixed Income Opportunity Portfolio, the term “Combined Assets” shall mean the sum of (i) the net assets of the Portfolio; and (ii) the net assets of each other Hirtle Callaghan account to which Seix provides similar services. During the fiscal year ended June 30, 2012 Seix received a fee of 0.42% of the average daily net assets of that portion of The Fixed Income Opportunity Portfolio allocated to Seix.

PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE.

 

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STATEMENT OF ADDITIONAL INFORMATION

HC Advisors Shares

November 1, 2012

As Supplemented June 10, 2013

HC CAPITAL TRUST

FIVE TOWER BRIDGE, 300 BARR HARBOR DRIVE, SUITE 500

WEST CONSHOHOCKEN, PA 19428-2970

This Statement of Additional Information is designed to supplement information contained in the Prospectus relating to HC Capital Trust (“Trust”). The Trust is an open-end, series, management investment company registered under the Investment Company Act of 1940, as amended (“Investment Company Act”). HC Capital Solutions serves as the overall investment adviser to the Trust under the terms of a discretionary investment advisory agreement. It generally oversees the services provided to the Trust. HC Capital Solutions is a separate operating division of Hirtle Callaghan & Co., LLC (the “Adviser”). This document although not a Prospectus, is incorporated by reference in its entirety in the Trust’s Prospectuses and should be read in conjunction with the Trust’s Prospectuses dated November 1, 2012. A copy of those Prospectuses is available by contacting the Trust at (800) 242-9596.

 

    

Ticker Symbol

The Value Equity Portfolio    HCVPX
The Institutional Value Equity Portfolio    HCEIX
The Growth Equity Portfolio    HCGWX
The Institutional Growth Equity Portfolio    HCIWX
The Small Capitalization Equity Portfolio    HCSAX
The Institutional Small Capitalization Equity Portfolio    HCISX
The Real Estate Securities Portfolio    HCRSX
The Commodity Returns Strategy Portfolio    HCCAX
The International Equity Portfolio    HCIAX
The Institutional International Equity Portfolio    HCITX
The Emerging Markets Portfolio    HCEPX
The Core Fixed Income Portfolio    HCFNX
The Fixed Income Opportunity Portfolio    HCFOX
The U.S. Government Fixed Income Securities Portfolio    HCUAX
The U.S. Corporate Fixed Income Securities Portfolio    HCXAX
The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio    HCAAX
The Short-Term Municipal Bond Portfolio    HCSTX

The Intermediate Term Municipal Bond Portfolio

The Intermediate Term Municipal Bond II Portfolio

  

HCIBX

HCBAX

This Statement of Additional Information does not contain all of the information set forth in the registration statement filed by the Trust with the Securities and Exchange Commission (“SEC”) under the Securities Act of 1933. Copies of the registration statement may be obtained at a reasonable charge from the SEC or may be examined, without charge, at its offices in Washington, D.C.

The Trust’s Annual Report to Shareholders dated June 30, 2012 and Semi-Annual Report dated December 31, 2011 accompanies this Statement of Additional Information and is incorporated herein by reference. The date of this Statement of Additional Information is November 1, 2012.


Table of Contents

TABLE OF CONTENTS

 

Statement of Additional Information Heading

   Page     

Corresponding Prospectus Heading

Management of the Trust    3      Management of the Trust
Further Information About the Trust’s Investment Policies    21      Investment Risks and Strategies
Investment Restrictions    53      Investment Risks and Strategies
Additional Purchase and Redemption Information    56      Shareholder Information
Portfolio Transactions and Valuation    56      Shareholder Information
Dividends, Distributions and Taxes    101      Shareholder Information
History of the Trust and Other Information    105      Management of Trust
Proxy Voting    108      N/A
Independent Registered Public Accounting Firm and Financial Statements    125      Financial Highlights
Ratings Appendix    126      N/A

 

2


Table of Contents

MANAGEMENT OF THE TRUST

GOVERNANCE. The Trust’s Board of Trustees (“Board”) currently consists of five members. A majority of the members of the Board are individuals who are not “interested persons” of the Trust within the meaning of the Investment Company Act; in the discussion that follows, these Board members are referred to as “Independent Trustees.” The remaining Board member is a senior officer of the Adviser and is thus considered an “interested person” of the Trust for purposes of the Investment Company Act. This Board member is referred to as an “Affiliated Trustee.” Each Trustee serves until the election and qualification of his or her successor, unless the Trustee sooner resigns or is removed from office.

Day-to-day operations of the Trust are the responsibility of the Trust’s officers, each of whom is elected by, and serves at the pleasure of, the Board. The Board is responsible for the overall supervision and management of the business and affairs of the Trust and of each of the Trust’s separate investment portfolios (each, a “Portfolio” and collectively, the “Portfolios”), including the selection and general supervision of those investment advisory organizations (“Specialist Managers”) retained by the Trust to provide portfolio management services to the respective Portfolios. The Board also may retain new Specialist Managers or terminate particular Specialist Managers, if the Board deems it appropriate to do so in order to achieve the overall objectives of the Portfolio involved. More detailed information regarding the Trust’s use of a multi-manager structure appears in this Statement of Additional Information under the heading “Management of the Trust: Multi-Manager Structure.”

OFFICERS AND AFFILIATED TRUSTEE. The table below sets forth certain information about the Trust’s Affiliated Trustee, as well as its executive officers.

 

NAME, ADDRESS, AND AGE

  

POSITION(S)

HELD WITH

TRUST

   TERM OF
OFFICE;
TERM

SERVED IN
OFFICE
   PRINCIPAL OCCUPATION(S)
DURING PAST 5 YEARS
   NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
OVERSEEN
   OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE**

Robert J. Zion*

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 50

   Trustee; President    Indefinite;

Trustee since

4/30/07;

President
since

6/12/2012

   Mr. Zion is currently the Chief
Operating Officer, Secretary
and a Principal of the Adviser.
He has been with the Adviser
for more than the past five
years.
   19    None

Colette Bull

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 42

   Vice President & Treasurer    Indefinite;

Since
6/12/2012

   Ms. Bull is currently a Vice
President of the Advisor. She
has been with the Adviser for
more than 5 years.
   19    None

Guy Talarico

Alaric Compliance Services, LLC

150 Broadway, Suite 302

New York, NY 10038

Age: 57

   Chief Compliance Officer    Indefinite;
Since
4/25/2013
   Mr. Talarico is the founder
and CEO of Alaric
Compliance Services LLC and
has been since the company’s
inception in 2004.
   19    NA

 

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Table of Contents

NAME, ADDRESS, AND AGE

  

POSITION(S)

HELD WITH

TRUST

   TERM OF
OFFICE; TERM
SERVED IN
OFFICE
   PRINCIPAL OCCUPATION(S)
DURING PAST 5 YEARS
   NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
OVERSEEN
   OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE**

Kristin Schantz

Citi Fund Services

3435 Stelzer Road

Columbus, OH 43219

Age: 32

   Secretary    Indefinite;
Since 12/10/09
   Ms. Schantz is a Vice President
and has been with Citi Fund
Services Ohio, Inc. since
January 2008. Prior to that she
was an Assistant Vice
President at Bank of America
Corporation from September
2006 to January 2008 and
Assistant Counsel at BISYS
Fund Services Ohio, Inc. from
October 2005 to September
2006.
   19    NA

 

 

* Mr. Zion may be deemed to be an “interested person,” of the Adviser as that term is defined by the Investment Company Act, as a result of his past or present positions with the Adviser or its affiliates.
** The information in this column relates only to directorships in companies required to file certain reports with the SEC under the various federal securities laws.

INDEPENDENT TRUSTEES. The following table sets forth certain information about the Independent Trustees.

 

NAME, ADDRESS, AND AGE

  

POSITION(S)

HELD WITH

TRUST

   TERM OF
OFFICE; TERM
SERVED IN
OFFICE
   PRINCIPAL OCCUPATION(S)
DURING PAST 5 YEARS
   NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
OVERSEEN
   OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE*

Jarrett Burt Kling

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 68

   Trustee    Indefinite; Since
7/20/95
   For more than the past five years
Mr. Kling has been a managing
director of CBRE Clarion
Securities, LLC, a registered
investment adviser.
   19   

Harvey G. Magarick

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 73

   Trustee    Indefinite; Since
7/01/04
   Mr. Magarick is retired. Prior to
June 3, 2004, he was a partner in
the accounting firm of BDO
Seidman, LLP.
   19    Atlas Energy LP

R. Richard Williams

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 67

   Trustee    Indefinite; Since
7/15/99
   Since 2000, Mr. Williams has
been the owner of Seaboard
Advisers (consulting services).
   19    Franklin Square
Energy and Power
Fund

Richard W. Wortham, III

Five Tower Bridge,

300 Barr Harbor Drive,

W. Conshohocken, PA 19428

Age: 74

   Trustee    Indefinite; Since
7/20/95
   Mr. Wortham is currently the
President of The Wortham
Foundation and has been a
Trustee for more than the past
five years.
   19    Oncor Electric
Delivery Company
LLC

 

 

* The information in this column relates only to directorships in companies required to file certain reports with the SEC under the various federal securities laws.

 

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The Independent Trustees identified in the table above have served together on the Trust’s Board for 8 years. Taken as a whole, the Board represents a broad range of business and investment experience, as well as professional skills. Mr. Magarick has extensive experience in public accounting, tax and internal controls and was previously a Partner with BDO Seidman, LLP. Mr. Kling, who holds a B. S. from the Wharton School of The University of Pennsylvania, has over 40 years of experience in investment management and as a co-founder of ING Real Estate Securities, LLC, has extensive experience in the distribution of investment products. Mr. Williams brings to the Board the experience of a long term business owner, having founded, owned and operated a company that became, during his tenure, the country’s largest distributor of certain industrial equipment, as well as a market leader in pharmaceutical, commercial construction and other business segments. Mr. Wortham has over three decades of executive management experience, having served as a Trustee of The Wortham Foundation, a private philanthropic foundation with assets of approximately $260 million. He is also a life trustee of the Museum of Fine Arts Houston, serving on the executive, finance, investment and audit committees, and is a director of a large electrical transmission and distribution company. The Affiliated Trustee, Mr. Zion, was a certified public accountant with Coopers & Lybrand LLP prior to joining the Hirtle Callaghan organization, has served in executive capacities with companies affiliated with Hirtle Callaghan & Co., LLC for more than ten years.

COMMITTEES OF THE BOARD OF TRUSTEES. The Board has established several committees to assist the Trustees in fulfilling their oversight responsibilities.

The Nominating Committee is responsible for the nomination of individuals to serve as Independent Trustees. The Nominating Committee, whose members consist of all of the Independent Trustees, did not meet during the fiscal year ended June 30, 2012. The Nominating Committee will consider persons submitted by security holders for nomination to the Board. Recommendations for consideration by the Nominating Committee should be sent to the Secretary of the Trust in writing, together with appropriate biographical information concerning each such proposed nominee, at the principal executive office of the Trust. When evaluating individuals for recommendation for Board membership, the Nominating Committee considers the candidate’s knowledge of the mutual fund industry, educational background and experience and the extent to which such experience and background would enable the Board to maintain a diverse mix of skills and qualifications. Additionally, the entire Board annually performs a self-assessment with respect to its current members, which includes a review of their backgrounds, professional experience, qualifications and skills.

The Audit Committee is responsible for overseeing the audit process and the selection of independent registered public accounting firms for the Trust, as well as providing assistance to the full Board in fulfilling its responsibilities as they relate to fund accounting, tax compliance and the quality and integrity of the Trust’s financial reports. The Audit Committee, whose members consist of all of the Independent Trustees, held 5 meetings during the fiscal year ended June 30, 2012. Mr. Magarick currently serves as the Audit Committee Chairman.

Compliance and Risk Oversight Process. The Trustees overall responsibility for identifying and overseeing the operational, business and investment risks inherent in the operation of the Trust is handled by the Board as a whole and by the Board’s Audit Committee, particularly with respect to valuation and accounting matters. To assist them in carrying out their oversight responsibilities, the Trustees receive, in connection with each of the Board’s regular quarterly meetings, regular reports from the Trust’s Administrator with respect to portfolio compliance, fund accounting matters and matters relating to the computation of the Trust’s net asset value per share. The Trustees also receive reports, at least quarterly, from the Trust’s Chief Compliance Officer or “CCO”. These reports, together with presentations provided to the Board at its regular meetings and regular compliance conference calls (normally monthly) among the Advisor, the CCO and the Chair of the Board’s Audit Committee, are designed to keep the Board informed with respect to the effectiveness of the Trust’s overall compliance program including compliance with stated investment strategies, and to help ensure that the occurrence of any event or circumstance that may have a material adverse affect on the Trust are brought promptly to the attention of the Board and that appropriate action is taken to mitigate any such adverse effect. Additionally, the full Board annually receives a report from the Trust’s CCO and both the full Board and, at the discretion of the Independent Trustees, the Independent Trustees separately meet with the CCO for the purpose of discussing the extent to which the Trust’s overall compliance program is reasonably designed to detect and prevent violations of the federal securities laws and assessing the effectiveness of the overall compliance program. Additionally, both the Board, and the Audit Committee (or, Audit Committee Chair) meet at least annually with the Trust’s independent public accounting firm. As indicated above, the Audit Committee is comprised solely of Independent Trustees and the Audit Committee and its Chair are regular participants in the compliance and risk oversight process. To date, the Board has not found it necessary to specifically identify a “lead trustee” or to elect, as the Board’s Chairman, an Independent Trustee, although the Board reserves the right to do so in the future.

COMPENSATION ARRANGEMENTS. Since January 1, 2011, each of the Independent Trustees has been entitled to receive from the Trust a fee of (i) $50,000 per year; (ii) an additional $10,000 for each regular and special in person Board meeting attended by him (regardless of whether attendance is in person or by telephone), plus reimbursement for reasonable out-of-pocket expenses incurred in connection with his attendance at such meetings; (iii) $2,500 for each Audit Committee Meeting attended in person or telephonically and (iv) $2,500 per each regular and special telephonic meeting attended by him, plus reimbursement for reasonable out-of-pocket expenses incurred in connection with his attendance at such meetings. Committee Chairs receive an additional $10,000 annual fee.

 

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The Affiliated Trustee and the Trust’s officers receive no compensation from the Trust for performing the duties of their respective offices. The table below shows the aggregate compensation received from the Trust by each of the Independent Trustees during the fiscal year ending June 30, 2012 (excluding reimbursed expenses).

 

NAME

   AGGREGATE
COMPENSATION
FROM

TRUST
     PENSION
RETIREMENT

BENEFITS  FROM
TRUST
   ESTIMATED BENEFITS
UPON RETIREMENT
FROM

TRUST
   TOTAL
COMPENSATION

FROM TRUST
 

Jarrett Burt Kling

   $ 112,500       none    none    $ 112,500   

Harvey G. Magarick

   $ 122,500       none    none    $ 122,500   

R. Richard Williams

   $ 112,500       none    none    $ 112,500   

Richard W. Wortham, III

   $ 112,500       none    none    $ 112,500   

TRUSTEE OWNERSHIP OF SECURITIES OF HC CAPITAL TRUST. The table below sets forth the extent of each Trustee’s beneficial interest in shares of the Portfolios as of December 31, 2011. For purposes of this table, beneficial interest includes any direct or indirect pecuniary interest in securities issued by the Trust and includes shares of any of the Trust’s Portfolios held by members of a Trustee’s immediate family. As of September 30, 2012, all of the officers and trustees of the Trust own, in the aggregate, less than one percent of the outstanding shares of the respective Portfolios of the Trust; officers and Trustees of the Trust may, however, be investment advisory clients of the Adviser and shareholders of the Trust.

 

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     ROBERT
J. ZION
*
   JARRETT
BURT
KLING
   HARVEY G.
MAGARICK
   R.
RICHARD
WILLIAMS
   RICHARD
W.
WORTHAM,
III
**

The Value Equity Portfolio

   d    d    d    e    a

The Institutional Value Equity Portfolio

   e    a    d    a    a

The Growth Equity Portfolio

   e    e    d    e    a

The Institutional Growth Equity Portfolio

   e    a    e    a    a

The Small Capitalization Equity Portfolio

   b    c    b    e    a

The Institutional Small Capitalization Equity Portfolio

   d    a    c    a    a

The Real Estate Securities Portfolio

   a    a    b    a    a

The Commodity Returns Strategy Portfolio

   a    c    d    e    a

The International Equity Portfolio

   d    e    d    e    a

The Institutional International Equity Portfolio

   e    a    e    a    a

The Emerging Markets Portfolio

   e    c    d    e    a

The Core Fixed Income Portfolio

   a    a    c    a    a

The Fixed Income Opportunity Portfolio

   a    a    e    a    a

The U.S. Government Fixed Income Securities Portfolio

   a    a    a    a    a

The U.S. Corporate Fixed Income Securities Portfolio

   a    a    a    a    a

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   a    a    a    a    a

The Short-Term Municipal Bond Portfolio

   a    a    c    a    a

The Intermediate Term Municipal Bond Portfolio

   a    d    e    a    a

The Intermediate Term Municipal Bond II Portfolio

   a    a    c    a    a

AGGREGATE DOLLAR RANGE OF TRUST SHARES

   e    e    e    e    a

NOTE:

a = None

b = $1—$10,000

c = $10,001—$50,000

 

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d = $50,001—$100,000

e = Over $100,000

 

 

* Mr. Zion is also a trustee of a Revocable Trust which held shares as of December 31, 2011 of between $10,001-$50,000 in The Intermediate Term Municipal Bond Portfolio, and also held shares as of December 31, 2011 of over $100,000 in each of The Value Equity Portfolio, The Growth Equity Portfolio, The International Equity Portfolio, and The Emerging Markets Portfolio. Mr. Zion disclaims beneficial ownership of the Trust.
** Mr. Wortham serves as a trustee for the Wortham Foundation which held shares as of December 31, 2011 of over $100,000 in each of The Emerging Markets Portfolio, The Fixed Income Opportunity Portfolio, The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio, The Institutional Small Capitalization Equity Portfolio and The Institutional International Equity Portfolio. Mr. Wortham has no beneficial interest in the Foundation.

MULTI-MANAGER STRUCTURE. As noted in the Prospectus, each of the Trust’s Portfolios is authorized to operate on a “multi-manager” basis. This means that a single Portfolio may be managed by more than one Specialist Manager. The multi-manager structure is generally designed to combine two or more investment styles. The goal of the multi-manager structure is to achieve a better rate of return with lower volatility than would typically be expected of any one management style. Its success depends upon the ability of the Adviser, under the oversight of the Board, to: (a) identify and retain Specialist Managers who have achieved and will continue to achieve superior investment records relative to selected benchmarks; (b) pair Specialist Managers that have complementary investment styles (e.g., top-down vs. bottom-up investment selections processes); (c) monitor Specialist Managers’ performance and adherence to stated styles; and (d) effectively allocate Portfolio assets among Specialist Managers. At present, the Value Equity, Growth Equity, Small Capitalization Equity, International Equity, Emerging Markets, Institutional Value Equity, Institutional Growth Equity, Institutional Small Capitalization Equity, Institutional International Equity, Fixed Income Opportunity, Core Fixed Income, Real Estate Securities, and Commodity Returns Strategy Portfolios each employ the multi-manager structure.

Engagement and Termination of Specialist Managers. The Board is responsible for making decisions with respect to the engagement and/or termination of Specialist Managers based on a continuing quantitative and qualitative evaluation of their skills and proven abilities in managing assets pursuant to specific investment styles. While superior performance is regarded as the ultimate goal, short-term performance by itself is not a significant factor in selecting or terminating Specialist Managers. From time to time, the Adviser may recommend, and the Board may consider, terminating the services of a Specialist Manager. The criteria for termination may include, but are not limited to, the following: (a) departure of key personnel from the Specialist Manager’s firm; (b) acquisition of the Specialist Manger by a third party; (c) change in or departure from investment style, or (d) prolonged poor performance relative to the relevant benchmark index.

The Board’s authority to retain Specialist Managers is subject to the provisions of Section 15(a) of the Investment Company Act. Section 15(a) prohibits any person from serving as an investment adviser to a registered investment company unless the written contract has been approved by the shareholders of that company. Rule 15a-4 under the Investment Company Act, however, provides for an exception from the provisions of Section 15(a). The rule permits an adviser to provide advisory services to an investment company before shareholder approval is obtained pursuant to the terms of an interim agreement in the event that a prior advisory contract is terminated by action of such company’s board; in such case, a new contract must be approved by such shareholders within 150 days of the effective date of the interim agreement, or such interim agreement will terminate. The Trust has relied upon the provisions of Rule 15a-4 from time to time, as more fully discussed in this Statement of Additional Information under the heading “Management of the Trust: Investment Advisory Arrangements.” The Board has authorized the Trust’s officers to request an order from the SEC that would exempt the Trust from the provisions of Section 15(a) and certain related provisions of the Investment Company Act. If issued, such an order would permit the Trust to enter into portfolio management agreements with Specialist Managers upon the approval of the Board but without submitting such contracts for the approval of the shareholders of the relevant Portfolio. The shareholders of each Portfolio have approved this structure. Unless otherwise permitted by law, the Board will not act in reliance upon such order with respect to any Portfolio unless the approval of the shareholders of that Portfolio is first obtained. The SEC has proposed a rule that, if adopted, would provide relief from Section 15(a) similar to that currently available only by SEC order. The Board may consider relying upon this rule, if adopted, in connection with the Trust’s multi-manager structure. There can be no assurance that the requested order will be issued by the SEC.

Allocation of Assets Among Specialist Managers. The Adviser is responsible for determining the level of assets that will be allocated among the Specialist Managers in those Portfolios that are served by two or more Specialist Managers. The Adviser and the Trust’s officers monitor the performance of both the overall Portfolio and of each Specialist Manager and, from time to time, may make changes in the allocation of assets to the Specialist Managers that serve a particular Portfolio. For example, a reallocation may be

 

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made in the event that a Specialist Manager experiences variations in performance as a result of factors or conditions that affect the particular universe of securities emphasized by that investment manager, as a result of personnel changes within the manager’s organization or in connection with the engagement of an additional Specialist Manager for a particular Portfolio.

INVESTMENT ADVISORY ARRANGEMENTS. The services provided to the Trust by the Adviser and by the various Specialist Managers are governed under the terms of written agreements, in accordance with the requirements of the Investment Company Act. Each of these agreements is described below.

The HC Capital Agreement. The services provided to the Trust by the Adviser, described above and in the Prospectus, are governed under the terms of two written agreements with the Trust (“HC Capital Agreements”).

Each HC Capital Agreement provides for an initial term of two years. Thereafter, each HC Capital Agreement remains in effect from year to year so long as such continuation is approved, at a meeting called for the purpose of voting on such continuance, at least annually (i) by the vote of a majority of the Board or the vote of the holders of a majority of the outstanding securities of the Trust within the meaning of Section 2(a)(42) of the Investment Company Act; and (ii) by a majority of the Independent Trustees, by vote cast in person. Each of the HC Capital Agreements may be terminated at any time, without penalty, either by the Trust or by the Adviser, upon sixty days written notice and will automatically terminate in the event of its assignment as defined in the Investment Company Act. The HC Capital Agreements permit the Trust to use the logos and/or trademarks of the Adviser. In the event, however, that the HC Capital Agreements are terminated, the Adviser has the right to require the Trust to discontinue any references to such logos and/or trademarks and to change the name of the Trust as soon as is reasonably practicable. The HC Capital Agreements further provide that the Adviser will not be liable to the Trust for any error, mistake of judgment or of law, or loss suffered by the Trust in connection with the matters to which the HC Capital Agreements relate (including any action of any officer of the Adviser or employee in connection with the service of any such officer or employee as an officer of the Trust), whether or not any such action was taken in reliance upon information provided to the Trust by the Adviser, except losses that may be sustained as a result of willful misfeasance, reckless disregard of its duties, bad faith or gross negligence on the part of the Adviser.

The dates of the Board and shareholder approvals of the HC Capital Agreements with respect to each Portfolio are set forth as follows:

 

AGREEMENT RELATING TO:

   SHAREHOLDERS    MOST RECENT
CONTRACT APPROVAL
BOARD

The Value Equity Portfolio

   December 27, 2006    March 13, 2012

The Institutional Value Equity Portfolio

   July 18, 2008    March 13, 2012

The Growth Equity Portfolio

   December 27, 2006    March 13, 2012

The Institutional Growth Equity Portfolio

   August 8, 2008    March 13, 2012

The Small Capitalization Equity Portfolio

   December 27, 2006    March 13, 2012

The Institutional Small Capitalization Equity Portfolio

   August 15, 2008    March 13, 2012

The Real Estate Securities Portfolio

   May 14, 2009    March 13, 2012

The Commodity Returns Strategy Portfolio

   June 2, 2010    March 13, 2012

The International Equity Portfolio

   December 27, 2006    March 13, 2012

The Institutional International Equity Portfolio

   November 20, 2009    March 13, 2012

The Emerging Markets Portfolio

   December 10, 2009    March 13, 2012

The Core Fixed Income Portfolio

   December 27, 2006    March 13, 2012

 

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AGREEMENT RELATING TO:

   SHAREHOLDERS    MOST RECENT
CONTRACT APPROVAL
BOARD

The Fixed Income Opportunity Portfolio

   December 27, 2006    March 13, 2012

The U.S. Government Fixed Income Securities Portfolio

   November 22, 2010    March 13, 2012

The U.S. Corporate Fixed Income Securities Portfolio

   November 22, 2010    March 13, 2012

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   November 22, 2010    March 13, 2012

The Short-Term Municipal Bond Portfolio

   December 27, 2006    March 13, 2012

The Intermediate Term Municipal Bond Portfolio

   December 27, 2006    March 13, 2012

The Intermediate Term Municipal Bond II Portfolio

   July 13, 2010    March 13, 2012

Portfolio Management Contracts with Specialist Managers. The provision of portfolio management services by the various Specialist Managers is governed by individual investment advisory contracts (each, a “Portfolio Management Contract”) between the relevant Specialist Manager and the Trust. Each of the Portfolio Management Contracts includes a number of similar provisions. Each Portfolio Management Contract provides that the named Specialist Manager will, subject to the overall supervision of the Board, provide a continuous investment program for the assets of the Portfolio to which such contract relates, or that portion of such assets as may be, from time, to time allocated to such Specialist Manager. Under their respective contracts, each Specialist Manager is responsible for the provision of investment research and management of all investments and other instruments and the selection of brokers and dealers through which securities transactions are executed. Each of the contracts provides that the named Specialist Manager will not be liable to the Trust for any error of judgment or mistake of law on the part of the Specialist Manager, or for any loss sustained by the Trust in connection with the purchase or sale of any instrument on behalf of the named Portfolio, except losses that may be sustained as a result of willful misfeasance, reckless disregard of its duties, bad faith or gross negligence on the part of the named Specialist Manager. Each of the Portfolio Management Contracts provides that it will remain in effect for an initial period of two years and then from year to year so long as such continuation is approved, at a meeting called to vote on such continuance, at least annually: (i) by the vote of a majority of the Board or the vote of the holders of a majority of the outstanding securities of the Trust within the meaning of Section 2(a)(42) of the Investment Company Act; and (ii) by a majority of the Independent Trustees, by vote cast in person, and further, that the contract may be terminated at any time, without penalty, either by the Trust or by the named Specialist Manager, in each case upon sixty days’ written notice. Each of the Portfolio Management Contracts provides that it will automatically terminate in the event of its assignment, as that term is defined in the Investment Company Act.

The Portfolio Management Contracts and the Portfolios to which they relate are listed on the following pages:

 

PORTFOLIO

  

SPECIALIST MANAGER

   SERVED
PORTFOLIO

SINCE
   MOST RECENT
CONTRACT

SHAREHOLDERS
   MOST RECENT
CONTRACT

BOARD

The Value Equity Portfolio

   Institutional Capital LLC (“ICAP”)(1)    Inception
(August 25, 1995)
   September 29, 2006    June 12, 2012
   SSgA Funds Management, Inc. (“SSgA FM”)    July 2, 2001    July 27, 2001    September 11, 2012
   AllianceBernstein L.P. (“AllianceBernstein”)    December 24, 2008    December 5, 2008    June 12, 2012

The Institutional Value Equity Portfolio

   ICAP    Inception

(July 18, 2008)

   July 18, 2008    June 12, 2012
   SSgA FM    Inception

(July 18, 2008)

   July 18, 2008    September 11, 2012
   AllianceBernstein    December 24, 2008    December 5, 2008    June 12, 2012
   Pacific Investment Management Company LLC (“PIMCO”)    April 22, 2009    December 5, 2008    June 12, 2012

 

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PORTFOLIO

  

SPECIALIST MANAGER

   SERVED
PORTFOLIO SINCE
   MOST RECENT
CONTRACT
APPROVAL

SHAREHOLDERS
   MOST RECENT
CONTRACT
APPROVAL

BOARD

The Growth Equity Portfolio

   Jennison Associates LLC (“Jennison”)    August 25, 1995    July 21, 1995    June 12, 2012
   SSgA FM    July 2, 2001    July 27, 2001    September 11, 2012
   Sustainable Growth Advisers (“SGA”)    May 22, 2006    May 15, 2006    June 12, 2012

The Institutional Growth Equity Portfolio

   Jennison    Inception

(August 8, 2008)

   August 8, 2008    June 12, 2012
   SSgA FM    Inception

(August 8, 2008)

   August 8, 2008    September 11, 2012
   SGA    Inception

(August 8, 2008)

   August 8, 2008    June 12, 2012
   PIMCO    April 22, 2009    December 5, 2008    June 12, 2012

The Small Capitalization Equity Portfolio

   IronBridge Capital Management L.P. (“IronBridge”)    November 1, 2004    May 30, 2008    September 11, 2012
   Frontier Capital Management Company, LLC (“Frontier”)    Inception
(September 5, 1995)
   December 16, 1999    September 11, 2012
   Pzena Investment Management, LLC (“Pzena”)    April 12, 2010    August 27, 2009    September 11, 2012
   SSgA FM    September 29, 2009    August 27, 2009    September 11, 2012
   Cupps Capital Management, LLC (“Cupps”)    *    June 6, 2011    September 11, 2012

The Institutional Small Capitalization Equity Portfolio

   IronBridge    Inception

(August 15, 2008)

   August 15, 2008    September 11, 2012
   Frontier    Inception

(August 15, 2008)

   August 15, 2008    September 11, 2012
   Pzena    April 12, 2010    August 27, 2009    September 11, 2012
   SSgA FM    September 29, 2009    August 27, 2009    September 11, 2012
   Cupps Capital Management, LLC (“Cupps”)    June 17, 2011    June 6, 2011    September 11, 2012

The Real Estate Securities Portfolio

   Wellington Management Company, LLP (“Wellington Management”)    May 21, 2009    May 14, 2009    December 4, 2012
   SSgA FM    *    September 23, 2011    September 11, 2012

The Commodity Returns Strategy Portfolio

   Wellington Management    Inception

(June 8, 2010)

   June 2, 2010    December 4, 2012
   PIMCO    Inception

(June 8, 2010)

   June 2, 2010    June 12, 2012
   SSgA FM    *    September 23, 2011    September 11, 2012

The International Equity Portfolio

   Capital Guardian Trust Company (“CapGuardian”)    April 28, 2000    May 30, 2008    December 4, 2012
   Artisan Partners Limited Partnership (“Artisan Partners”)    July 23, 1999    May 30, 2008    December 4, 2012

 

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PORTFOLIO

  

SPECIALIST MANAGER

   SERVED
PORTFOLIO
SINCE
   MOST RECENT
CONTRACT
APPROVAL
SHAREHOLDERS
   MOST RECENT
CONTRACT
APPROVAL

BOARD
   Causeway Capital Management LLC (“Causeway”)    May 22, 2006    May 15, 2006    December 4, 2012
   SSgA FM    *    December 18, 2009    September 11, 2012

The Institutional International Equity Portfolio

   CapGuardian    Inception
(November 20, 2009)
   November 20, 2009    December 4, 2012
   Artisan    Inception

(November 20, 2009)

   November 20, 2009    December 4, 2012
   Causeway    Inception

(November 20, 2009)

   November 20, 2009    December 4, 2012
   Lazard Asset Management LLC (“Lazard”)    September 27, 2011    September 23, 2011    December 4, 2012
   SSgA FM    *    November 20, 2009    September 11, 2012

The Emerging Markets Portfolio

   SSgA FM (Active)    Inception

(December 10, 2009)

   December 10, 2009    September 11, 2012
   The Boston Company Asset Management LLC (“TBCAM”)    March 16, 2010    December 10, 2009    December 4, 2012
   SSgA FM (Passive)    *    December 10, 2009    September 11, 2012

The Core Fixed Income Portfolio

   Mellon Capital Management Corporation (“Mellon Capital”)    December 6, 2010    November 30, 2010    March 13, 2012
   Seix Investment Advisors LLC (“Seix”)    December 6, 2010    November 30, 2010    March 13, 2012

The Fixed Income Opportunity Portfolio

   Seix(3)    December 18, 2006    April 30, 2007    March 13, 2012
   PIMCO    *    January 25, 2010    June 12, 2012
   Fort Washington Investment Advisors, Inc. (“Fort Washington”)    *    April 30, 2012    March 13, 2012

The U.S. Government Fixed Income Securities Portfolio

   Mellon Capital    December 6, 2010    November 22, 2010    March 13, 2012

The U.S. Corporate Fixed Income Securities Portfolio

   Seix    December 6, 2010    November 22, 2010    March 13, 2012

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   Mellon Capital    January 8, 2013    Not Applicable    December 4, 2012

The Short-Term Municipal Bond Portfolio

   Breckinridge Capital Advisors, Inc. (“Breckinridge”)    Inception

(March 1, 2006)

   February 28, 2006    March 13, 2012

The Intermediate Term Municipal Bond Portfolio

   Standish Mellon Asset Management Company LLC (“Standish”)    December 5, 2008    February 6, 2009    March 13, 2012

 

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PORTFOLIO

  

SPECIALIST MANAGER

  

SERVED

PORTFOLIO

SINCE

  

MOST RECENT
CONTRACT

APPROVAL
SHAREHOLDERS

  

MOST RECENT
CONTRACT

APPROVAL

BOARD

The Intermediate Term Municipal Bond II Portfolio

   Breckinridge   

Inception

(July 13, 2010)

   July 13, 2010    March 13, 2012

 

 

* As of the date of this statement of additional information, the Specialist Manager had not yet begun providing investment management services to the applicable Portfolios.
(1) ICAP or its predecessor has served as a Specialist Manager for The Value Equity Portfolio since its inception.
(2) BlackRock or its predecessor has served as a Specialist Manager for The Core Fixed Income Portfolio since September 24, 2001.
(3) Seix or its predecessor has served as a Specialist Manager for The Fixed Income Opportunity Portfolio since December 18, 2006.

INVESTMENT ADVISORY FEES: The following table sets forth the advisory fees received by the Adviser from each of the Portfolios, calculated at an annual rate of 0.05% of each of the Portfolio’s average daily net assets, for services rendered during the periods indicated (amounts in thousands).

 

     FISCAL YEAR
ENDED
     FISCAL YEAR
ENDED
    FISCAL YEAR
ENDED
 
   June 30, 2012      June 30, 2011     June 30, 2010  

The Value Equity Portfolio

   $ 283       $ 252      $ 256   

The Institutional Value Equity Portfolio

   $ 446       $ 411      $ 280   

The Growth Equity Portfolio

   $ 360       $ 352      $ 388   

The Institutional Growth Equity Portfolio

   $ 531       $ 525      $ 377   

The Small Capitalization Equity Portfolio

   $ 62       $ 67      $ 113   

The Institutional Small Capitalization Equity Portfolio

   $ 91       $ 96      $ 98   

The Real Estate Securities Portfolio

   $ 67       $ 116      $ 75   

The Commodity Returns Strategy Portfolio

   $ 255       $ 119      $ 3 (a) 

The International Equity Portfolio

   $ 561       $ 565      $ 703   

The Institutional International Equity Portfolio

   $ 888       $ 867      $ 442 (b) 

The Emerging Markets Portfolio

   $ 284       $ 235      $ 84 (c) 

The Core Fixed Income Portfolio

   $ 53       $ 110      $ 178   

The Fixed Income Opportunity Portfolio

   $ 264       $ 222      $ 186   

The U.S. Government Fixed Income Securities Portfolio

   $ 133       $ 75 (d)      *   

The U.S. Corporate Fixed Income Securities Portfolio

   $ 109       $ 59 (d)      *   

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   $ 126       $ 71 (d)      *   

The Short-Term Municipal Bond Portfolio

   $ 15       $ 18      $ 17   

The Intermediate Term Municipal Bond Portfolio

   $ 237       $ 261      $ 279   

The Intermediate Term Municipal Bond II Portfolio

   $ 36       $ 30 (e)      *   

 

* The Portfolio was not operational during the period.
(a) For the period June 8, 2010 (commencement of operations) through June 30, 2010.

 

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(b) For the period November 20, 2009 (commencement of operations) through June 30, 2010.
(c) For the period December 10, 2009 (commencement of operations) through June 30, 2010.
(d) For the period December 6, 2010 (commencement of operations) through June 30, 2011.
(e) For the period July 13, 2010 (commencement of operations) through June 30, 2011.

INVESTMENT ADVISORY FEES: SPECIALIST MANAGERS. In addition to the fees paid by the Trust to the Adviser, each of the Portfolios pays a fee to its Specialist Manager(s). For each Portfolio, the Specialist Managers receive a fee based on a specified percentage of that portion of the Portfolio’s assets allocated to that Specialist Manager. The rate at which these fees are calculated is set forth in the Trust’s Prospectuses.

SPECIALIST MANAGER FEES. In addition to the fees paid by the Trust to the Adviser, each of the Portfolios pays a fee to its Specialist Manager(s). For each Portfolio, the Specialist Managers receive a fee based on a specified percentage of that portion of the Portfolio’s assets allocated to that Specialist Manager. The rate at which these fees are calculated is set forth in the Trust’s Prospectuses. The following table sets forth the actual investment advisory fee received from the specified Portfolio by each of its respective Specialist Managers for services rendered during each of the Trust’s last three fiscal years (amounts in thousands):

 

          ACTUAL FEES EARNED FOR FISCAL  
          YEAR ENDED JUNE 30  
PORTFOLIO    SPECIALIST MANAGER    2012      2011      2010  

The Value Equity Portfolio

   ICAP(1)    $  263       $ 398       $ 413   
   SSgA FM(2)    $ 139       $ 75       $ 73   
   AllianceBernstein(3)    $ 374       $ 508       $ 600   

The Institutional Value Equity Portfolio

   ICAP(1)    $ 458       $ 710       $ 519   
   SSgA FM(2)    $ 202       $ 75       $ 37   
   AllianceBernstein(3)    $ 511       $ 744       $ 603   
   PIMCO(17)    $ 143       $ 333       $ 252   

The Growth Equity Portfolio

   Jennison(4)    $ 529       $ 670       $ 719   
   SSgA FM(2)    $ 122       $ 64       $ 73   
   SGA(5)    $ 737       $ 974       $  1,055   

The Institutional Growth Equity Portfolio

   Jennison(4)    $ 667       $ 889       $ 683   
   SSgA FM(2)    $ 148       $ 58       $ 19   
   SGA(5)    $ 875       $  1,281       $  1,009   
   PIMCO(17)    $ 456       $ 458       $ 347   

The Small Capitalization Equity Portfolio

   Frontier(6)    $ 120       $ 137       $ 259   
   Sterling Johnston Capital Management. L.P. (“Sterling Johnston”)(7)    $ —         $ 58       $ 296   
   Mellon Capital(8)    $ —         $ —         $ 66   
   IronBridge(9)    $ 241       $ 299       $ 566   
  

Geewax & Partners LLC

(“Geewax”)(10)

   $ —         $ —         $ 32   
   Pzena(11)    $ 228       $ 218       $ 49   

 

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         ACTUAL FEES EARNED FOR FISCAL  
         YEAR ENDED JUNE 30  
PORTFOLIO    SPECIALIST MANAGER   2012     2011     2010  
   SSgA FM(2)   $ 26      $ 50      $ 38   
   Cupps(23)   $ —          —          —     

The Institutional Small Capitalization Equity Portfolio

   Frontier(6)   $ 157      $ 174      $ 170   
   Geewax (10)   $ —        $ —        $ 27   
   Sterling Johnston(7)   $ —        $ 89      $ 269   
   Mellon Capital(8)   $ —        $ —        $ 73   
   IronBridge(9)   $ 361      $ 428      $ 484   
   Pzena(11)   $ 366      $ 354      $ 77   
   SSgA FM(2)   $ 19      $ 50      $ 37   
   Cupps(23)   $ 268      $ 9        —     

The Real Estate Securities Portfolio

   Wellington
Management
(1 2 )
  $ 911      $  1,536      $  1,014   
   SSgA FM(2)     *     *     *

The Commodity Returns Strategy Portfolio

   Wellington Management

(Commodity)(1 2)

  $ 701      $ 109      $ —     
   Wellington Management (Global

Natural Resources)(12)

  $  1,689      $  1,834      $ 53   
   PIMCO(17)   $ 446      $ 33      $ —     
   SSgA FM(2)   $ 76        *     *

The International Equity Portfolio

   CapGuardian(13)   $  1,298      $  1,621      $  1,598   
   Artisan(14)   $  1,559      $  1,259      $  2,051   
   Causeway(15)   $  1,514      $  1,767      $  2,155   
   SSgA FM(2)   $ 42      $ —        $ —     

The Institutional International Equity Portfolio

   CapGuardian(13)   $  1,777      $  2,383      $  1,275   
   Artisan(14)   $  2,407      $  2,120      $ 994   
   Causeway(15)   $  2,276      $  2,667      $  1,363   
   Lazard(24)   $ 559        *     *
   SSgA FM(2)   $ 63      $ —        $ —     

The Emerging Markets Portfolio

   SSgA FM (Active)(2)   $  2,684      $  3,025      $  1,180   
   TBCAM(16)   $  1,498      $ 458      $ 74   
   SSgA FM (Passive)(2)   $ 7      $ —        $ —     

The Core Fixed Income Portfolio

   BlackRock(18)   $ 67      $ 357      $ 721   
   Seix(19)   $ 78      $ 44      $ —     
   Mellon Capital (22)   $ 37      $ 24      $ —     

 

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         ACTUAL FEES EARNED FOR FISCAL  
         YEAR ENDED JUNE 30  
PORTFOLIO    SPECIALIST MANAGER   2012     2011     2010  

The Fixed Income Opportunity Portfolio

   Seix(19)   $  2,104      $  1,838      $  1,572   
   PIMCO(17)   $ —        $ —        $ —     
   Fort Washington(25)   $ 51        *     *

The U.S. Government Fixed Income Securities Portfolio

   Mellon Capital(22)   $ 319      $  179        *   

The U.S. Corporate Fixed Income Securities Portfolio

   Seix(19)   $ 481      $  262        *   

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   Blackrock(18)   $ 426      $  237        *   
   Mellon Capital(22)     *     *     *

The Short-Term Municipal Bond Portfolio

   Breckinridge(20)   $ 38      $ 45      $ 42   

The Intermediate Term Municipal Bond Portfolio

   Standish(21)   $ 941      $  1,044      $ 1,116   

The Intermediate Term Municipal Bond II Portfolio

   Breckinridge(20)   $ 91      $ 74        *   

 

 

* The Intermediate Term Municipal Bond II Portfolio commenced operations on July 13, 2010; The U.S. Government Fixed Income Securities Portfolio, The U.S. Corporate Fixed Income Securities Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio each commenced operations on December 6, 2010.
** The Specialist Manager had not yet begun providing portfolio management services to the Portfolio.
(1) For its services to The Value Equity and The Institutional Value Equity Portfolios, ICAP is compensated at an annual rate of 0.35% of the average net assets of the respective Portfolio assigned to ICAP.
(2) With respect to The Value Equity, The Institutional Value Equity, The Growth Equity and The Institutional Growth Equity Portfolios, SSgA FM is compensated at an annual rate of 0.04% of the average net assets of the respective Portfolio assigned to SSgA FM.

SSgA FM became a Specialist Manager to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolios on August 27, 2009 and began managing assets for the Portfolios on September 29, 2009. With respect to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolio, SSgA FM is compensated at an annual rate of 0.04% of the average net assets of the respective Portfolio assigned to SSgA FM.

With respect to the passively managed portion of The International Equity Portfolio, The Institutional International Equity Portfolio and The Commodity Returns Strategy Portfolio, SSgA FM is compensated at an annual rate of 0.06% of the average net assets of the respective Portfolio. SSgA FM had not begun managing assets of The Commodity Returns Strategy Portfolio as of the date of this Statement of Additional Information.

 

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With respect to the passively managed portion of The Real Estate Securities Portfolio, SSgA FM is compensated at an annual rate of 0.12% of the average net assets of the respective Portfolio. SSgA FM had not begun managing assets of The Real Estate Securities Portfolio as of the date of this Statement of Additional Information.

With respect to the actively managed portion of The Emerging Markets Portfolio assigned to SSgA FM, SSgA FM is compensated at an annual rate of 0.85% for the first $50 million of average net assets, 0.75% for the next $50 million in such assets and 0.70% of such assets in excess of $100 million of the average net assets of the Portfolio assigned to SSgA FM.

With respect to passive investment strategy for The Emerging Markets Portfolio, SSgA FM is compensated at an annual rate of 0.16% of the average net assets of the respective Portfolio.

 

(3) AllianceBernstein began serving as a Specialist Manager to The Value Equity and The Institutional Value Equity Portfolios on December 5, 2008 and began managing assets for the Portfolios on December 24, 2008. AllianceBernstein is compensated at an annual rate of 0.38% of the first $300 million in total Combined Assets (see the Specialist Manager section of the Prospectus for the definition of Combined Assets) and 0.37% on such Combined Assets over $300 million. Pursuant to a Fee Waiver Agreement dated October 16, 2009 and the Amendments to the Fee Waiver Agreement dated December 16, 2010, June 30, 2011 and October 1, 2012, AllianceBernstein has contractually agreed to waive the portion of the fee to which it is entitled that exceeds 0.25% of the average daily net assets of the Combined Assets, for the period October 1, 2009 to September 30, 2011 and it will waive that portion of the fee to which it is entitled that exceeds 0.31% of the Portfolio’s average daily net asset value of the Combined Assets for the period from October 1, 2011 through September 30, 2013. Numbers shown reflect contractual fee waivers for the period October 1, 2009 to June 30, 2012.
(4) For its services to The Growth Equity and The Institutional Growth Equity Portfolios, Jennison is compensated for it services to each Portfolio, at an annual rate of 0.75% on the first $10 million of Combined Assets (see the Specialist Manager section of the Prospectus for the definition of Combined Assets), 0.50% on the next $30 million of such Combined Assets; 0.35% of the next $25 million of such Combined Assets; 0.25% on the next $335 million of such Combined Assets; 0.22% of the next $600 million of such Combined Assets; 0.20% on the next $4 billion of such Combined Assets; and 0.25% on the balance of such Combined Assets; subject to a maximum annual fee of 0.30% of the average daily net assets of the portion of the Portfolios allocated to Jennison.
(5) For its services to The Growth Equity and The Institutional Growth Equity Portfolios, SGA is compensated at an annual rate of 0.35% of the average net assets of the respective Portfolios assigned to SGA.
(6) For its services to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolios, Frontier is compensated at an annual rate of 0.45% of the average net assets of the respective Portfolios assigned to Frontier.
(7) For its services to The Small Capitalization Equity Portfolio and beginning with the inception of The Institutional Small Capitalization Equity Portfolio, Sterling Johnston was compensated at an annual rate of 0.75% of the average net assets of the respective Portfolios assigned to Sterling Johnston. Sterling Johnston was terminated as a Specialist Manager to each Portfolio as of November 10, 2010.
(8) For its services to The Small Capitalization Equity Portfolio and beginning with the inception of The Institutional Small Capitalization Equity Portfolio, Mellon Capital was compensated at an annual rate of 0.30% of the average net assets of the respective Portfolios assigned to Mellon Capital. Mellon Capital was terminated as a Specialist Manager to each Portfolio as of March 26, 2010.
(9) For its services to the Small Capitalization Equity Portfolio and beginning with the inception of The Institutional Small Capitalization Equity Portfolio, IronBridge is compensated at an annual rate of 0.95% of the average net assets of the respective Portfolios assigned to IronBridge.
(10) Geewax or its predecessor has served as a Specialist Manager for The Small Capitalization Equity Portfolio since April 1, 1998. Formerly known as Geewax, Terker & Co., (“Geewax Terker”) the firm served pursuant to a Portfolio Management Contract between Geewax Terker and the Trust first approved by shareholders of The Small Capitalization Equity Portfolio on June 15, 1998. Geewax was terminated as a Specialist Manager to each Portfolio as of October 19, 2009. For its services to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolios, Geewax was entitled to receive a fee calculated at an annual rate of 0.30% of the average net assets of the respective Portfolios assigned to Geewax. Numbers shown reflect voluntary fee waivers.

 

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(11) Pzena became a Specialist Manager to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolios on August 27, 2009 and began managing assets for the Portfolios on April 12, 2010. For its services to The Small Capitalization Equity and The Institutional Small Capitalization Equity Portfolios, Pzena is compensated at an annual rate of 1.00% of the average net assets of the respective Portfolio assigned to Pzena.
(12) For its services to The Real Estate Securities Portfolio, Wellington Management is compensated at an annual rate of 0.75% on the first $50 million of the average daily net Combined Assets (see the Specialist Manager section of the Prospectus for the definition of Combined Assets) and 0.65% on Combined Assets over $50 million. Wellington Management became a Specialist Manager to The Commodity Returns Strategy Portfolio on June 2, 2010 and began managing assets of the Portfolio on June 8, 2010. With respect to The Commodity Returns Strategy Portfolio, for assets managed in its Global Natural Resources strategy, Wellington Management receives a fee at an annual rate of 0.85% of the average daily net assets of that portion of the Portfolio’s assets allocated to such strategy so long as there are at least $50 million in assets present in such account and 1.00% if less than $50 million are present in the account. Wellington Management has waived the $50 million minimum assets level for the first six months of the Portfolio’s operations. For assets managed in its Commodity strategy, Wellington Management receives a fee at an annual rate of 0.75% of the average daily net assets of that portion of the Portfolio’s assets allocated to such strategy.
(13) For its services to The International Equity Portfolio and beginning with the inception of The Institutional International Equity Portfolio, CapGuardian is compensated at an annual rate of 0.70% for the first $25 million of the average of the month-end net asset values of the CapGuardian account during the quarter, 0.55% for the next $25 million, 0.425% for the next $200 million in such assets and 0.375% for those assets in excess of $250 million. There is a minimum annual fee of $312,500 based upon an account size of $50 million. The following fee discounts will be applied based upon the total annualized aggregate fees (include other assets managed by CapGuardian); 5% discount on fees from $1.25 million to $4 million; 7.5% discount on fees from $4 million to $8 million; 10% discount on fees from $8 million to $12 million; and 12.5% discount on fees over $12 million. When the total aggregate fees exceed $3 million, before discounts, fee break points are to be eliminated and the Portfolios will pay a fee at an annual rate of 0.375% on all assets in the Portfolios managed by CapGuardian.
(14) For its services to The International Equity Portfolio and beginning with the inception of The Institutional International Equity Portfolio, Artisan is compensated at an annual rate of 0.47% of the average net assets of the respective Portfolios allocated to Artisan, so long as the combined assets of the Portfolios are greater than $500 million. If the combined assets of the Portfolios are reduced to $500 million or less, Artisan is compensated at an annual rate of 0.80% of average net assets for the first $50 million of the respective Portfolio assets allocated to Artisan, 0.60% for the next $50 million in such assets, and 0.70% for such assets over $100 million.
(15) Causeway is compensated at an annual rate of 0.45% of the average net assets of The International Equity and The Institutional International Equity Portfolios allocated to Causeway.
(16) For its services to The Emerging Markets Portfolio, TBCAM is compensated at an annual rate of 0.90% of average net assets for the first $50 million in Portfolio assets, 0.85% for the next $50 million in such assets, 0.70% for the next $100 million in such assets and 0.60% for such assets over $200 million.
(17) For its services to The Institutional Value Equity Portfolio and The Institutional Growth Equity Portfolio, PIMCO is compensated at an annual rate of 0.25% of the average net assets of each Portfolio assigned to PIMCO. Shareholders of The Fixed Income Opportunity Portfolio approved a Portfolio Management Agreement between PIMCO and the Trust with respect to The Fixed Income Opportunity Portfolio on January 25, 2010. As of the date of this statement of additional information, PIMCO had not begun providing portfolio management services to The Fixed Income Opportunity Portfolio. PIMCO entered into an agreement to serve as a Specialist Manager to The Commodity Returns Strategy Portfolio on June 2, 2010 and began managing assets on June 8, 2010. With respect to The Commodity Returns Strategy Portfolio, PIMCO is compensated at an annual rate of 0.49% of that portion of the Portfolio allocated to PIMCO.
(18) For its services to The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio, BlackRock is entitled to receive a fee of 0.175% of the average daily net assets of the first $200 million of the Combined Assets (as defined below) of that portion of the Portfolio allocated to BlackRock and 0.15% of those Combined Assets exceeding $200 million. For purposes of computing BlackRock’s fee for the two Portfolios, the term “Combined Assets” shall mean the consolidated total amount of the assets managed by BlackRock in each of The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio and certain other assets managed by BlackRock for clients of Hirtle Callaghan and Co., LLC. Effective January 8, 2013, the investment advisory relationship between the Trust and BlackRock Financial Management, Inc. with respect to The Core Fixed Income Portfolio and The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio has been terminated.

 

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(19) For its services to The Fixed Income Opportunity Portfolio Seix receives a fee, based on the average daily net asset value of the assets of the Portfolio under its management at an annual rate of 0.40% for the first $100 million of the Combined Assets (as defined below), 0.25% on the next $200 million of the Combined Assets, and 0.20% on the balance of the Combined Assets. For the purpose of computing Seix’s fee for The Fixed Income Opportunity Portfolio, the term “Combined Assets” shall mean the sum of (i) the net assets of the Portfolio; and (ii) the net assets of each other Hirtle Callaghan account to which Seix provides similar services. For its services to The Core Fixed Income Portfolio and The U.S. Corporate Fixed Income Securities Portfolio, Seix receives a fee, based on the average daily net asset value of the assets of the Portfolios under its management at an annual rate of 0.25% of the first $100 million in such Combined Assets (as defined below) of that portion of the Portfolio allocated to Seix and 0.20% of for those Combined Assets exceeding $100 million. For purposes of computing Seix’s fee for the two Portfolios, the term “Combined Assets” shall mean the consolidated total amount of the assets managed by Seix in each of The Core Fixed Income Portfolio and The U.S. Corporate Fixed Income Securities Portfolio.
(20) For it services to The Intermediate Term Municipal Bond II Portfolio and The Short Term Municipal Bond Portfolio, Breckinridge is compensated at an annual rate of 0.125% of the average net assets of each Portfolio. Breckinridge became a Specialist Manager and began providing investment management serves to The Intermediate Term Municipal Bond II Portfolio on July 13, 2010.
(21) For its services to The Intermediate Term Municipal Bond Portfolio, Standish is compensated at the annual rate of 0.25% for the first $100 million of the “Combined Assets” of that portion of the Portfolio allocated to Standish and 0.15% of those Combined Assets (as defined below) exceeding $100 million, subject to a maximum annual fee of 0.20% of the average daily of net assets of the Portfolio. For the purposes of computing Standish’s fee for the Portfolio, the term “Combined Assets” shall mean the consolidated total amount of the assets managed by Standish in The Intermediate Term Municipal Bond Portfolio and certain other assets managed by Standish for clients of Hirtle Callaghan and Co., LLC.
(22) For it services to The Core Fixed Income Portfolio and The U.S. Government Fixed Income Securities Portfolio, Mellon Capital is compensated at an annual rate of 0.12% of the average net assets of the Portfolio. Effective September 1, 2012, Mellon Capital receives a fee, based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.06%. For its services to The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio Mellon Capital receives a fee based on the average daily net asset value of that portion of the assets of the Portfolios managed by it, at an annual rate of 0.06%.
(23) For its services to The Small Capitalization Equity Portfolio and The Institutional Small Capitalization Equity Portfolio, Cupps receives a fee based on the average daily net asset value of that portion of each Portfolio allocated to it, at an annual rate of 0.85%.
(24) For its services to The Institutional International Equity Portfolio, Lazard receives at the annual rate of 0.45% of the average daily net assets of the first $100 million 0.40% on assets between $100 million and $250 million and 0.375% on the excess over $250 million of that portion of the assets of the Portfolio that may, from time to time be allocated to Lazard, Lazard had not begun managing assets of The Institutional International Equity Portfolio as of the date of this Statement of Additional Information.
(25) For its services to The Fixed Income Opportunity Portfolio, Fort Washington receives a fee at the annual rate of 0.40% of the first $25 million of the Combined Assets (as defined below) that may, from time to time, be allocated to it by the Adviser, 0.375% of the next $25 million, 0.3375% of the next $50 million, 0.25% of the next $100 million and 0.20% on all assets allocated to Fort Washington if the average daily net assets exceeds $200 million. For the purposes of computing Fort Washington’s fee for the Portfolio, the term “Combined Assets” shall mean the consolidated total amount of the assets managed by Fort Washington in The Fixed Income Opportunity Portfolio and certain other assets managed by Fort Washington for clients of Hirtle Callaghan and Co., LLC.

ADMINISTRATION, DISTRIBUTION, AND RELATED SERVICES. Citi Fund Services Ohio, Inc. (“Citi”), 3435 Stelzer Road, Columbus, Ohio 43219 has been retained, pursuant to a separate Administrative Services Contract with the Trust, to serve as the Trust’s administrator. Citi performs similar services for mutual funds other than the Trust. Citi is owned by Citibank, N.A. Citibank, N.A. and its affiliated companies are wholly owned subsidiaries of Citigroup Inc., a publicly held company (NYSE: C).

 

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Services performed by Citi include: (a) general supervision of the operation of the Trust and coordination of services performed by the various service organizations retained by the Trust; (b) regulatory compliance, including the compilation of information for documents and reports furnished to the SEC and corresponding state agencies; (c) assistance in connection with the preparation and filing of the Trust’s registration statement and amendments thereto; and (d) maintenance of the Trust’s registration in the various states in which shares of the Trust are offered. Pursuant to separate contracts, Citi or its affiliates also serve as the Trust’s transfer and dividend disbursing agent, as well as the Trust’s accounting agent and receives fees for such services. For its services, Citi receives a single all-inclusive fee (“Omnibus Fee”). The Omnibus Fee, which is computed daily and paid monthly in arrears, is calculated at an annual rate of 0.054% of the Portfolios’ average daily net assets up to $6 billion; and 0.005% of the Portfolios’ average daily net assets in excess of $6 billion.

For the fiscal years ended June 30, 2010, 2011 and 2012 Citi, as Administrator received administration fees in the following amounts for each of the Portfolios (amounts in thousands):

 

    

FISCAL YEAR

ENDED

    

FISCAL YEAR

ENDED

    FISCAL YEAR
ENDED
 
     June 30, 2012      June 30, 2011     June 30, 2010  

The Value Equity Portfolio

   $ 206       $ 188      $ 229   

The Institutional Value Equity Portfolio

   $ 325       $ 308      $ 242   

The Growth Equity Portfolio

   $ 260       $ 263      $ 348   

The Institutional Growth Equity Portfolio

   $ 383       $ 393      $ 328   

The Small Capitalization Equity Portfolio

   $ 45       $ 50      $ 105   

The Institutional Small Capitalization Equity Portfolio

   $ 66       $ 72      $ 88   

The Real Estate Securities Portfolio

   $ 48       $ 87      $ 63   

The Commodity Returns Strategy Portfolio

   $ 184       $ 87      $ 2 (a) 

The International Equity Portfolio

   $ 405       $ 423      $ 649   

The Institutional International Equity Portfolio

   $ 641       $ 651      $ 372 (b) 

The Emerging Markets Portfolio

   $ 204       $ 175      $ 67 (c) 

The Core Fixed Income Portfolio

   $ 38       $ 86      $ 157   

The Fixed Income Opportunity Portfolio

   $ 189       $ 166      $ 164   

The U.S. Government Fixed Income Securities Portfolio

   $ 96       $ 53 (d)      *   

The U.S. Corporate Fixed Income Securities Portfolio

   $ 79       $ 42 (d)      *   

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   $ 91       $ 50 (d)      *   

The Short-Term Municipal Bond Portfolio

   $ 11       $ 13      $ 15   

The Intermediate Term Municipal Bond Portfolio

   $ 171       $ 197      $ 246   

The Intermediate Term Municipal Bond II Portfolio

   $ 26         22 (e)      *   

 

 

* The Portfolio had not commenced operations during the fiscal year.
(a) For the period June 8, 2010 (commencement of operations) through June 30, 2010.
(b) For the period November 20, 2009 (commencement of operations) through June 30, 2010.
(c) For the period December 10, 2009 (commencement of operations) through June 30, 2010.
(d) For the period December 6, 2010 (commencement of operations) through June 30, 2011.
(e) For the period July 13, 2010 (commencement of operations) through June 30, 2011.

Under a Compliance Services Agreement between the Trust and Citi, Citi provides infrastructure and support in implementing the written policies and procedures comprising the Trust’s compliance program. This includes providing support services to the Chief Compliance Officer (“CCO”), and assisting in preparing or providing documentation for the Trust’s CCO, to deliver to the Board.

 

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Unified Financial Securities, Inc. (“Unified”) serves as the Trust’s principal underwriter pursuant to an agreement approved by the Board on March 13, 2012. Unified is a wholly-owned subsidiary of Huntington Bancshares, Inc. Because shares of the Trust’s Portfolios are available only to clients of the Adviser and financial intermediaries that have established a relationship with the Adviser, the services to be provided by Unified are limited. Unified will receive an annual fee of $50,000 for performing the services listed under its agreement. The offices of the principal underwriter are located at 2960 North Meridian St., Suite 300, Indianapolis, IN, 46208. None of Unified’s duties under its agreement are primarily intended to result in the sale of Trust shares.

Alaric Compliance Services LLC (“Alaric”), 800 Third Ave., 11th Floor, New York, NY, 10022 provides CCO services to the Trust and its Portfolios pursuant to a Compliance Services Agreement. Alaric makes an Alaric employee available to serve as the CCO for the Trust. The CCO develops the reports for the Board, makes findings and conducts reviews pertaining to the Trust’s compliance program and related policies and procedures of the Trust’s service providers.

State Street Bank and Trust Company is the Trust’s custodian and is an affiliate of SSgA FM, which serves as a Specialist Manager for the Value Equity, Growth Equity, Small Capitalization Equity, International Equity, Emerging Markets, Institutional Value Equity, Institutional Growth Equity, Institutional Small Capitalization Equity, Institutional International Equity, Real Estate Securities and Commodity Returns Strategy Portfolios. The custodian is responsible for the safekeeping of the domestic and foreign assets of each of the Trust’s Portfolios. The custodian is compensated at the rate of 0.01% of the first $2 billion, 0.0075% of the next $3 billion, and 0.005% of the assets in excess of $5 billion of the Trust’s domestic assets, 0.0225% of the Trust’s foreign assets in developed countries. With respect to securities from emerging markets, the custodian is compensated at rates ranging from 0.07% to 0.50% depending upon the particular market in question. The offices of the custodian are located at State Street Financial Center, 1 Lincoln Street, Boston, MA 02111.

HC Advisors Shares Marketing and Service Plan. Under the Trust’s Marketing and Service Plan (the “12b-1 Plan), the Trust can pay to the Adviser a fee of up to 0.25% annually of the average daily net assets attributable to HC Advisors Shares. The fee is not tied exclusively to actual expenses incurred by the Adviser in performing the services set forth below and the fee may exceed then such expenses. The Plan Fee shall be calculated daily based upon the average daily net assets of each Portfolio attributable to such Portfolio’s HC Advisors Shares, and such fee shall be charged only to such HC Advisors Shares.

The fee is intended to compensate the Adviser for expenses associated with the (i) oversight and coordination of those organizations, including the Administrator, Transfer Agent, Fund Accounting Agent and principal underwriter (collectively, “Service Organizations”) retained by the Trust in connection with the distribution of shares of the HC Advisors Shares to Third Party Institutions that will, in turn, hold shares of one or more of the HC Advisors Shares for the benefit of their Discretionary Clients; and (ii) the provision of shareholder services to such Third Party Institutions. Such oversight, coordination and shareholder services may include, but are not limited to, the following: (1) services associated with the provision of prospectuses, statements of additional information, any supplements thereto and shareholder reports relating to the HC Advisors Shares and to be provided to Third Party Institutions; (2) obtaining information and providing explanations to Third Party Institutions (and, if requested to do so by a Third Party Institution that would be permitted to acquire shares of the HC Advisors Shares as outlined in the Section 1 and if acceptable to the Adviser, to Discretionary Clients of such institutions) regarding the investment objectives and policies of the respective Portfolios, as well as other information appropriate information about the HC Advisors Shares and the Portfolios; (3) coordination and oversight of the accounting and record-keeping processes as they relate to the HC Advisors Shares and responding in inquires from Third Party Institutions that are holder of record of shares of HC Advisors Shares through “f/b/o” or “omnibus accounts” and coordination of administrative services for the HC Advisors Shares (e.g. in connection with proxy solicitations; distribution of periodic shareholders reports); and compliance with applicable regulations as they related to HC Advisors Shares (e.g. Rule 22c-2 and anti-money laundering procedures); (4) any other activity that the Board determines is primarily intended to result in the sale of shares of HC Advisors Shares or to provide appropriate services to a Third Party Institution.

The 12b-1 Plan was approved by the Board on December 10, 2009 and not operational during the most recent fiscal year. Accordingly, no payments under the 12b-1 Plan were made by the Trust during the last fiscal year.

FURTHER INFORMATION ABOUT THE TRUST’S INVESTMENT POLICIES

As stated in the Prospectuses, the Trust currently offers nineteen portfolios, each of which are presented in this Statement of Additional Information, each with its own investment objectives and policies. These portfolios are: The Equity Portfolios —The Value Equity, Growth Equity, Small Capitalization Equity, Real Estate Securities, International Equity, Emerging Markets Portfolios and Commodity Returns Strategy Portfolios; The Institutional Equity Portfolios—The Institutional Value Equity, Institutional Growth Equity, Institutional Small Capitalization Equity, Institutional International Equity; U.S. Government Fixed Income Securities, U.S.

 

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Corporate Fixed Income Securities and U.S. Mortgage/Asset Backed Fixed Income Securities Portfolios; and The Income Portfolios — The Core Fixed Income, Fixed Income Opportunity, Short-Term Municipal Bond, Intermediate Term Municipal Bond and Intermediate Term Municipal Bond II Portfolios.

The following discussion supplements the prospectus discussion of the investment risks associated with the types of investments in which the Portfolios are entitled to invest. The table below summarizes these investments. The table is, however, only a summary list and is qualified in its entirety by the more detailed discussion included in the Prospectuses and in this Statement of Additional Information.

Further, as indicated in the Prospectuses, that portion of the assets of the Value Equity, Growth Equity, Small Capitalization Equity, International Equity, Institutional Value Equity, Institutional Growth Equity, Institutional Small Capitalization, Institutional International Equity, Real Estate Securities and Commodity Related Securities Portfolios (“Index Accounts”) that have been or may be allocated to SSgA FM and the indexing strategy that SSgA FM has been retained to provide, may be invested exclusively in securities included in the benchmark index associated with those Portfolios, respectively, provided that SSgA FM is authorized to and may use certain derivative instruments solely for the purpose of gaining market exposure consistent with such index strategy and provided further that the Index Accounts may temporarily hold non-index names due to corporate actions (i.e., spin-offs, mergers, etc.). SSgA FM has also been allocated portions of The Emerging Markets Portfolio to manage with both an active management and a passive or index-based strategy. With respect to the “index-based” mandate, SSgA FM may be invested exclusively in securities included in the benchmark index associated with that Portfolio, provided that SSgA FM is authorized to and may use certain derivative instruments solely for the purpose of gaining market exposure consistent with such index strategy and provided further that the Index Accounts may temporarily hold non-index names due to corporate actions (i.e., spin-offs, mergers, etc.).

Additionally, to enable The Commodity Returns Strategy Portfolio to achieve its investment objective through commodity, economic and investment cycles, the Portfolio seeks to augment its equity returns by reinforcing the Specialist Managers’ commodity views via exposure to commodity-linked structured notes. The Portfolio may also anticipate future investments in equities by investing in options and futures contracts. The Portfolio may focus on the securities of particular issuers or industries within the commodity-related industries in which the Portfolio invests, or in particular countries or regions, at different times. The Portfolio intends to gain exposure to the commodity markets in part by investing a portion of its assets in two wholly-owned subsidiaries organized under the laws of the Cayman Islands (the “Subsidiaries”). Among other investments, the Subsidiaries are expected to invest in commodity-linked derivative instruments, such as swaps and futures. The Subsidiaries have the same investment objective and will generally be subject to the same fundamental, non-fundamental and certain other investment restrictions as the Portfolio; however, the Subsidiaries (unlike the Portfolio) may invest without limitation in commodities, commodity-linked swap agreements and other commodity linked derivative instruments as well as make short sales of securities, maintain a short position or purchase securities on margin within the context of a total portfolio of investments designed to achieve the Portfolio’s objectives. The Portfolio and the Subsidiaries may test for compliance with certain investment restrictions on a consolidated basis. The Subsidiaries must, however, comply with the asset segregation requirements (described elsewhere in the SAI) with respect to its investments in commodity-linked swaps and other commodity-linked derivatives as well as short sales. By investing in the Subsidiaries, the Portfolio is indirectly exposed to the risks associated with the Subsidiaries’ investments.

 

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The Equity and Institutional Equity Portfolios

 

Investment

Instrument/Strategy

   Value   Growth   Small
Cap
  Real
Estate
  Int’l   Emerging
Markets
  Inst.
Value
   Inst.
Growth
   Inst.
Small
Cap
  Inst.
Int’l
  Commodity

ADRs, EDRs and GDRs

   x   x   x   x   x   x   x    x    x   x   x

Agencies

   *   *   *   *   *   *   x    x    *   *   x

Asset-Backed Securities

   -   -   -   -   -   -   x    x    -   -   x

Cash Equivalents

   *   *   *   *   *   *   x    x    *   *   x

Collateralized Mortgage Obligations

   -   -   -   -   -   -   x    x    -   -   x

Commercial Paper

   *   *   *   *   *   *   x    x    *   *   x

Commodity-Linked Derivatives

   -   -   -   -   -   -   -    -    -   -   x

Common Stock

   x   x   x   x   x   x   x    x    x   x   x

Convertibles

   x   x   x   x   x   x   x    x    x   x   x

Corporates

   -   -   -   -   -   -   x    x    -   -   x

Depositary Receipts

   x   x   x   x   x   x   x    x    x   x   x

Emerging Markets Securities

   x   x   x   x   x   x   x    x    x   x   x

Floaters

   *   *   *   -   *   *   x    x    *   *   x

Foreign Currency

   -   -   -   x   x   x   x    x    -   x   x

Foreign Equity (US $)

   x   x   x   x   x   x   x    x    x   x   x

Foreign Equity (non-US $)

   x   x   x   x   x   x   x    x    x   x   x

Foreign Fixed-Income Securities

   -   -   -   -   -   -   x    x    -   -   x

Forwards

   **   **   **   x   **   **   x    x    **   **   x

Futures

   **   **   **   **   **   **   x    x    **   **   x

High Yield Debt Securities

   -   -   -   x   -   -   -    -    -   -   -

Investment Companies

   x   x   x   x   x   x   x    x    x   x   x

Investment Grade Debt Securities

   -   -   -   x   -   -   x    x    -   -   x

Money Market Funds

   x   x   x   x   x   x   x    x    x   x   x

Mortgage-Backed Securities

   -   -   -   x   -   -   x    x    -   -   x

 

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Investment

Instrument/Strategy

   Value   Growth   Small
Cap
  Real
Estate
  Int’l   Emerging
Markets
  Inst.
Value
  Inst.
Growth
  Inst.
Small
Cap
  Inst.
Int’l
  Commodity

Mortgage Securities

   -   -   -   -   -   -   x   x   -   -   x

Municipals

   -   -   -   -   -   -   x   x   -   -   x

Options

   **   **   **   x   **   **   x   x   **   **   x

Preferred Stock

   x   x   x   x   x   x   x   x   x   x   x

REITs

   x   x   x   x   x   x   x   x   x   x   x

Repurchase Agreements

   *   *   *   *   *   *   x   x   *   *   x

Reverse Repurchase Agreements

   *   *   *   *   *   *   x   x   *   *   x

Rights

   x   x   x   x   x   x   x   x   x   x   x

Securities Lending

   x   x   x   x   x   x   x   x   x   x   x

Short Sales

   **   **   **   **   **   **   **   **   **   **   **

Step-Up Bonds

   -   -   -   -   -   -   x   x   -   -   x

Stripped Mortgage-Backed Securities

   -   -   -   -   -   -   x   x   -   -   x

Structured Notes

   x   x   x   -   x   x   x   x   x   x   x

Swaps

   x   x   x   -   x   x   x   x   x   x   x

TIPS

   -   -   -   -   -   -   x   x   -   -   x

U.S. Governments

   *   *   *   *   *   *   x   x   *   *   x

Warrants

   x   x   x   x   x   x   x   x   x   x   x

When-Issued Securities

   x   x   x   x   x   x   x   x   x   x   x

Yankees and Eurobonds

   -   -   -   -   -   -   x   x   -   -   x

Zero Coupon Agencies

   -   -   -   -   -   -   x   x   -   -   x

 

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The Income Portfolios:

 

Investment

Instrument/Strategy

   Core
Fixed
   Fixed
Inc.

Oppy.
   U.S.
Govt.
   U.S.
Corporate
   U.S.
Mortgage/Asset
Backed
   Short-
Term
   Interm.    Intermediate
Term II

Agencies

   x    x    x    x    x    x    x    x

Asset-Backed Securities

   x    x    -    -    x    x    x    x

Brady Bonds

   x    x    -    -    -    -    -    -

Cash Equivalents

   x    x    x    x    x    x    *    *

Collateralized Bond Obligations

   -    x    -    -    x    -    -    -

Collateralized Debt Obligations

   -    x    -    -    x    -    -    -

Collateralized Loan Obligations

   -    x    -    -    x    -    -    -

Collateralized Mortgage Obligations

   x    x    -    -    x    -    -    -

Commercial Paper

   x    x    x    x    x    x    *    *

Commodity-Linked Derivatives

   -    -    -    -    -    -    -    -

Convertibles

   x    x    -    -    -    -    -    -

Corporates

   x    x    -    x    -    -    -    -

Depositary Receipts

   x    x    -    x    x    -    -    -

Emerging Markets Securities

   -    x    -    -    -    -    -    -

Floaters

   x    x    -    -    -    -    -    x

Foreign Currency

   x    x    -    x    -    -    -    -

Foreign Equity (US $)

   -    x    -    -    -    -    -    -

Foreign Equity (non-US $)

   -    x    -    -    -    -    -    -

Foreign Fixed Income Securities

   x    x    -    -    -    -    -    -

Mortgage Securities

   x    x    -    -    x    x    x    x

Forwards

   x    x    -    -    -    -    -    -

Futures

   x    x    -    -    x    x    -    -

High Yield Securities

   x    x    -    -    -    -    -    -

Inverse Floaters

   x    x    -    -    -    -    -    -

Investment Companies

   x    x    x    x    x    x    x    x

Loan (Participations and Assignments)

   -    x    -    -    x    x    -    -

Municipals

   x    x    -    x    -    x    x    x

Options

   x    x    -    -    x    x    -    -

 

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Investment

Instrument/Strategy

   Core
Fixed
  Fixed
Inc.

Oppy.
  U.S.
Govt.
  U.S.
Corporate
  U.S.
Mortgage/Asset
Backed
  Short-
Term
  Interm.   Intermediate
Term II

Preferred Stock

   x   x   -   x   -   -   -   -

REITS

   -   x   -   -   -   -   -   -

Repurchase Agreements

   *   *   *   *   *   *   *   *

Reverse Repurchase Agreements

   *   *   *   *   *   *   *   *

Rights

   x   x   -   -   -   -   -   -

Stripped Mortgage-Backed Securities

   x   x   -   -   x   -   -   -

Securities Lending

   x   x   x   x   x   x   x   x

Short Sales

   **   **   **   **   **   **   **   **

Step-Up Bonds

   x   x   -   -   -   -   -   -

Structured Investments

   x   x   -   x   -   x   x   x

Structured Notes

   x   x   -   x   -   x   x   x

Swaps

   x   x   -   -   x   x   x   x

TIPs

   x   x   x   x   -   x   x   x

U.S. Governments

   x   x   x   x   x   x   x   x

Warrants

   -   x   -   -   -   -   -   -

When-Issued Securities

   x   x   -   -   -   x   x   x

Yankees and Eurobonds

   x   x   -   x   -   -   -   -

Zero Coupons Agencies

   x   x   x   x   x   x   -   -

 

x Allowable investment
- Not an allowable investment
* Money market instruments for cash management or temporary purposes
** For hedging purposes

FOREIGN INVESTMENTS.

FOREIGN SECURITIES AND FOREIGN GOVERNMENT SECURITIES. American Depositary Receipts (“ADRs”) are dollar-denominated receipts generally issued in registered form by domestic banks that represent the deposit with the bank of a security of a foreign issuer. ADRs, which are publicly traded on U.S. exchanges and in the over-the-counter markets. Generally, they are issued in registered form, denominate in U.S. dollars, and designed for use in the U.S. securities markets. The Equity and Institutional Equity Portfolios are permitted to invest in ADRs. Additionally, these portfolios may invest in European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”). EDRs are similar to ADRs but are issued and traded in Europe. Both EDRs and GDRs may be issued in bearer form and denominated in currencies other than U.S. dollars, and are generally designed for use in securities markets outside the U.S. For purposes of the Trust’s investment policies, ADRs, EDRs and GDRs are deemed to have the same classification as the underlying securities they represent. Thus, an ADR, EDR or GDR representing ownership of common stock will be treated as common stock. ADR, EDR or GDR programs may be sponsored or unsponsored. The depositary receipts are securities that demonstrate ownership interests in a security or pool of securities that have been placed with a ‘depository.’ These depositary receipts may be sponsored or unsponsored. Depositary receipts may or may not be denominated in the same currency as the underlying securities. Unsponsored programs are subject to certain risks. In contrast to sponsored programs, where the foreign issuer of the underlying security works with the depository institution to ensure a centralized source of information about the underlying

 

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company, including any annual or other similar reports to shareholders, dividends and other corporate actions, unsponsored programs are based on a service agreement between the depository institution and holders of ADRs, EDRs or GDRs issued by the program; thus, investors bear expenses associated with certificate transfer, custody and dividend payments. In addition, there may be several depository institutions involved in issuing unsponsored ADRs, EDRs or GDRs for the same underlying issuer. Such duplication may lead to market confusion because there would be no central source of information for buyers, sellers and intermediaries, and delays in the payment of dividends and information about the underlying issuer or its securities could result. For other depositary receipts, the depository may be foreign or a U.S. entity, and the underlying securities may have a foreign or U.S. issuer.

The foreign government securities in which certain Portfolios may invest generally consist of debt obligations issued or guaranteed by national, state or provincial governments or similar political subdivisions. Foreign government securities also include debt securities of supranational entities. Such securities may be denominated in other currencies. Foreign government securities also include mortgage-related securities issued or guaranteed by national, state or provincial governmental instrumentalities, including quasi-governmental agencies. A Portfolio may invest in foreign government securities in the form of ADRs as described above.

The Real Estate Securities Portfolio may invest without limit in equity securities of non-U.S. real estate companies, or sponsored and unsponsored depositary receipts for such securities.

CURRENCY RELATED INSTRUMENTS. As indicated in the Prospectuses, certain Portfolios may use forward foreign currency exchange contracts in connection with permitted purchases and sales of securities of non-U.S. issuers. Certain Portfolios may, consistent with their respective investment objectives and policies, use such contracts as well as certain other currency related instruments to reduce the risks associated with the types of securities in which each is authorized to invest and to hedge against fluctuations in the relative value of the currencies in which securities held by each are denominated. The following discussion sets forth certain information relating to forward currency contracts and other currency related instruments, together with the risks that may be associated with their use. Currency positions are not considered to be an investment in a foreign government for industry concentration purposes.

ABOUT CURRENCY TRANSACTIONS AND HEDGING. Certain Portfolios are authorized to purchase and sell options, futures contracts and options thereon relating to foreign currencies and securities denominated in foreign currencies. Such instruments may be traded on foreign exchanges, including foreign over-the-counter markets. Transactions in such instruments may not be regulated as effectively as similar transactions in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by: (i) foreign political, legal and economic factors; (ii) lesser availability than in the United States of data on which to make trading decisions; (iii) delays in a portfolio’s ability to act upon economic events occurring in foreign markets during non-business hours in the United States; and (iv) lesser trading volume. Foreign currency exchange transactions may be entered into for the purpose of hedging against foreign currency exchange risk arising from the Portfolio’s investment or anticipated investment in securities denominated in foreign currencies. Options relating to foreign currencies may also be purchased or sold to increase exposure to a foreign currency or to shift foreign currency exposure from one country to another.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS. Certain Portfolios may take positions in options on foreign currencies to hedge against the risk of foreign exchange rate fluctuations on foreign securities the Portfolio holds in its portfolio or intends to purchase. For example, if the Portfolio were to enter into a contract to purchase securities denominated in a foreign currency, it could effectively fix the maximum U.S. dollar cost of the securities by purchasing call options on that foreign currency. Similarly, if the Portfolio held securities denominated in a foreign currency and anticipated a decline in the value of that currency against the U.S. dollar, it could hedge against such a decline by purchasing a put option on the currency involved. The markets in foreign currency options are relatively new, and the Portfolio’s ability to establish and close out positions in such options is subject to the maintenance of a liquid secondary market. There can be no assurance that a liquid secondary market will exist for a particular option at any specific time. In addition, options on foreign currencies are affected by all of those factors that influence foreign exchange rates and investments generally. The quantities of currencies underlying option contracts represent odd lots in a market dominated by transactions between banks, and as a result extra transaction costs may be incurred upon exercise of an option. There is no systematic reporting of last sale information for foreign currencies or any regulatory requirement that quotations be firm or revised on a timely basis. Quotation information is generally representative of very large transactions in the interbank market and may not reflect smaller transactions where rates may be less favorable. Option markets may be closed while round-the-clock interbank currency markets are open, and this can create price and rate discrepancies.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. To the extent indicated in the Prospectuses, the Portfolios may use forward contracts to protect against uncertainty in the level of future exchange rates in connection with specific transactions or for hedging purposes. For example, when a Portfolio enters into a contract for the purchase or sale of a security denominated in a foreign

 

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currency, or when the Portfolio anticipates the receipt in a foreign currency of dividend or interest payments on a security that it holds, the Portfolio may desire to “lock in” the U.S. dollar price of the security or the U.S. dollar equivalent of the payment, by entering into a forward contract for the purchase or sale of the foreign currency involved in the underlying transaction in exchange for a fixed amount of U.S. dollars or foreign currency. This may serve as a hedge against a possible loss resulting from an adverse change in the relationship between the currency exchange rates during the period between the date on which the security is purchased or sold, or on which the payment is declared, and the date on which such payments are made or received. The International Equity, Institutional International Equity, Institutional Value Equity, Institutional Growth Equity, Commodity Returns Strategy, Fixed Income Opportunity and Emerging Markets Portfolios may also use forward contracts in connection with specific transactions. In addition, they may use such contracts to lock in the U.S. dollar value of those positions, to increase the Portfolio’s exposure to foreign currencies that the Specialist Manager believes may rise in value relative to the U.S. dollar or to shift the Portfolio’s exposure to foreign currency fluctuations from one country to another. For example, when the Specialist Manager believes that the currency of a particular foreign country may suffer a substantial decline relative to the U.S. dollar or another currency, it may enter into a forward contract to sell the amount of the former foreign currency approximating the value of some or all of the portfolio securities held by the Portfolio that are denominated in such foreign currency. This investment practice generally is referred to as “cross-hedging.”

The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency the Portfolio is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Portfolio is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Portfolio to sustain losses on these contracts and transaction costs. A portfolio may enter into forward contracts or maintain a net exposure to such contracts only if: (1) the consummation of the contracts would not obligate the portfolio to deliver an amount of foreign currency in excess of the value of the portfolio’s securities and other assets denominated in that currency; or (2) the portfolio maintains cash, U.S. government securities or other liquid securities in a segregated account in an amount which, together with the value of all the portfolio’s securities denominated in such currency, equals or exceeds the value of such contracts.

At or before the maturity date of a forward contract that requires the portfolio to sell a currency, the portfolio may either sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the portfolio will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, the portfolio may close out a forward contract requiring it to purchase a specified currency by entering into another contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. As a result of such an offsetting transaction, a Portfolio would realize a gain or a loss to the extent of any change in the exchange rate between the currencies involved between the execution dates of the first and second contracts. The cost to a portfolio of engaging in forward contracts varies with factors such as the currencies involved, the length of the contract period and the prevailing market conditions. Because forward contracts are usually entered into on a principal basis, no fees or commissions are involved. The use of forward contracts does not eliminate fluctuations in the prices of the underlying securities the portfolio owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although forward contracts limit the risk of loss due to a decline in the value of the hedged currencies, they also limit any potential gain that might result should the value of the currencies increase.

Although the Portfolios value their assets daily in terms of U.S. dollars, no Portfolio intends to convert its holdings of foreign currencies into U.S. dollars on a daily basis. The Portfolios may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio at one rate, while offering a lesser rate of exchange should the Portfolio desire to resell that currency to the dealer.

HEDGING INSTRUMENTS AND OTHER DERIVATIVES.

OPTIONS. To the extent indicated in the Prospectuses, the Portfolios may, consistent with their investment objectives and policies, use options on securities and securities indexes to reduce the risks associated with the types of securities in which each is authorized to invest and/or in anticipation of future purchases, including to achieve market exposure, pending direct investment in securities. A

 

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Portfolio may use options only in a manner consistent with its investment objective and policies and may not invest more than 10% of its total assets in option purchases. With the exception of The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio, The Commodity Returns Strategy Portfolio and The Fixed Income Opportunity Portfolio, options may be used only for the purpose of reducing investment risk or to gain market exposure pending investment. The Portfolios mentioned above may invest in options as disclosed in their Prospectus. The Portfolios may invest in options on individual securities, baskets of securities or particular measurements of value or rate (an “index”), such as an index of the price of treasury securities or an index representative of short-term interest rates. Such options may be traded on an exchange or in the over-the-counter (“OTC”) markets. OTC options are subject to greater credit and liquidity risk. See “Additional Risk Factors of OTC Options.” The following discussion sets forth certain information relating to the types of options that the Portfolios may use, together with the risks that may be associated with their use.

ABOUT OPTIONS ON SECURITIES. A call option is a short-term contract pursuant to which the purchaser of the option, in return for a premium, has the right to buy the security underlying the option at a specified price at any time during the term of the option. The writer of the call option, who receives the premium, has the obligation, upon exercise of the option during the option period, to deliver the underlying security against payment of the exercise price. A put option is a similar contract that gives its purchaser, in return for a premium, the right to sell the underlying security at a specified price during the term of the option. The writer of the put option, who receives the premium, has the obligation, upon exercise of the option during the option period, to buy the underlying security at the exercise price. Options may be based on a security, a securities index or a currency. Options on securities are generally settled by delivery of the underlying security whereas options on a securities index or currency are settled in cash.

OPTIONS ON SECURITIES INDICES. Options on securities indices may be used in much the same manner as options on securities. Index options may serve as a hedge against overall fluctuations in the securities markets or market sectors, rather than anticipated increases or decreases in the value of a particular security. Thus, the effectiveness of techniques using stock index options will depend on the extent to which price movements in the securities index selected correlate with price movements of the Portfolio to be hedged. Options on stock indices are settled exclusively in cash.

OPTION PURCHASES. Call options on securities may be purchased in order to fix the cost of a future purchase. In addition, call options may be used as a means of participating in an anticipated advance of a security on a more limited risk basis than would be possible if the security itself were purchased. In the event of a decline in the price of the underlying security, use of this strategy would serve to limit the amount of loss, if any, to the amount of the option premium paid. Conversely, if the market price of the underlying security rises and the call is exercised or sold at a profit, that profit will be reduced by the amount initially paid for the call.

Put options may be purchased in order to hedge against a decline in market value of a security held by the purchasing Portfolio. The put effectively guarantees that the underlying security can be sold at the predetermined exercise price, even if that price is greater than the market value at the time of exercise. If the market price of the underlying security increases, the profit realized on the eventual sale of the security will be reduced by the premium paid for the put option. Put options may also be purchased on a security that is not held by the purchasing portfolio in anticipation of a price decline in the underlying security. In the event the market value of such security declines below the designated exercise price of the put, the purchasing portfolio would then be able to acquire the underlying security at the market price and exercise its put option, thus realizing a profit. In order for this strategy to be successful, however, the market price of the underlying security must decline so that the difference between the exercise price and the market price is greater than the option premium paid.

OPTION WRITING. Call options may be written (sold) by the Portfolios. Generally, calls will be written only when, in the opinion of a Portfolio’s Specialist Manager, the call premium received, plus anticipated appreciation in the market price of the underlying security up to the exercise price of the call, will be greater than the appreciation in the price of the underlying security.

Put options may also be written. This strategy will generally be used when it is anticipated that the market value of the underlying security will remain higher than the exercise price of the put option or when a temporary decrease in the market value of the underlying security is anticipated and, in the view of a Portfolio’s Specialist Manager, it would not be appropriate to acquire the underlying security. If the market price of the underlying security rises or stays above the exercise price, it can be expected that the purchaser of the put will not exercise the option and a profit, in the amount of the premium received for the put, will be realized by the writer of the put. However, if the market price of the underlying security declines or stays below the exercise price, the put option may be exercised and the portfolio that sold the put will be obligated to purchase the underlying security at a price that may be higher than its current market value. All option writing strategies will be employed only if the option is “covered.” For this purpose, “covered” means that, so long as the Portfolio that has written (sold) the option is obligated as the writer of a call option, it will (1) own the security underlying the option; or (2) hold on a share-for-share basis a call on the same security, the exercise price of which is equal to or less than the exercise price of the call written. In the case of a put option, the Portfolio that has written (sold) the put option will (1) maintain cash or cash equivalents in an amount equal to or greater than the exercise price; or (2) hold on a share-for share basis, a put on the same security as the put written provided that the exercise price of the put held is equal to or greater than the exercise price of the put written.

 

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RISK FACTORS RELATING TO THE USE OF OPTIONS STRATEGIES. The premium paid or received with respect to an option position will reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to the market price, the historical price volatility of the underlying security, the option period, supply and demand, and interest rates. Moreover, the successful use of options as a hedging strategy depends upon the ability to forecast the direction of market fluctuations in the underlying securities, or in the case of index options, in the market sector represented by the index selected.

Under normal circumstances, options traded on one or more of the several recognized options exchanges may be closed by effecting a “closing purchase transaction,” (i.e., by purchasing an identical option with respect to the underlying security in the case of options written and by selling an identical option on the underlying security in the case of options purchased). A closing purchase transaction will effectively cancel an option position, thus permitting profits to be realized on the position, to prevent an underlying security from being called from, or put to, the writer of the option or, in the case of a call option, to permit the sale of the underlying security. A profit or loss may be realized from a closing purchase transaction, depending on whether the overall cost of the closing transaction (including the price of the option and actual transaction costs) is less or more than the premium received from the writing of the option. It should be noted that, in the event a loss is incurred in a closing purchase transaction, that loss may be partially or entirely offset by the premium received from a simultaneous or subsequent sale of a different call or put option. Also, because increases in the market price of an option will generally reflect increases in the market price of the underlying security, any loss resulting from a closing purchase transaction is likely to be offset in whole or in part by appreciation of the underlying security held. Options will normally have expiration dates between three and nine months from the date written. The exercise price of the options may be below, equal to, or above the current market values of the underlying securities at the time the options are written. Options that expire unexercised have no value. Unless an option purchased by a Portfolio is exercised or a closing purchase transaction is effected with respect to that position, a loss will be realized in the amount of the premium paid.

To the extent that a Portfolio writes a call option on a security it holds in its portfolio and intends to use such security as the sole means of “covering” its obligation under the call option, the Portfolio has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price during the option period, but, as long as its obligation under such call option continues, has retained the risk of loss should the price of the underlying security decline. If a Portfolio were unable to close out such a call option, the Portfolio would not be able to sell the underlying security unless the option expired without exercise.

ADDITIONAL RISK FACTORS OF OTC OPTIONS. Certain instruments traded in OTC markets, including indexed securities and OTC options, involve significant liquidity and credit risks. The absence of liquidity may make it difficult or impossible for a Portfolio to sell such instruments promptly at an acceptable price. In addition, lack of liquidity may also make it more difficult to the Portfolio to ascertain a market value for the instrument. A Portfolio will only acquire an illiquid OTC instrument if the agreement with the counterparty contains a formula price at which the contract can be sold or terminated or if on each business day, the Specialist Manager anticipates that at least one dealer quote is available.

Instruments traded in OTC markets are not guaranteed by an exchange or clearing organization and generally do not require payment of margin. To the extent that a Portfolio has unrealized gains in such instruments or has deposited collateral with its counterparty, the Portfolio is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The Portfolio will attempt to minimize these risks by engaging in transactions with counterparties who have significant capital or who have provided the Portfolio with a third party guarantee or credit enhancement.

FUTURES CONTRACTS AND RELATED INSTRUMENTS. To the extent indicated in the Prospectuses, the Portfolios may use futures contracts and options on futures contracts. The following discussion sets forth certain information relating to the types of futures contracts that the Portfolios may use, together with the risks that may be associated with their use. As part of their investment strategies, a portion of each of The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio, The Commodity Returns Strategy Portfolio and The Fixed Income Opportunity Portfolio will invest directly in futures contracts and options on futures contracts to attempt to achieve each Portfolio’s investment objective without investing directly in the securities included in the underlying index.

ABOUT FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract is a bilateral agreement pursuant to which one party agrees to make, and the other party agrees to accept, delivery of the specified type of security or currency called for in the contract at a specified future time and at a specified price. In practice, however, contracts relating to financial instruments or currencies are closed out through the use of closing purchase transactions before the settlement date and without

 

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delivery or the underlying security or currency. In the case of futures contracts based on a securities index, the contract provides for “delivery” of an amount of cash equal to the dollar amount specified multiplied by the difference between the value of the underlying index on the settlement date and the price at which the contract was originally fixed.

STOCK INDEX FUTURES CONTRACTS. A Portfolio may sell stock index futures contracts in anticipation of a general market or market sector decline that may adversely affect the market values of securities held. To the extent that securities held correlate with the index underlying the contract, the sale of futures contracts on that index could reduce the risk associated with a market decline. Where a significant market or market sector advance is anticipated, the purchase of a stock index futures contract may afford a hedge against not participating in such advance at a time when a Portfolio is not fully invested. This strategy would serve as a temporary substitute for the purchase of individual stocks which may later be purchased in an orderly fashion. Generally, as such purchases are made, positions in stock index futures contracts representing equivalent securities would be liquidated.

FUTURES CONTRACTS ON DEBT SECURITIES. Futures contracts on debt securities, often referred to as “interest rate futures,” obligate the seller to deliver a specific type of debt security called for in the contract, at a specified future time. A public market now exists for futures contracts covering a number of debt securities, including long-term U.S. Treasury bonds, ten-year U.S. Treasury notes, and three-month U.S. Treasury bills, and additional futures contracts based on other debt securities or indices of debt securities may be developed in the future. Such contracts may be used to hedge against changes in the general level of interest rates. For example, a Portfolio may purchase such contracts when it wishes to defer a purchase of a longer-term bond because short-term yields are higher than long-term yields. Income would thus be earned on a short-term security and minimize the impact of all or part of an increase in the market price of the long-term debt security to be purchased in the future. A rise in the price of the long-term debt security prior to its purchase either would be offset by an increase in the value of the contract purchased by the Portfolio or avoided by taking delivery of the debt securities underlying the futures contract. Conversely, such a contract might be sold in order to continue to receive the income from a long-term debt security, while at the same time endeavoring to avoid part or all of any decline in market value of that security that would occur with an increase in interest rates. If interest rates did rise, a decline in the value of the debt security would be substantially offset by an increase in the value of the futures contract sold.

OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the purchaser the right, in return for the premium, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified price at any time during the period of the option. The risk of loss associated with the purchase of an option on a futures contract is limited to the premium paid for the option, plus transaction cost. The seller of an option on a futures contract is obligated to a broker for the payment of initial and variation margin in amounts that depend on the nature of the underlying futures contract, the current market value of the option, and other futures positions held by the portfolio. Upon exercise of the option, the option seller must deliver the underlying futures position to the holder of the option, together with the accumulated balance in the seller’s futures margin account that represents the amount by which the market price of the underlying futures contract exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option involved. If an option is exercised on the last trading day prior to the expiration date of the option, settlement will be made entirely in cash equal to the difference between the exercise price of the option and the value at the close of trading on the expiration date.

RISK CONSIDERATIONS RELATING TO FUTURES CONTRACTS AND RELATED INSTRUMENTS. Participants in the futures markets are subject to certain risks. Positions in futures contracts may be closed out only on the exchange on which they were entered into (or through a linked exchange): no secondary market exists for such contracts. In addition, there can be no assurance that a liquid market will exist for the contracts at any particular time. Most 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. It is possible that futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. In such event, and in the event of adverse price movements, a portfolio would be required to make daily cash payments of variation margin. In such circumstances, an increase in the value of that portion of the securities being hedged, if any, may partially or completely offset losses on the futures contract.

As noted above, there can be no assurance that price movements in the futures markets will correlate with the prices of the underlying securities positions. In particular, there may be an imperfect correlation between movements in the prices of futures contracts and the market value of the underlying securities positions being hedged. In addition, the market prices of futures contracts may be affected by factors other than interest rate changes and, as a result, even a correct forecast of interest rate trends might not result in a successful hedging strategy. If participants in the futures market elect to close out their contracts through offsetting transactions rather than by meeting margin deposit requirements, distortions in the normal relationship between debt securities and the futures markets could result. Price distortions could also result if investors in the futures markets opt to make or take delivery of the underlying securities rather than engage in closing transactions because such trend might result in a reduction in the liquidity of the futures market. In addition, an increase in the participation of speculators in the futures market could cause temporary price distortions.

 

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The risks associated with options on futures contracts are similar to those applicable to all options and are summarized above under the heading “Hedging Through the Use of Options: Risk Factors Relating to the Use of Options Strategies.” In addition, as is the case with futures contracts, there can be no assurance that (1) there will be a correlation between price movements in the options and those relating to the underlying securities; (2) a liquid market for options held will exist at the time when a Portfolio may wish to effect a closing transaction; or (3) predictions as to anticipated interest rate or other market trends on behalf of a Portfolio will be correct.

MARGIN AND SEGREGATION REQUIREMENTS APPLICABLE TO FUTURES RELATED TRANSACTIONS. When a purchase or sale of a futures contract is made by a Portfolio, that Portfolio is required to deposit with its custodian (or broker, if legally permitted) a specified amount of cash or U.S. government securities (“initial margin”). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Portfolio upon termination of the contract, assuming all contractual obligations have been satisfied. The Portfolio expects to earn interest income on its initial margin deposits. A futures contract held by a Portfolio is valued daily at the official settlement price of the exchange on which it is traded. Each day the Portfolio pays or receives cash, called “variation margin” equal to the daily change in value of the futures contract. This process is known as “marking to market.” Variation margin does not represent a borrowing or loan by the Portfolio but is instead a settlement between the Portfolio and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, the Portfolio will value its open futures positions at market.

With the exception of The Institutional Value Equity, The Institutional Growth Equity Portfolio, The Fixed Income Opportunity Portfolio and The Commodity Returns Strategy Portfolio, a Portfolio will not enter into a futures contract or an option on a futures contract if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are “in-the-money,” would exceed 5% of the Portfolio’s total assets. A call option is “in-the-money” if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is “in-the-money” if the exercise price exceeds the value of the futures contract that is the subject of the option.

When purchasing a futures contract, a portfolio will maintain, either with its custodian bank or, if permitted, a broker, and will mark-to-market on a daily basis, cash, U.S. government securities, or other highly liquid securities that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, a portfolio may “cover” its position by purchasing a put option on the same futures contract with a strike price as high as or higher than the price of the contract held by the portfolio. When selling a futures contract, a portfolio will similarly maintain liquid assets that, when added to the amount deposited with a futures commission merchant as margin, are equal to the market value of the instruments underlying the contract. Alternatively, a portfolio may “cover” its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting a portfolio to purchase the same futures contract at a price no higher than the price of the contract written by that portfolio (or at a higher price if the difference is maintained in liquid assets with the Trust’s custodian).

When selling a call option on a futures contract, a portfolio will maintain, either with its custodian bank or, if permitted, a broker, and will mark-to-market on a daily basis, cash, U. S. government securities, or other highly liquid securities that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, a portfolio may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the portfolio to purchase the same futures contract at a price not higher than the strike price of the call option sold by the portfolio.

When selling a put option on a futures contract, the Portfolio will similarly maintain cash, U.S. government securities, or other highly liquid securities that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Portfolio may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Portfolio.

SWAP AGREEMENTS. A Portfolio may enter into swap agreements for purposes of attempting to gain exposure to the securities making up an index without actually purchasing those instruments, to hedge a position or to gain exposure to a particular instrument or currency.

 

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ABOUT SWAP AGREEMENTS. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one-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. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested 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 that 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 that interest rates fall below a specified level, or “floor;” and interest rate dollars, 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. A credit default swap is a specific kind of counterparty agreement designed to transfer the third party credit risk between parties. One party in the swap is a lender and faces credit risk from a third party and the counterparty in the credit default swap agrees to insure this risk in exchange for regular periodic payments (essentially an insurance premium). If the third party defaults, the party providing insurance will have to purchase from the insured party the defaulted asset. The Select Aggregate Market Index (“SAMI”) is a basket of credit default swaps whose underlying reference obligations are floating rate loans. Investments in SAMIs increase exposure to risks that are not typically associated with investments in other floating rate debt instruments, and involve many of the risks associated with investments in derivative instruments. The liquidity of the market for SAMIs is subject to liquidity in the secured loan and credit derivatives markets.

The Commodity Returns Strategy Portfolio may enter into credit default swap agreements. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by the Portfolio. The protection “buyer” in a credit default contract is generally obligated to pay the protection “seller” an upfront or a periodic stream of payments over the term of the contract provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. The Portfolio may be either the buyer or seller in the transaction. If the Portfolio is a buyer and no credit event occurs, the Portfolio may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, a Portfolio generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Portfolio would effectively add leverage to its portfolio because, in addition to its total net assets, a Portfolio would be subject to investment exposure on the notional amount of the swap.

The use of equity swaps is a highly specialized activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.

A Portfolio’s current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by earmarking or segregating assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of a Portfolio’s investment restriction concerning senior securities. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for a Portfolio’s illiquid investment limitations. A Portfolio will not enter into any swap agreement unless the Specialist Manager believes that the other party to the transaction is creditworthy. A Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Portfolio may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay a Portfolio the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. A Portfolio will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Portfolio on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by a Portfolio on the notional amount.

Swap agreements typically are settled on a net basis, which means that the two payment streams are netted out, with a Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that a Portfolio is contractually obligated to make. If the other party to a swap agreement defaults, a Portfolio’s risk of loss consists of the net amount of payments that such Portfolio is contractually entitled to receive, if any. The net amount of the excess, if any, of a Portfolio’s obligations over its entitlements with respect

 

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to each swap will be accrued on a daily basis and liquid assets, having an aggregate net asset value at least equal to such accrued excess will be earmarked or maintained in a segregated account by the Portfolio’s custodian. In as much as these transactions are entered into for hedging purposes or are offset by segregating liquid assets, as permitted by applicable law, the Portfolios and their respective Specialist Manager(s) believe that these transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them as being subject to a Portfolio’s borrowing restrictions. For purposes of each of the Portfolio’s requirements under Rule 12d3-1 (where, for example, a Portfolio is prohibited from investing more than 5% of its total assets in any one broker, dealer, underwriter or investment adviser (the “securities-related issuer”) and Section 5b-1 where, for example, a diversified Portfolio is prohibited from owning more than 5% of its total assets in any one issuer with respect to 75% of a Portfolio’s total assets, the mark-to-market value will be used to measure the Portfolio’s counterparty exposure. In addition, the mark-to-market value will be used to measure the Portfolio’s issuer exposure for purposes of Section 5b-1.

A Portfolio may enter into index swap agreements as an additional hedging strategy for cash reserves held by the Portfolio or to effect investment transactions consistent with the Portfolio’s investment objective and strategies. Index swaps tend to have a maturity of one year. There is not a well-developed secondary market for index swaps. Many index swaps are considered to be illiquid because the counterparty will typically not unwind an index swap prior to its termination (and, not surprisingly, index swaps tend to have much shorter terms). A Portfolio may therefore treat all swaps as subject to their limitation on illiquid investments.

The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments, which are traded in the over-the-counter market. The Specialist Manager, under the supervision of the Board of Trustees and the Adviser, is responsible for determining and monitoring the liquidity of Portfolio transactions in swap agreements.

Pursuant to an exemption under Rule 4.5(a)(i) of the Commodity Exchange Act (“CEA”) the Trust continues to rely on an exclusion from the definition of “commodity pool operator” under the CEA and, therefore, is not subject to registration or regulation as a pool operator under the CEA. The Trust has filed the appropriate documentation with the National Futures Association pursuant to this exemption.

Synthetic Equity Swaps. Certain Portfolios may also enter into synthetic equity swaps, in which one party to the contract agrees to pay the other party the total return earned or realized on a particular “notional amount” of value of an underlying equity security including any dividends distributed by the underlying security. The other party to the contract makes regular payments, typically at a fixed rate or at a floating rate based on LIBOR or other variable interest rated based on the notional amount. The notional amount is not invested in the reference security. Similar to currency swaps, synthetic equity swaps are generally entered into on a net basis, which means the two payment streams are netted out and the Portfolio will either pay or receive the net amount. The Portfolio will enter into a synthetic equity swap instead of purchasing the reference security when the synthetic equity swap provides a more efficient or less expensive way of gaining exposure to a security compared with a direct investment in the security.

OTHER HEDGING INSTRUMENTS. Generally, a Portfolio’s investment in the shares of another investment company is restricted to up to 5% of its total assets and aggregate investments in all investment companies is limited to 10% of total assets. Provided certain requirements set forth in the Act are met, however, investments in excess of these limitations may be made. Certain of the Portfolios may make such investments, some of which are described below.

The Portfolios may invest in exchange-traded funds (“ETFs”) as part of each portfolio’s overall hedging strategies. The Real Estate Securities Portfolio may invest up to 100% of its assets in ETFs. Such strategies are designed to reduce certain risks that would otherwise be associated with the investments in the types of securities in which the Portfolios invest and/or in anticipation of future purchases, including to achieve market exposure pending direct investment in securities, provided that the use of such strategies is consistent with the investment policies and restrictions adopted by the Portfolios. Although similar diversification benefits may be achieved through an investment in another investment company, ETFs generally offer greater liquidity and lower expenses. Because an ETF charges its own fees and expenses, fund shareholders will indirectly bear these costs. The Portfolios will also incur brokerage commissions and related charges when purchasing shares in an exchange-traded fund in secondary market transactions. Unlike typical investment company shares, which are valued once daily, shares in an ETF may be purchased or sold on a listed securities exchange throughout the trading day at market prices that are generally close to net asset value. ETFs are subject to liquidity and market risks. Some ETFs traded on securities exchanges are actively managed and subject to the same Management Risks as other actively managed investment companies. Other ETFs have an objective to track the performance of a specified index (“Index ETFs”). Therefore, securities may be purchased, retained and sold by an Index ETF at times when an actively managed trust would not do so. As a result, in an Index ETF you can expect greater risk of loss (and a correspondingly greater prospect of gain) from changes in the value of the securities that are heavily weighted in the index than would be the case if the Index ETF portfolio was not fully invested

 

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in such securities. In addition, the results of an Index ETF investment will not match the performance of the specified index due to reductions in the Index ETF’s performance attributable to transaction and other expenses, including fees paid by the Index ETF portfolio to service providers. Because of these factors, the price of ETFs can be volatile, and a Portfolio may sustain sudden, and sometimes substantial, fluctuations in the value of its investment in an ETF.

The Portfolios may invest in ETFs that are consistent with the Portfolio’s investment strategy, as well as Standard & Poor’s Depositary Receipts (“SPDRs”). SPDRs are interests in a unit investment trust (“UIT”) that may be obtained directly from the UIT or purchased in the secondary market (SPDRs are listed on the American Stock Exchange). The UIT will issue SPDRs in aggregations known as “Creation Units” in exchange for a “Portfolio Deposit” consisting of (a) a portfolio of securities substantially similar to the component securities (“Index Securities”) of the S&P Index, (b) a cash payment equal to a pro rata portion of the dividends accrued on the UIT’s portfolio securities since the last dividend payment by the UIT, net of expenses and liabilities, and (c) a cash payment or credit, called a “Balancing Amount”) designed to equalize the net asset value of the S&P Index and the net asset value of a Portfolio Deposit. SPDRs are not individually redeemable, except upon termination of the UIT. To redeem, a Portfolio must accumulate enough SPDRs to reconstitute a Creation Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the existence of a secondary market. Upon redemption of a Creation Unit, the Portfolio will receive Index Securities and cash identical to the Portfolio Deposit required of an investor wishing to purchase a Creation Unit that day. The price of SPDRs is derived from and based upon the securities held by the UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR is similar to the risk involved in the purchase or sale of traditional common stock, with the exception that the pricing mechanism for SPDRs is based on a basket of stocks. Disruptions in the markets for the securities underlying SPDRs purchased or sold by a Portfolio could result in losses on SPDRs. Trading in SPDRs involves risks similar to those risks involved in the writing of options on securities. The Portfolios may invest in certain ETFs in excess of the normal statutory limits in reliance on exemptive orders that have been issued to the entities issuing shares in those ETFs, provided that certain conditions are met.

COMMODITY-LINKED DERIVATIVES. The Commodity Returns Strategy Portfolio may invest in instruments with principal and/or coupon payments linked to the value of commodities, commodity futures contracts, or the performance of commodity indices such as “commodity-linked” or “index-linked” notes. These instruments are sometimes referred to as “structured notes” because the terms of the instrument may be structured by the issuer of the note and the purchaser of the note, such as the Portfolio.

The values of these notes will rise and fall in response to changes in the underlying commodity or related index or investment. These notes expose the Portfolio economically to movements in commodity prices, but a particular note has many features of a debt obligation. These notes also are subject to credit and interest rate risks that in general affect the value of debt securities. Therefore, at the maturity of the note, the Portfolio may receive more or less principal than it originally invested. The Portfolio might receive interest payments on the note that are more or less than the stated coupon interest rate payments.

Structured notes may involve leverage, meaning that the value of the instrument will be calculated as a multiple of the upward or downward price movement of the underlying commodity future or index. The prices of commodity-linked instruments may move in different directions than investments in traditional equity and debt securities in periods of rising inflation. Of course, there can be no guarantee that the Portfolio’s commodity-linked investments would not be correlated with traditional financial assets under any particular market conditions.

Commodity-linked notes may be issued by US and foreign banks, brokerage firms, insurance companies and other corporations. These notes, in addition to fluctuating in response to changes in the underlying commodity assets, these notes will be subject to credit and interest rate risks that typically affect debt securities.

The commodity-linked instruments may be wholly principal protected, partially principal protected or offer no principal protection. With a wholly principal protected instrument, the Portfolio will receive at maturity the greater of the par value of the note or the increase in value of the underlying index. Partially protected instruments may suffer some loss of principal up to a specified limit if the underlying index declines in value during the term of the instrument. For instruments without principal protection, there is a risk that the instrument could lose all of its value if the index declines sufficiently. The Specialist Managers’ decisions on whether and to what extent to use principal protection depend in part on the cost of the protection. In addition, the ability of the Portfolio to take advantage of any protection feature depends on the creditworthiness of the issuer of the instrument.

Commodity-linked derivatives are generally hybrid instruments which are excluded from regulation under the CEA and the rules thereunder, so that the Portfolio will not be considered a “commodity pool.” Additionally, from time to time the Portfolio may invest in other hybrid instruments that do not qualify for exemption from regulation under the CEA.

 

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NON-DIVERSIFICATION

The Real Estate Securities Portfolio is classified as a non-diversified investment portfolio under the 1940 Act. As such, there is no limit on the percentage of assets which can be invested in any single issuer. An investment in this Portfolio, therefore, may entail greater risk than would exist in a diversified investment portfolio because the potential for a higher percentage of investments among fewer issuers may result in greater fluctuation in the total market value of the Portfolio. Any economic, political, or regulatory developments affecting the value of the securities in the Portfolio will have a greater impact on the total value of the Portfolio than would be the case if the Portfolio were diversified among more issuers. The Portfolio intends to comply with Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). This undertaking requires that at the end of each quarter of the Portfolio’s taxable year, with regard to at least 50% of its total assets, no more than 5% of its total assets are invested in the securities of a single issuer; beyond that, no more than 25% of its total assets are invested in the securities of a single issuer.

INDEX INVESTING

A portion of the assets of certain Portfolios may at times be committed to investing assets in a manner that replicates the composition of an appropriate benchmark index. At times, subsets of these indices may also be used as a basis for selecting securities for such a portion of a Portfolio. This passive investment style would differ from the active management investment techniques used with respect to the Portfolios’ other assets. Rather than relying upon fundamental research, economic analysis and investment judgment, this approach uses automated statistical analytic procedures that seek to track the performance of a selected stock index.

MONEY MARKET INSTRUMENTS

BANK OBLIGATIONS. Bank Obligations may include certificates of deposit, time deposits and bankers’ acceptances. Certificates of Deposit (“CDs”) are short-term negotiable obligations of commercial banks. Time Deposits (“TDs”) are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Bankers’ acceptances are time drafts drawn on commercial banks by borrowers usually in connection with international transactions. U.S. commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System and to be insured by the Federal Deposit Insurance Corporation (the “FDIC”). U.S. banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. Most state banks are insured by the FDIC (although such insurance may not be of material benefit to a portfolio, depending upon the principal amount of CDs of each bank held by the Portfolio) and are subject to federal examination and to a substantial body of federal law and regulation. As a result of governmental regulations, U.S. branches of U.S. banks, among other things, generally are required to maintain specified levels of reserves, and are subject to other supervision and regulation designed to promote financial soundness. U.S. savings and loan associations, the CDs of which may be purchased by the Portfolios, are supervised and subject to examination by the Office of Thrift Supervision. U.S. savings and loan associations are insured by the Savings Association Insurance Portfolio which is administered by the FDIC and backed by the full faith and credit of the U.S. government.

COMMERCIAL PAPER. Commercial paper is a short-term, unsecured negotiable promissory note of a U.S. or non-U.S. issuer. Each of the Portfolios may purchase commercial paper for temporary purposes; The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio and the Income Portfolios may acquire these instruments as described in the Prospectuses. Each Portfolio may similarly invest in variable rate master demand notes which typically are issued by large corporate borrowers and which provide for variable amounts of principal indebtedness and periodic adjustments in the interest rate. Demand notes are direct lending arrangements between a portfolio and an issuer, and are not normally traded in a secondary market. A portfolio, however, may demand payment of principal and accrued interest at any time. In addition, while demand notes generally are not rated, their issuers must satisfy the same criteria as those that apply to issuers of commercial paper. The appropriate Specialist Manager will consider the earning power, cash flow and other liquidity ratios of issuers of demand notes and continually will monitor their financial ability to meet payment on demand. See also “Variable and Floating Rate Instruments,” below.

REPURCHASE AGREEMENTS. Repurchase Agreements may be used for temporary investment purposes. Under the terms of a typical repurchase agreement, a portfolio would acquire an underlying debt security for a relatively short period (usually not more than one week), subject to an obligation of the seller to repurchase that security and the obligation of that Portfolio to resell that security at an agreed-upon price and time. Repurchase agreements could involve certain risks in the event of default or insolvency of the other party, including possible delays or restrictions upon a portfolio’s ability to dispose of the underlying securities. The Specialist Manager for each Portfolio, in accordance with guidelines adopted by the Board, monitors the creditworthiness of those banks and non-bank dealers with which the respective Portfolios may enter into repurchase agreements. The Trust also monitors the market value of the securities underlying any repurchase agreement to ensure that the repurchase obligation of the seller is adequately collateralized.

 

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Repurchase agreements may be entered into with primary dealers in U.S. government securities who meet credit guidelines established by the Board (each a “repo counterparty”). Under each repurchase agreement, the repo counterparty will be required to maintain, in an account with the Trust’s custodian bank, securities that equal or exceed the repurchase price of the securities subject to the repurchase agreement. A Portfolio will generally enter into repurchase agreements with short durations, from overnight to one week, although securities subject to repurchase agreements generally have longer maturities. A Portfolio may not enter into a repurchase agreement with more than seven days to maturity if, as a result, more than 15% of the value of its net assets would be invested in illiquid securities including such repurchase agreements. For purposes of the Investment Company Act, a repurchase agreement may be deemed a loan to the repo counterparty. It is not clear whether, in the context of a bankruptcy proceeding involving a repo counterparty, a court would consider a security acquired by a portfolio subject to a repurchase agreement as being owned by that portfolio or as being collateral for such a “loan.” If a court were to characterize the transaction as a loan, and a portfolio has not perfected a security interest in the security acquired, that portfolio could be required to turn the security acquired over to the bankruptcy trustee and be treated as an unsecured creditor of the repo counterparty. As an unsecured creditor, a portfolio would be at the risk of losing some or all of the principal and income involved in the transaction. In the event of any such bankruptcy or insolvency proceeding involving a repo counterparty with whom a portfolio has outstanding repurchase agreements, a portfolio may encounter delays and incur costs before being able to sell securities acquired subject to such repurchase agreements. Any such delays may involve loss of interest or a decline in price of the security so acquired.

Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the repo counterparty may fail to repurchase the security. However, a Portfolio will always receive as collateral for any repurchase agreement to which it is a party, securities acceptable to it, the market value of which is equal to at least 102% of the repurchase price, and the Portfolio will make payment against such securities only upon physical delivery or evidence of book entry transfer of such collateral to the account of its custodian bank. If the market value of the security subject to the repurchase agreement falls below the repurchase price the Trust will direct the repo counterparty to deliver to the Trust’s custodian additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed the repurchase price.

SECURITIES LENDING. Certain of the Portfolios may lend from their total assets in the form of their portfolio securities to broker dealers under contracts calling for collateral equal to at least the market value of the securities loaned, marked to market on a daily basis. The Portfolios will continue to benefit from interest or dividends on the securities loaned and may also earn a return from the collateral, which may include shares of a money market fund subject to any investment restrictions listed in this Statement. The Portfolios pay various fees in connection with the investment of the collateral. Under some securities lending arrangements a Portfolio may receive a set fee for keeping its securities available for lending. Any voting rights, or rights to consent, relating to securities loaned pass to the borrower. Cash collateral received by a Portfolio in securities lending transactions may be invested in short-term liquid fixed income instruments or in money market or short-term funds, or similar investment vehicles, including affiliated money market or short-term mutual funds. A Portfolio bears the risk of such investments.

VARIABLE AND FLOATING RATE INSTRUMENTS. Short-term variable rate instruments (including floating rate instruments) from banks and other issuers may be used for temporary investment purposes, or longer-term variable and floating rate instruments may be used in furtherance of a Portfolio’s investment objectives. A “variable rate instrument” is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A “floating rate instrument” is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. These instruments may include variable amount master demand notes that permit the indebtedness to vary in addition to providing for periodic adjustments in the interest rates.

Variable rate instruments are generally not rated by nationally recognized ratings organizations. The appropriate Specialist Manager will consider the earning power, cash flows and other liquidity ratios of the issuers and guarantors of such instruments and, if the instrument is subject to a demand feature, will continuously monitor their financial ability to meet payment on demand. Where necessary to ensure that a variable or floating rate instrument is equivalent to the quality standards applicable to a Portfolio’s fixed income investments, the issuer’s obligation to pay the principal of the instrument will be backed by an unconditional bank letter or line of credit, guarantee or commitment to lend. Any bank providing such a bank letter, line of credit, guarantee or loan commitment will meet the Portfolio’s investment quality standards relating to investments in bank obligations. A Portfolio will invest in variable and floating rate instruments only when the appropriate Specialist Manager deems the investment to involve minimal credit risk. The Specialist Manager will also continuously monitor the creditworthiness of issuers of such instruments to determine whether a Portfolio should continue to hold the investments.

 

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The absence of an active secondary market for certain variable and floating rate notes could make it difficult to dispose of the instruments, and a portfolio could suffer a loss if the issuer defaults or during periods in which a portfolio is not entitled to exercise its demand rights. Variable and floating rate instruments held by a Portfolio will be subject to the Portfolio’s limitation on investments in illiquid securities when a reliable trading market for the instruments does not exist and the Portfolio may not demand payment of the principal amount of such instruments within seven days. If an issuer of a variable rate demand note defaulted on its payment obligation, a Portfolio might be unable to dispose of the note and a loss would be incurred to the extent of the default.

MORTGAGE-BACKED AND ASSET-BACKED SECURITIES

MORTGAGE-BACKED SECURITIES. Certain Portfolios may invest in mortgage-backed securities, including derivative instruments. Mortgage-backed securities represent direct or indirect participations in or obligations collateralized by and payable from mortgage loans secured entirely or primarily by “pools” of residential or commercial mortgage loans or other assets. A Portfolio may invest in mortgage-backed securities issued by U.S. government agencies and government-sponsored entities such as the Government National Mortgage Association (“GNMA”), the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal Home Loan Banks. Obligations of GNMA are backed by the full faith and credit of the U.S. Government. Obligations of FNMA, FHLMC and Federal Home Loan Banks are not backed by the full faith and credit of the U.S. Government but are considered to be of high quality since they are considered to be instrumentalities of the United States. The payment of interest and principal on mortgage-backed obligations issued by these entities may be guaranteed by the full faith and credit of the U.S. Government (in the case of GNMA), or may be guaranteed by the issuer (in the case of FNMA and FHLMC). However, these guarantees do not apply to the market prices and yields of these securities, which vary with changes in interest rates as well as early prepayments of underlying mortgages. These securities represent ownership in a pool of Federally insured mortgage loans with a maximum maturity of 30 years. The scheduled monthly interest and principal payments relating to mortgages in the pool will be “passed through” to investors. Government mortgage-backed securities differ from conventional bonds in that principal is paid back to the certificate holders over the life of the loan rather than at maturity. As a result, there will be monthly scheduled payments of principal and interest.

Mortgage-backed securities also include securities issued by non-governmental entities including collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”) that are not insured or guaranteed. CMOs are securities collateralized by mortgages, mortgage pass-throughs, mortgage pay-through bonds (bonds representing an interest in a pool of mortgages where the cash flow generated from the mortgage collateral pool is dedicated to bond repayment), and mortgage-backed bonds (general obligations of the issuers payable out of the issuers’ general funds and additionally secured by a first lien on a pool of single family detached properties). Many CMOs are issued with a number of classes or series which have different maturities and are retired in sequence. Investors purchasing such CMOs in the shortest maturities receive or are credited with their pro rata portion of the unscheduled prepayments of principal up to a predetermined portion of the total CMO obligation. Until that portion of such CMO obligation is repaid, investors in the longer maturities receive interest only. Accordingly, the CMOs in the longer maturity series are less likely than other mortgage pass-throughs to be prepaid prior to their stated maturity. Although some of the mortgages underlying CMOs may be supported by various types of insurance, and some CMOs may be backed by GNMA certificates or other mortgage pass-throughs issued or guaranteed by U.S. government agencies or instrumentalities, the CMOs themselves are not generally guaranteed. REMICs are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. REMICs are similar to CMOs in that they issue multiple classes of securities, including “regular” interests and “residual” interests. The Portfolios do not intend to acquire residual interests in REMICs under current tax law, due to certain disadvantages for regulated investment companies that acquire such interests.

Mortgage-backed securities are subject to unscheduled principal payments representing prepayments on the underlying mortgages. Although these securities may offer yields higher than those available from other types of securities, mortgage-backed securities may be less effective than other types of securities as a means of “locking in” attractive long-term rates because of the prepayment feature. For instance, when interest rates decline, the value of these securities likely will not rise as much as comparable debt securities due to the prepayment feature. In addition, these prepayments can cause the price of a mortgage-backed security originally purchased at a premium to decline in price to its par value, which may result in a loss.

Due to prepayments of the underlying mortgage instruments, mortgage-backed securities do not have a known actual maturity. In the absence of a known maturity, market participants generally refer to an estimated average life. The appropriate Specialist Manager believes that the estimated average life is the most appropriate measure of the maturity of a mortgage-backed security. Accordingly, in order to determine whether such security is a permissible investment, it will be deemed to have a remaining maturity of three years or less if the average life, as estimated by the appropriate Specialist Manager, is three years or less at the time of purchase of the security by a Portfolio. An average life estimate is a function of an assumption regarding anticipated prepayment patterns. The assumption is based upon current interest rates, current conditions in the appropriate housing markets and other factors. The

 

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assumption is necessarily subjective, and thus different market participants could produce somewhat different average life estimates with regard to the same security. Although the appropriate Specialist Manager will monitor the average life of the Portfolio securities of each Portfolio with a portfolio maturity policy and make needed adjustments to comply with such Portfolios’ policy as to average dollar weighted portfolio maturity, there can be no assurance that the average life of portfolio securities as estimated by the appropriate Specialist Manager will be the actual average life of such securities.

The residential mortgage market in the United States recently has experienced difficulties that may adversely affect the performance and market value of certain of the Portfolios’ mortgage-related investments. Delinquencies and losses on residential mortgage loans (especially subprime and second-lien mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of housing values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure replacement mortgages at comparably low interest rates. Also, a number of residential mortgage loan originators have recently experienced serious financial difficulties or bankruptcy. Owing largely to the foregoing, reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen.

On September 6, 2008, the Federal Housing Finance Agency (“FHFA”) placed FNMA and FHLMC into conservatorship. As the conservator, FHFA succeeded to all rights, titles, powers and privileges of FNMA and FHLMC and of any stockholder, officer or director of FNMA and FHLMC with respect to FNMA and FHLMC and the assets of FNMA and FHLMC. FHFA selected a new chief executive officer and chairman of the board of directors for each of FNMA and FHLMC.

On September 7, 2008, the U.S. Treasury announced three additional steps taken by it in connection with the conservatorship. First, the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of FNMA and FHLMC pursuant to which the U.S. Treasury will purchase up to an aggregate of $100 billion of each of FNMA and FHLMC to maintain a positive net worth in each enterprise. This agreement contains various covenants that severely limit each enterprise’s operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprise’s senior preferred stock and warrants to purchase 79.9% of each enterprise’s common stock. Second, the U.S. Treasury announced the creation of a new secured lending facility which is available to each of FNMA and FHLMC as a liquidity backstop. Third, the U.S. Treasury announced the creation of a temporary program to purchase mortgage-backed securities issued by each of FNMA and FHLMC. The liquidity backstop was extended through December 2012. The original mortgage-backed securities purchase program was completed in March 2010.

FNMA and FHLMC are continuing to operate as going concerns while in conservatorship and each remain liable for all of its obligations, including its guaranty obligations, associated with its mortgage-backed securities. The liquidity backstop and the Senior Preferred Stock Purchase Agreement are both intended to enhance each of FNMA’s and FHLMC’s ability to meet its obligations.

Under the Federal Housing Finance Regulatory Reform Act of 2008 (the Reform Act”), which was included as part of the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by FNMA or FHLMC prior to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly administration of FNMA’s or FHLMC’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period of time after its appointment as conservator or receiver.

FHFA, in its capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA views repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the conservatorship or receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMA’s or FHLMC’s assets available therefore.

In the event of repudiation, the payments of interest to holders of FNMA or FHLMC mortgage-backed securities would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders.

 

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Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or liability of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another party, holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.

In addition, certain rights provided to holders of mortgage-backed securities issued by FNMA and FHLMC under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC mortgage-backed securities may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such mortgage-backed securities have the right to replace FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed securities holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or receiver has been appointed. The Reform Act also provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which FNMA or FHLMC is a party, or obtain possession of or exercise control over any property of FNMA or FHLMC, or affect any contractual rights of FNMA or FHLMC, without the approval of FHFA, as conservator or receiver, for a period of 45 or 90 days following the appointment of FHFA as conservator or receiver, respectively.

Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities or private insurers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the Trust’s investment quality standards. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements.

ASSET-BACKED SECURITIES. Certain Portfolios may invest in asset-backed securities, which represent participations in, or are secured by and payable from, pools of assets including company receivables, truck and auto loans, leases and credit card receivables. The asset pools that back asset-backed securities are securitized through the use of privately-formed trusts or special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued by a financial institution unaffiliated with the trust or corporation, or other credit enhancements may be present. Certain asset backed securities may be considered derivative instruments.

COLLATERALIZED DEBT OBLIGATIONS. The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio and The Commodity Returns Strategy Portfolio may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities. CBOs, CLOs and other CDOs are types of asset-backed securities. A CBO is a trust which is backed by a diversified pool of high risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities such as high yield debt, residential privately issue mortgage-related securities, commercial privately issued mortgage-related securities, trust preferred securities and emerging market debt. A CLO is a trust typically collateralized by a pool of loans, which may include, among other things, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Other CDOs are trusts backed by other types of assets representing obligation of various parties. CBOs, CLOs and other CDOs may charge management fees and administrative expenses.

For both CBOs, CLOs and other CDOs, the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default in all but the most severe circumstances. Since they are partially protected from defaults, senior tranches from a CBO trust, CLO trust or trust of another CDO typically have higher ratings and lower yields than their underlying securities, and can be rated investment grade. Despite the protection from the equity tranche, CBO, CLO or other CDO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as aversion to CBO, CLO or other CDO securities as a class.

 

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The risks of an investment in a CBO, CLO or other CDO depend largely on the type of the collateral securities and the class of the instrument in which a Portfolio invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Portfolio as illiquid securities, however an active dealer market may exist for CBOs, CLOs and other CDOs allowing them to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities, CBOs, CLOs and other CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the Portfolio may invest in CBOs, CLOs and other CDOs that are subordinate to other classes; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose entities of the foregoing.

SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all of the interest (the “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including pre-payments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Portfolio’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated pre-payments of principal, a Portfolio may fail to recoup some or all of its initial investment in these securities even if the security is in one of the highest rating categories.

REAL ESTATE SECURITIES

REAL ESTATE INVESTMENT TRUSTS (“REITS”). REITs are pooled investment vehicles that invest the majority of their assets directly in real property and/or in loans to building developers. They derive income primarily from the collection of rents and/or interest on loans.

REITs are sometimes informally characterized as Equity REITs, Mortgage REITs, Hybrid REITs and REOCs. An Equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings and derives its income primarily from rental income. An Equity REIT may also realize capital gains (or losses) by selling real estate properties in its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT invests primarily in mortgages on real estate, which may secure construction, development or long-term loans. A Mortgage REIT generally derives its income primarily from interest payments on the credit it has extended. A Hybrid REIT combines the characteristics of Equity REITs and Mortgage REITs, generally by holding both ownership interests and mortgage interests in real estate. REOCs are real estate companies that engage in the development, management, or financing of real estate. Typically, they provide services such as property management, property development, facilities management, and real estate financing. REOCs are publicly traded corporations that have not elected to be taxed as REITs. The three primary reasons for such an election are (a) availability of tax-loss carryforwards, (b) operation in non-REIT-qualifying lines of business, and (c) ability to retain earnings.

Similar to investment companies, REITs are not taxed on income distributed to shareholders provided they comply with several requirements of the Code. The Real Estate Securities Portfolio will indirectly bear its proportionate share of expenses incurred by REITs in which it invests in addition to the expenses incurred directly by the Portfolio.

Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. First, the value of a REIT may be affected by changes in the value of the underlying property owned by the REITs. In addition, REITs are dependent upon management skills, are not diversified, are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax-free pass-through of income under the Code and failing to maintain their exemption from registration under the Investment Company Act.

Investment in REITs involves risks similar to those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Historically, small capitalization stocks, such as REITs, have been more volatile in price than the larger capitalization stocks included in the Standard & Poor’s 500 Composite Stock Price Index (the “S&P Index”).

 

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MUNICIPAL SECURITIES

As stated in the Prospectuses, The Short-Term Municipal Bond, The Intermediate Term Municipal Bond, The Intermediate Term Municipal Bond II Portfolios and The U.S. Corporate Fixed Income Securities Portfolio, and to a lesser extent The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio and each of the other Income Portfolios, may invest in municipal securities. Municipal securities consist of bonds, notes and other instruments issued by or on behalf of states, territories and possessions of the United States (including the District of Columbia) and their political subdivisions, agencies or instrumentalities, the interest on which is exempt from regular federal tax. Municipal securities may also be issued on a taxable basis.

The two principal classifications of municipal securities are “general obligations” and “revenue obligations.” General obligations are secured by the issuer’s pledge of its full faith and credit for the payment of principal and interest although the characteristics and enforcement of general obligations may vary according to law applicable to the particular issuer. Revenue obligations, which include, but are not limited to, private activity bonds, resource recovery bonds, certificates of participation and certain municipal notes, are not backed by the credit and taxing authority of the issuer and are payable solely from the revenues 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. Nevertheless, the obligations of the issuers with respect to “general obligations” and/or “revenue obligations” may be backed by a letter of credit, guarantee or insurance. General obligations and revenue obligations may be issued in a variety of forms, including commercial paper, fixed, variable and floating rate securities, tender option bonds, auction rate bonds and capital appreciation bonds. In addition to general obligations and revenue obligations, there is a variety of hybrid and special types of municipal securities. There are also numerous differences in the credit backing of municipal securities both within and between these two principal classifications. For the purpose of applying a portfolio’s investment restrictions, the identification of the issuer of a municipal security which is not a general obligation is made by the appropriate Specialist Manager based on the characteristics of the municipal security, the most important of which is the source of funds for the payment of principal and interest on such securities.

An entire issue of municipal securities may be purchased by one or a small number of institutional investors such as a portfolio. Thus, the issue may not be said to be publicly offered. Unlike some securities that are not publicly offered, a secondary market exists for many municipal securities that were not publicly offered initially and such securities can be readily marketable. The obligations of an issuer to pay the principal of and interest on a municipal security are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any, that may be enacted by Congress or state legislatures extending the time for payment of principal or interest or imposing other constraints upon the enforcement of such obligations. There is also the possibility that, as a result of litigation or other conditions, the power or ability of the issuer to pay when due principal of or interest on a municipal security may be materially affected.

MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND OTHER PARTICIPATION INTERESTS. Municipal leases frequently involve special risks not normally associated with general obligation or revenue bonds, some of which are summarized in the Prospectuses. In addition, leases and installment purchase or conditional sale contracts (which normally provide for title to the leased asset to pass eventually to the governmental issuer) have evolved as a means for governmental issuers to acquire property and equipment without meeting the constitutional and statutory requirements for the issuance of debt. The debt issuance limitations are deemed to be inapplicable because of the inclusion in many leases or contracts of “non-appropriation” clauses that relieve the governmental issuer of any obligation to make future payments under the lease or contract unless money is appropriated for such purpose by the appropriate legislative body on a yearly or other periodic basis. Thus, a portfolio’s investment in municipal leases will be subject to the special risk that the governmental issuer may not appropriate funds for lease payments. In addition, such leases or contracts may be subject to the temporary abatement of payments in the event the issuer is prevented from maintaining occupancy of the leased premises or utilizing the leased equipment. Although the obligations may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and result in an unsatisfactory or delayed recoupment of a portfolio’s original investment.

Certificates of participation represent undivided interests in municipal leases, installment purchase contracts or other instruments. The certificates are typically issued by a trust or other entity which has received an assignment of the payments to be made by the state or political subdivision under such leases or installment purchase contracts.

Certain municipal lease obligations and certificates of participation may be deemed illiquid for the purpose of the Portfolios’ respective limitations on investments in illiquid securities. Other municipal lease obligations and certificates of participation acquired by a Portfolio may be determined by the appropriate Specialist Manager, pursuant to guidelines adopted by the Board, to be liquid securities for the purpose of such Portfolio’s limitation on investments in illiquid securities. In determining the liquidity of municipal lease obligations and certificates of participation, the appropriate Specialist Manager will consider a variety of factors including: (1) the willingness of dealers to bid for the security; (2) the number of dealers willing to purchase or sell the obligation and the number of

 

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other potential buyers; (3) the frequency of trades or quotes for the obligation; and (4) the nature of the marketplace trades. In addition, the appropriate Specialist Manager will consider factors unique to particular lease obligations and certificates of participation affecting the marketability thereof. These include the general creditworthiness of the issuer, the importance to the issuer of the property covered by the lease and the likelihood that the marketability of the obligation will be maintained throughout the time the obligation is held by a Portfolio. No Portfolio, with the exception of The Institutional Value Equity Portfolio, The Institutional Growth Equity Portfolio, The Fixed Income Opportunity Portfolio and The Commodity Returns Strategy Portfolio, may invest more than 5% of its net assets in municipal leases. Each of the Income Portfolios may purchase participations in municipal securities held by a commercial bank or other financial institution. Such participations provide a Portfolio with the right to a pro rata undivided interest in the underlying municipal securities. In addition, such participations generally provide a Portfolio with the right to demand payment, on not more than seven days notice, of all or any part of the Portfolio’s participation interest in the underlying municipal security, plus accrued interest.

MUNICIPAL NOTES. Municipal securities in the form of notes generally are used to provide for short-term capital needs, in anticipation of an issuer’s receipt of other revenues or financing, and typically have maturities of up to three years. Such instruments may include Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes, Tax and Revenue Anticipation Notes and Construction Loan Notes. Tax Anticipation Notes are issued to finance the working capital needs of governments. Generally, they are issued in anticipation of various tax revenues, such as income, sales, property, use and business taxes, and are payable from these specific future taxes. Revenue Anticipation Notes are issued in expectation of receipt of other kinds of revenue, such as federal revenues available under federal revenue sharing programs. Bond Anticipation Notes are issued to provide interim financing until long-term bond financing can be arranged. In most cases, the long-term bonds then provide the funds needed for repayment of the notes. Tax and Revenue Anticipation Notes combine the funding sources of both Tax Anticipation Notes and Revenue Anticipation Notes. Construction Loan Notes are sold to provide construction financing. These notes are secured by mortgage notes insured by the Federal Housing Authority; however, the proceeds from the insurance may be less than the economic equivalent of the payment of principal and interest on the mortgage note if there has been a default. The obligations of an issuer of municipal notes are generally secured by the anticipated revenues from taxes, grants or bond financing. An investment in such instruments, however, presents a risk that the anticipated revenues will not be received or that such revenues will be insufficient to satisfy the issuer’s payment obligations under the notes or that refinancing will be otherwise unavailable.

PRE-REFUNDED MUNICIPAL SECURITIES. The principal of and interest on municipal securities that have been pre-refunded are no longer paid from the original revenue source for the securities. Instead, after pre-refunding, the source of such payments is typically an escrow fund consisting of obligations issued or guaranteed by the U.S. Government. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities. However, except for a change in the revenue source from which principal and interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer. Pre-refunded municipal securities are usually purchased at a price which represents a premium over their face value.

AUCTION RATE SECURITIES. Auction rate securities consist of auction rate municipal securities and auction rate preferred securities issued by closed-end investment companies that invest primarily in municipal securities. Provided that the auction mechanism is successful, auction rate securities usually permit the holder to sell the securities in an auction at par value at specified intervals. The dividend is reset by “Dutch” auction in which bids are made by broker-dealers and other institutions for a certain amount of securities at a specified minimum yield. The dividend rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale. While this process is designed to permit auction rate securities to be traded at par value, there is the risk that an auction will fail due to insufficient demand for the securities.

Dividends on auction rate preferred securities issued by a closed-end fund may be designated as exempt from federal income tax to the extent they are attributable to tax-exempt interest income earned by the fund on the securities in its portfolio and distributed to holders of the preferred securities, provided that the preferred securities are treated as equity securities for federal income tax purposes and the closed-end fund complies with certain requirements under the Internal Revenue Code of 1986, as amended (the “Code”). For purposes of complying with the 20% limitation on each of the municipal Portfolio’s investments in taxable investments, auction rate preferred securities will be treated as taxable investments unless substantially all of the dividends on such securities are expected to be exempt from regular federal income taxes.

 

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A portfolio’s investments in auction rate preferred securities of closed-end funds are subject to limitations on investments in other U.S. registered investment companies, which limitations are prescribed by the Investment Company Act. These limitations include prohibitions against acquiring more than 3% of the voting securities of any other such investment company, and investing more than 5% of that Portfolio’s total assets in securities of any one such investment company or more than 10% of its total assets in securities of all such investment companies. A portfolio will indirectly bear its proportionate share of any management fees paid by such closed-end funds in addition to the advisory fee payable directly by that portfolio.

PRIVATE ACTIVITY BONDS. Certain types of municipal securities, generally referred to as industrial development bonds (and referred to under current tax law as private activity bonds), are issued by or on behalf of public authorities to obtain funds for privately-operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and certain local facilities for water supply, gas or electricity. Other types of industrial development bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues. The interest from certain private activity bonds owned by a Portfolio (including an Income Portfolio’s distributions attributable to such interest) may be a preference item for purposes of the alternative minimum tax. The Short-Term Municipal Bond Portfolio does not currently intend to invest in Private Activity Bonds.

TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper typically represent short-term, unsecured, negotiable promissory notes. These obligations are issued by state and local governments and their agencies to finance working capital needs of municipalities or to provide interim construction financing and are paid from general revenues of municipalities or are refinanced with long-term debt. In most cases, tax-exempt commercial paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions.

TENDER OPTION BONDS. A tender option bond is a municipal security (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term tax-exempt rates. The bond is typically issued in conjunction with the agreement of a third party, such as a bank, broker-dealer or other financial institution, pursuant to which such institution grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof.

As consideration for providing the option, the financial institution receives periodic fees equal to the difference between the bond’s fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to trade at par on the date of such determination. Thus, after payment of this fee, the security holder effectively holds a demand obligation that bears interest at the prevailing short-term tax-exempt rate. However, an institution will not be obligated to accept tendered bonds in the event of certain defaults or a significant downgrade in the credit rating assigned to the issuer of the bond. The liquidity of a tender option bond is a function of the credit quality of both the bond issuer and the financial institution providing liquidity. Tender option bonds are deemed to be liquid unless, in the opinion of the appropriate Specialist Manager, the credit quality of the bond issuer and the financial institution is deemed, in light of the Portfolio’s credit quality requirements, to be inadequate. Each Income Portfolio intends to invest only in tender option bonds the interest on which will, in the opinion of bond counsel, counsel for the issuer of interests therein or counsel selected by the appropriate Specialist Manager, be exempt from regular federal income tax. However, because there can be no assurance that the Internal Revenue Service (“IRS”) will agree with such counsel’s opinion in any particular case, there is a risk that an Income Portfolio will not be considered the owner of such tender option bonds and thus will not be entitled to treat such interest as exempt from such tax. Additionally, the federal income tax treatment of certain other aspects of these investments, including the proper tax treatment of tender option bonds and the associated fees, in relation to various regulated investment company tax provisions is unclear. Each Income Portfolio intends to manage its portfolio in a manner designed to eliminate or minimize any adverse impact from the tax rules applicable to these investments.

 

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OTHER FIXED INCOME SECURITIES AND STRATEGIES.

HIGH YIELD SECURITIES AND SECURITIES OF DISTRESSED COMPANIES. High yield securities, commonly referred to as junk bonds, are debt obligations rated below investment grade, i.e., below BBB by Standard & Poor’s Ratings Group (“S&P”) or Baa by Moody’s Investors Service, Inc. (“Moody’s”), or their unrated equivalents. The Fixed Income Opportunity Portfolio invests primarily in such securities. The Real Estate Securities Portfolio and The Core Fixed Income Portfolio may also invest in such securities according to each Portfolio’s Prospectus. High yield securities and securities of distressed companies generally provide greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk. Securities of distressed companies include both debt and equity securities. High yield securities and debt securities of distressed companies are regarded as predominantly speculative with respect to the issuer’s continuing ability to meet principal and interest payments. Issuers of high yield and distressed company securities may be involved in restructurings or bankruptcy proceedings that may not be successful. While any investment carries some risk, certain risks associated with high yield securities and debt securities of distressed companies which are different than those for investment grade are as follows:

 

  1. The market for high risk, high yield securities and debt securities of distressed companies may be thinner and less active, causing market price volatility and limited liquidity in the secondary market. This may limit the ability of a Portfolio to sell these securities at their fair market values either to meet redemption requests, or in response to changes in the economy or the financial markets.

 

  2. Market prices for high risk, high yield securities and debt securities of distressed companies may also be affected by investors’ perception of the issuer’s credit quality and the outlook for economic growth. Thus, prices for high risk, high yield securities and debt securities of distressed companies may move independently of interest rates and the overall bond market.

 

  3. The market for high risk, high yield and distressed company securities may be adversely affected by legislative and regulatory developments.

 

  4. The risk of loss through default is greater for high yield fixed income securities and securities of distressed companies than for investment grade debt because the issuers of these securities frequently have high debt levels and are thus more sensitive to difficult economic conditions, individual corporate developments and rising interest rates.

Consequently, the market price of these securities may be quite volatile and may result in wider fluctuations in a portfolio’s net asset value per share.

In addition, an economic downturn or increase in interest rates could have a negative impact on both the markets for high yield and distressed company securities (resulting in a greater number of bond defaults) and the value of such securities held by a portfolio. Current laws, such as those requiring federally insured savings and loan associations to remove investments in such lower rated securities from their funds, as well as other pending proposals, may also have a material adverse effect on the market for lower rated securities.

The economy and interest rates may affect high yield securities and debt securities of distressed companies differently than other securities. For example, the prices of such securities are more sensitive to adverse economic changes or individual corporate developments than are the prices of higher rated investments. In addition, during an economic downturn or period in which interest rates are rising significantly, highly leveraged issuers may experience financial difficulties, which, in turn, would adversely affect their ability to service their principal and interest payment obligations, meet projected business goals and obtain additional financing.

Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed to be of comparable quality), or change in the percentage of Portfolio assets invested in certain securities or other instruments, or change in the average duration of a Portfolio’s investment portfolio, resulting from market fluctuations or other changes in a Portfolio’s total assets will not require the Portfolio to dispose of an investment. If an issuer of a security held by a portfolio defaults, that portfolio may incur additional expenses to seek recovery. In addition, periods of economic uncertainty would likely result in increased volatility for the market prices of high yield securities and debt securities of distressed companies as well as the Portfolio’s net asset value. In general, both the prices and yields of such securities will fluctuate.

In certain circumstances it may be difficult to determine a security’s fair value due to a lack of reliable objective information. Such instances occur where there is no established secondary market for the security or the security is lightly traded. As a result, a portfolio’s valuation of a security and the price it is actually able to obtain when it sells the security could differ.

 

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Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of high yield securities and distressed company held by a portfolio, especially in a thinly traded market. Illiquid or restricted securities held by a portfolio may involve special registration responsibilities, liabilities and costs, and could involve other liquidity and valuation difficulties.

The ratings of Moody’s, S&P and Fitch evaluate the safety of a lower rated security’s principal and interest payments, but do not address market value risk. Because the ratings of the rating agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the Specialist Managers perform their own analysis of the issuers of high yield securities and debt securities of distressed companies purchased by a Portfolio. Because of this, a Portfolio’s performance may depend more on its own credit analysis than is the case for mutual funds investing in higher rated securities.

The Specialist Managers continuously monitor the issuers of high yield securities and debt securities of distressed companies held by a Portfolio for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Portfolio so that it can meet redemption requests.

CUSTODIAL RECEIPTS. Custodial Receipts are U.S. government securities and their unmatured interest coupons that have been separated (“stripped”) by their holder, typically a custodian bank or investment brokerage firm. Having separated the interest coupons from the underlying principal of the U.S. government securities, the holder will resell the stripped securities in custodial receipt programs with a number of different names, including “Treasury Income Growth Receipts” (“TIGRs”) and “Certificate of Accrual on Treasury Securities” (“CATS”). The stripped coupons are sold separately from the underlying principal, which is usually sold at a deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive any rights to periodic interest (cash) payments. The underlying U.S. Treasury bonds and notes themselves are generally held in book-entry form at a Federal Reserve Bank. Counsel to the underwriters of these certificates or other evidences of ownership of U.S. Treasury securities have stated that, in their opinion, purchasers of the stripped securities most likely will be deemed the beneficial holders of the underlying U.S. government securities for federal tax and securities purposes. In the case of CATS and TIGRs, the IRS has reached this conclusion for the purpose of applying the tax diversification requirements applicable to regulated investment companies such as the Portfolios. CATS and TIGRs are not considered U.S. government securities by the staff of the Commission. Further, the IRS conclusion noted above is contained only in a general counsel memorandum, which is an internal document of no precedential value or binding effect, and a private letter ruling, which also may not be relied upon by the Portfolios. The Trust is not aware of any binding legislative, judicial or administrative authority on this issue.

WHEN-ISSUED SECURITIES. When-issued transactions involve a commitment to purchase at a predetermined price or yield in which delivery takes place after the customary settlement period for that type of security. Fixed income securities may be purchased on a “when-issued” basis. The price of securities purchased on a when-issued basis, which may be expressed in yield terms, is fixed at the time the commitment to purchase is made, but delivery and payment for the when-issued securities takes place at a later date. Normally, the settlement date occurs within one month of the purchase. At the time a commitment to purchase a security on a when-issued basis is made, the transaction is recorded and the value of the security will be reflected in determining net asset value. No payment is made by the purchaser, until settlement. The market value of the when-issued securities may be more or less than the purchase price. The Trust does not believe that net asset value will be adversely affected by the purchase of securities on a when-issued basis. Equity securities acquired by an Equity Portfolio as a result of corporate actions such as spin-offs may be treated as when-issued securities under certain circumstances. Additionally, when selling a security on a when-issued, delayed delivery, or forward commitment basis without owning the security, a Portfolio will incur a loss if the security’s price appreciates in value such that the security’s price is above the agreed upon price on the settlement date.

A Portfolio may dispose of or renegotiate a transaction after it is entered into, and may purchase or sell when-issued, delayed delivery or forward commitment securities before the settlement date, which may result in a gain or loss. To the extent permitted by applicable law, there is no percentage limitation on the extent to which the Portfolios may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.

INDEBTEDNESS, LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain Portfolios may purchase indebtedness and participations in commercial loans. Loan Participations typically will result in a Portfolio having a contractual relationship only with the lender, not with the borrower. A Portfolio will have the right to receive payments of principal, interest, and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In connection with purchasing indebtedness and Loan Participations, a Portfolio generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and Portfolio may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. As a result, a Portfolio

 

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will assume the credit risk of both the borrower and the lender that is selling the Participation. In the event of the insolvency of the lender selling indebtedness or a Loan Participation, a portfolio may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. A Portfolio will acquire indebtedness and Loan Participations only if the lender interpositioned between the Portfolio and the borrower is determined by the applicable Specialist Manager to be creditworthy. When a Portfolio purchases Assignments from lenders, the Portfolio will acquire direct rights against the borrower on the loan, except that under certain circumstances such rights may be more limited than those held by the assigning lender. Indebtedness is different from traditional debt securities in that debt securities are part of a large issue of securities to the public and indebtedness may not be a security, but may represent a specific commercial loan to a borrower.

A Portfolio may have difficulty disposing of Indebtedness, Assignments and Loan Participations. Since the market for such instruments is not highly liquid, the Portfolio anticipates that such instruments could be sold only to a limited number of institutional investors. Further, restrictions in the underlying credit agreement could limit the number of eligible purchasers. The lack of a highly liquid secondary market and restrictions in the underlying credit agreement may have an adverse impact on the value of such instruments and will have an adverse impact on the Portfolio’s ability to dispose of particular Assignments or Loan Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. In valuing a Loan Participation or Assignment held by a Portfolio for which a secondary trading market exists, the Portfolio will rely upon prices or quotations provided by banks, dealers or pricing services. To the extent a secondary trading market does not exist, the Portfolio’s Loan Participations and Assignments will be valued in accordance with procedures adopted by the Board of Trustees, taking into consideration, among other factors: (i) the creditworthiness of the borrower and the lender; (ii) the current interest rate; period until next rate reset and maturity of the loan; (iii) currently available prices in the market for similar loans; and (iv) currently available prices in the market for instruments of similar quality, rate, period until next interest rate reset and maturity. The secondary market for loan participations is limited and any such participation purchased by Specialist Manager may be regarded as illiquid.

Loan Collateral. In order to borrow money pursuant to a Senior Loan, a borrower will frequently, for the term of the Senior Loan, pledge collateral, including but not limited to, (i) working capital assets, such as accounts receivable and inventory; (ii) tangible fixed assets, such as real property, buildings and equipment; (iii) intangible assets, such as trademarks and patent rights (but excluding goodwill); and/or (iv) security interests in shares of stock of subsidiaries or affiliates. In the case of Senior Loans made to non-public companies, the company’s shareholders or owners may provide collateral in the form of secured guarantees and/or security interests in assets that they own. In many instances, a Senior Loan may be secured only by stock in the borrower or its subsidiaries. Collateral may consist of assets that may not be readily liquidated, and there is no assurance that the liquidation of such assets would satisfy a borrower’s obligations under a Senior Loan.

Certain Fees Paid to the Portfolios. In the process of buying, selling and holding Senior Loans, the Portfolios may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, commissions and prepayment penalty fees. When the Portfolios buy a Senior Loan they may receive a facility fee and when it sells a Senior Loan it may pay a facility fee. On an ongoing basis, the Portfolios may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a Senior Loan. In certain circumstances, the Portfolios may receive a prepayment penalty fee upon the prepayment of a Senior Loan by a borrower. Other fees received by the Portfolios may include amendment fees.

Borrower Covenants. A borrower must comply with various restrictive covenants contained in a loan agreement or note purchase agreement between the borrower and the holders of the Senior Loan (the “Loan Agreement”). Such covenants, in addition to requiring the scheduled payment of interest and principal, may include restrictions on dividend payments and other distributions to stockholders, provisions requiring the borrower to maintain specific minimum financial ratios, and limits on total debt. In addition, the Loan Agreement may contain a covenant requiring the borrower to prepay the Loan with all or a portion of any free cash flow. Free cash flow is generally defined as net cash flow after scheduled debt service payments and permitted capital expenditures, and includes the proceeds from asset dispositions or sales of securities. A breach of a covenant which is not waived by the Agent, or by the Loan Investors directly, as the case may be, is normally an event of acceleration; i.e., the Agent, or the Loan Investors directly, as the case may be, has the right to call the outstanding Senior Loan. The typical practice of an Agent or a Loan Investor in relying exclusively or primarily on reports from the borrower may involve a risk of fraud by the borrower. In the case of a Senior Loan in the form of a Participation, the agreement between the buyer and seller may limit the rights of the holder to vote on certain changes which may be made to the Loan Agreement, such as loosening a covenant. However, the holder of the Participation will, in almost all cases, have the right to vote on or direct the seller of the Participation to vote on certain fundamental issues such as changes in principal amount, payment dates and interest rate.

Administration of Loans. In a typical Senior Loan, the Agent administers the terms of the Loan Agreement. In such cases, the Agent is normally responsible for the collection of principal and interest payments from the borrower and the apportionment of these payments to the credit of all institutions which are parties to the Loan Agreement. The Portfolios will generally rely upon the Agent

 

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or an intermediate participant to receive and forward to the Portfolios its portion of the principal and interest payments on the Senior Loan. Furthermore, unless under the terms of a Participation Agreement the Portfolios have direct recourse against the borrower, the Portfolios will rely on the Agent and the other Loan Investors to use appropriate credit remedies against the borrower. The Agent is typically responsible for monitoring compliance with covenants contained in the Loan Agreement based upon reports prepared by the borrower. The Agent of the Senior Loan usually does, but is often not obligated to, notify holders of Senior Loans of any failures of compliance. The Agent may monitor the value of the collateral and, if the value of the collateral declines, may accelerate the Senior Loan, may give the borrower an opportunity to provide additional collateral or may seek other protection for the benefit of the holders of the Senior Loan. The Agent is compensated by the borrower for providing these services under a Loan Agreement, and such compensation may include special fees paid upon structuring and funding the Senior Loan and other fees paid on a continuing basis. With respect to Senior Loans for which the Agent does not perform such administrative and enforcement functions, the Portfolios will perform such tasks on its own behalf, although a collateral bank will typically hold any collateral on behalf of the Portfolios and the other Loan Investors pursuant to the applicable Loan Agreement.

A financial institution’s appointment as Agent may be terminated in the event that it fails to observe the requisite standard of care or becomes insolvent, enters Federal Deposit Insurance Corporation (“FDIC”) receivership, or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent would generally be appointed to replace the terminated Agent, and assets held by the Agent under the Loan Agreement should remain available to holders of Senior Loans. However, if assets held by the Agent for the benefit of the Portfolios were determined to be subject to the claims of the Agent’s general creditors, the Portfolios might incur certain costs and delays in realizing payment on a Senior Loan, or suffer a loss of principal and/or interest. In situations involving intermediate participants similar risks may arise.

Prepayments. Senior Loans can require, in addition to scheduled payments of interest and principal, the prepayment of the Senior Loan from free cash flow, as defined above. The degree to which borrowers prepay Senior Loans, whether as a contractual requirement or at their election, may be affected by general business conditions, the financial condition of the borrower and competitive conditions among Loan Investors, among other factors. As such, prepayments cannot be predicted with accuracy. Upon a prepayment, either in part or in full, the actual outstanding debt on which the Portfolios derive interest income will be reduced. However, the Portfolios may receive both a prepayment penalty fee from the prepaying borrower and a facility fee upon the purchase of a new Senior Loan with the proceeds from the prepayment of the former. Prepayments generally will not materially affect the Portfolios‘ performance because the Portfolios should be able to reinvest prepayments in other Senior Loans that have similar yields (subject to market conditions) and because receipt of such fees may mitigate any adverse impact on the Portfolios’ yield.

Other Information Regarding Senior Loans. Certain Portfolios may purchase and retain a Senior Loan where the borrower has experienced, or may be perceived to be likely to experience, credit problems, including involvement in or recent emergence from bankruptcy reorganization proceedings or other forms of debt restructuring. Such investments may provide opportunities for enhanced income as well as capital appreciation. At times, in connection with the restructuring of a Senior Loan either outside of bankruptcy court or in the context of bankruptcy court proceedings, the Portfolios may determine or be required to accept equity securities or junior debt securities in exchange for all or a portion of a Senior Loan. As soon as reasonably practical, a Portfolio will divest itself of any equity securities or any junior debt securities received if it is determined that the security is an ineligible holding for the Portfolio.

Certain Portfolios may acquire interests in Senior Loans which are designed to provide temporary or “bridge” financing to a borrower pending the sale of identified assets or the arrangement of longer-term loans or the issuance and sale of debt obligations. Bridge loans are often unrated. the Portfolios may also invest in Senior Loans of borrowers that have obtained bridge loans from other parties. A borrower’s use of bridge loans involves a risk that the borrower may be unable to locate permanent financing to replace the bridge loan, which may impair the borrower’s perceived creditworthiness.

Certain Portfolios will be subject to the risk that collateral securing a loan will decline in value or have no value. Such a decline, whether as a result of bankruptcy proceedings or otherwise, could cause the Senior Loan to be undercollateralized or unsecured. In most credit agreements there is no formal requirement to pledge additional collateral. In addition, the Portfolios may invest in Senior Loans guaranteed by, or secured by assets of, shareholders or owners, even if the Senior Loans are not otherwise collateralized by assets of the borrower; provided, however, that such guarantees are fully secured. There may be temporary periods when the principal asset held by a borrower is the stock of a related company, which may not legally be pledged to secure a Senior Loan. On occasions when such stock cannot be pledged, the Senior Loan will be temporarily unsecured until the stock can be pledged or is exchanged for or replaced by other assets, which will be pledged as security for the Senior Loan.

 

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If a borrower becomes involved in bankruptcy proceedings, a court may invalidate the Portfolios’ security interest in the loan collateral or subordinate the Portfolios’ rights under the Senior Loan to the interests of the borrower’s unsecured creditors or cause interest previously paid to be refunded to the borrower. If a court required interest to be refunded, it could negatively affect the Portfolios’ performance. Such action by a court could be based, for example, on a “fraudulent conveyance” claim to the effect that the borrower did not receive fair consideration for granting the security interest in the loan collateral to the Portfolios or a “preference claim” that a pre-petition creditor received a greater recovery on an existing debt than it would have in a liquidation situation. For Senior Loans made in connection with a highly leveraged transaction, consideration for granting a security interest may be deemed inadequate if the proceeds of the Loan were not received or retained by the borrower, but were instead paid to other persons (such as shareholders of the borrower) in an amount which left the borrower insolvent or without sufficient working capital. There are also other events, such as the failure to perfect a security interest due to faulty documentation or faulty official filings, which could lead to the invalidation of the Portfolios’ security interest in loan collateral. If the Portfolios’ security interest in loan collateral is invalidated or the Senior Loan is subordinated to other debt of a borrower in bankruptcy or other proceedings, the Portfolios would have substantially lower recovery, and perhaps no recovery on the full amount of the principal and interest due on the Loan, or the Portfolios could also have to refund interest (see the prospectus for additional information).

Certain Portfolios may acquire warrants and other equity securities as part of a unit combining a Senior Loan and equity securities of a borrower or its affiliates. The acquisition of such equity securities will only be incidental to the Portfolios’ purchase of a Senior Loan. Certain Portfolios may also acquire equity securities or debt securities (including non-dollar denominated debt securities) issued in exchange for a Senior Loan or issued in connection with the debt restructuring or reorganization of a borrower, or if such acquisition, in the judgment of the Specialist Manager, may enhance the value of a Senior Loan or would otherwise be consistent with the Portfolios investment policies.

Regulatory Changes. To the extent that legislation or state or federal regulators that regulate certain financial institutions impose additional requirements or restrictions with respect to the ability of such institutions to make loans, particularly in connection with highly leveraged transactions, the availability of Senior Loans for investment may be adversely affected. Further, such legislation or regulation could depress the market value of Senior Loans.

TRADE CLAIMS. Certain Portfolios may purchase trade claims and similar obligations or claims against companies in bankruptcy proceedings. Trade claims are non-securitized rights of payment arising from obligations that typically arise when vendors and suppliers extend credit to a company by offering payment terms for products and services. If the company files for bankruptcy, payments on these trade claims stop and the claims are subject to compromise along with the other debts of the company. Trade claims may be purchased directly from the creditor or through brokers. There is no guarantee that a debtor will ever be able to satisfy its trade claim obligations. Trade claims are subject to the risks associated with low-quality obligations.

STRUCTURED PRODUCTS. One common type of security is a “structured” product. Structured products, such as structured notes, generally are individually negotiated agreements and may be traded over-the-counter. They are organized and operated to restructure the investment characteristics of the underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, of specified instruments (such as commercial bank loans) and the issuance by that entity of one or more classes of securities (“structured securities”) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of such payments made with respect to structured securities is dependent on the extent of the cash flow on the underlying instruments.

With respect to structured products, because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Investments in structured securities are generally of a class that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks than unsubordinated structured securities. Structured securities are typically sold in private placement transactions, and there is currently no active trading market for these securities.

Structured products include instruments such as credit-linked securities, commodity-linked notes and structured notes, which are potentially high-risk derivatives. For example, a structured product may combine a traditional stock, bond, or commodity with an option or forward contract.

Structured Notes. Structured notes are derivative instruments, the interest rate or principal of which is determined by reference to changes in value of a specific security, reference rate, or index. Indexed securities, similar to structured notes, are typically, but not always, debt securities whose value a maturity or coupon rate is determined by reference to other securities. The performance of a structured note or indexed security is based upon the performance of the underlying instrument.

 

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The terms of a structured note may provide that, in certain circumstances, no principal is due on maturity and, therefore, may result in loss of investment. Structured notes may be indexed positively or negatively to the performance of the underlying instrument such that the appreciation or deprecation of the underlying instrument will have a similar effect on the value of the structured note at maturity or of any coupon payment. In addition, changes in the interest rate and value of the principal at maturity may be fixed at a specific multiple of the change in value of the underlying instrument, making the value of the structured note more volatile than the underlying instrument. Further, structured notes may be less liquid and more difficult to price accurately than less complex securities or traditional debt securities

Credit-Linked Securities. Credit-linked securities are issued by a limited purpose trust or other vehicle that, in turn, invests in a basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain high yield or other fixed income markets. For example, a Portfolio may invest in credit-linked securities as a cash management tool in order to gain exposure to the high yield markets and/or to remain fully invested when more traditional income producing securities are not available. Like an investment in a bond, investments in credit-linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the trust’s receipt of payments from, and the trust’s potential obligations to, the counterparties to the derivative instruments and other securities in which the trust invests. For instance, the trust may sell one or more credit default swaps, under which the trust would receive a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the trust would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that a Portfolio would receive as an investor in the trust. A Portfolio’s investments in these instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk and management risk. It is expected that the securities will be exempt from registration under the 1933 Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid investments.

Commodity-Linked Notes. The Commodity Returns Strategy Portfolio may invest in commodity linked notes. Certain structured products may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked structured products may be either equity or debt securities, leveraged or unleveraged, and have both security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable. The Portfolio will only invest in commodity-linked structured products that qualify under applicable rules of the CFTC for an exemption from the provisions of the CEA.

Certain issuers of structured products may be deemed to be investment companies as defined in the 1940 Act. As a result, the Portfolio’s investments in these structured products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.

EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS. Eurodollar obligations are U.S. dollar denominated obligations issued outside the United States by non-U.S. corporations or other entities. Yankee dollar obligations are U.S. dollar denominated obligations issued in the United States by non-U.S. corporations or other entities. Yankee obligations are subject to the same risks that pertain to the domestic issues, notably credit risk, market risk and liquidity risk. Additionally, Yankee obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital from flowing across their borders. Other risks include: adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization or foreign issuers.

ZERO COUPON SECURITIES. Zero coupon securities are debt securities that make no coupon payment but are sold at substantial discounts from their value at maturity. When a zero coupon security is held to maturity, its entire return, which consists of the amortization of discount, comes from the difference between its purchase price and its maturity value. This difference is known at the time of purchase, so that investors holding zero coupon securities until maturity know at the time of their investment what the expected return on their investment will be. Zero coupon securities may have conversion features. Zero coupon securities tend to be subject to greater price fluctuations in response to changes in interest rates than are ordinary interest-paying debt securities with similar maturities. The value of zero coupon securities appreciates more during periods of declining interest rates and depreciates more during periods of rising interest rates than ordinary interest-paying debt securities with similar maturities. Zero coupon securities may be issued by a wide variety of corporate and governmental issuers. Although these instruments are generally not traded on a national securities exchange, they are widely traded by brokers and dealers and, to such extent, will generally not be considered illiquid for the purposes of a Portfolio’s limitation on investments in illiquid securities.

 

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TREASURY INFLATION PROTECTED SECURITIES (“TIPS”). TIPS are securities issued by the U.S. Treasury that are designed to provide inflation protection to investors. TIPS are income-generating instruments that provide a ‘real rate of return’ by adjusting interest and principal payments for the impact of inflation. This periodic inflation adjustment of U.S. inflation-indexed securities is tied to the Consumer Price Index (CPI), which is calculated monthly by the U.S. Bureau of Labor Statistics. CPI measures the change in the cost of a fixed basket of consumer goods and services, such as transportation, food, and housing. A fixed coupon rate is applied to the inflation-adjusted principal so that as inflation rises, both the principal value and the interest payments increase. This can provide investors with a hedge against inflation, as it helps preserve the purchasing power of an investment. Because of this inflation adjustment feature, inflation-protected bonds typically have lower yields than conventional fixed-rate bonds.

NON-PUBLICLY TRADED SECURITIES; RULE 144A SECURITIES AND PRIVATE PLACEMENTS. The Portfolios may purchase securities that are not registered under the Securities Act of 1933, as amended (the “1933 Act”), but that can be sold to “accredited investors” under Regulation D under the 1933 Act (“Reg. D Securities” or “Private Placements”)) or “qualified institutional buyers” in accordance with Rule 144A under the 1933 Act (“Rule 144A Securities”). An investment in Rule 144A Securities will be considered illiquid and therefore subject to a portfolio’s limitation on the purchase of illiquid securities, unless a portfolio’s governing Board of Trustees determines on an ongoing basis that an adequate trading market exists for the security. In addition to an adequate trading market, the Board of Trustees will also consider factors such as trading activity, availability of reliable price information and other relevant information in determining whether a Rule 144A Security is liquid. This investment practice could have the effect of increasing the level of illiquidity in a portfolio to the extent that qualified institutional buyers become uninterested for a time in purchasing Rule 144A Securities. The Board of Trustees will carefully monitor any investments by a Portfolio in Rule 144A Securities. The Trust’s Board of Trustees may adopt guidelines and delegate to the Specialist Managers the daily function of determining and monitoring the liquidity of Rule 144A Securities, although the Board of Trustees will retain ultimate responsibility for any determination regarding liquidity.

Non-publicly traded securities (including Reg. D and Rule 144A Securities) may involve a high degree of business and financial risk and may result in substantial losses. These securities may be less liquid than publicly traded securities, and a Portfolio may take longer to liquidate these positions than would be the case for publicly traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized on such sales could be less than those originally paid by a Portfolio. Further, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements applicable to companies whose securities are publicly traded. A Portfolio’s investments in illiquid securities are subject to the risk that should a portfolio desire to sell any of these securities 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.

ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or disposed of in the ordinary course of business (within seven days) at approximately the prices at which they are valued. Because of their illiquid nature, illiquid securities must be priced at fair value as determined in good faith pursuant to procedures approved by the Trust’s Board of Trustees. Despite such good faith efforts to determine fair value prices, a Portfolio’s illiquid securities are subject to the risk that the security’s fair value price may differ from the actual price, which the Portfolio may ultimately realize upon its sale or disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to a Portfolio. Under the supervision of the Trust’s Board of Trustees, the Specialist Manager determines the liquidity of a Portfolio’s investments. In determining the liquidity of a Portfolio’s investments, the Specialist Manager may consider various factors, including (1) the frequency and volume of trades and quotations, (2) the number of dealers and prospective purchasers in the marketplace, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (including any demand, put or tender features, the mechanics and other requirements for transfer, any letters of credit or other credit enhancement features, any ratings, the number of holders, the method of soliciting offers, the time required to dispose of the security, and the ability to assign or offset the rights and obligations of the security).

PAY-IN-KIND SECURITIES. Pay-In-Kind securities are debt obligations or preferred stock that pay interest or dividends in the form of additional debt obligations or preferred stock.

PREFERRED STOCK. Preferred stock is a corporate equity security that pays a fixed or variable stream of dividends. Preferred stock is generally a non-voting security. Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company’s common stock, and thus also represent an ownership interest in that company.

Preferred stocks may pay fixed or adjustable rates of return. Preferred stock is subject to issuer-specific and market risks applicable generally to equity securities. In addition, a company’s preferred stock generally pays dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of preferred stock will usually react more strongly than bonds and other debt to actual or perceived changes in the company’s financial condition or prospects. Preferred stock of smaller companies may be more vulnerable to adverse developments than preferred stock of larger companies.

 

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CONVERTIBLE SECURITIES. Each Portfolio may invest in convertible securities, which may offer higher income than the common stocks into which they are convertible.

A convertible security is a bond, debenture, note, preferred stock, or other security that entitles the holder to acquire common stock or other equity securities of the same or a different issuer. A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to non-convertible debt or preferred securities, as applicable. Convertible securities rank senior to common stock in a corporation’s capital structure and, therefore, generally entail less risk than the corporation’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. Convertible securities are subordinate in rank to any senior debt obligations of the issuer, and, therefore, an issuer’s convertible securities entail more risk than its debt obligations. Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar credit quality because of the potential for capital appreciation. In addition, convertible securities are often lower-rated securities.

Because of the conversion feature, the price of the convertible security will normally fluctuate in some proportion to changes in the price of the underlying asset, and as such is subject to risks relating to the activities of the issuer and/or general market and economic conditions. The income component of a convertible security may tend to cushion the security against declines in the price of the underlying asset. However, the income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer.

If the convertible security’s “conversion value,” which is the market value of the underlying common stock that would be obtained upon the conversion of the convertible security, is substantially below the “investment value,” which is the value of a convertible security viewed without regard to its conversion feature (i.e. strictly on the basis of its yield), the price of the convertible security is governed principally by its investment value. If the conversion value of a convertible security increases to the point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding an income-producing security.

A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by a Portfolio is called for redemption, the Portfolio would be required to permit the issuer to redeem the security and convert it to underlying common stock, or would sell the convertible security to a third party, which may have an adverse effect on the Portfolio’s ability to achieve its investment objective,

A “synthetic” convertible security may be created by combining separate securities that possess the two principal characteristics of a traditional convertible security, i.e., an income-producing security (“income producing component”) and the right to acquire an equity security (“convertible component”). The income-producing component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market instruments, which may be represented by derivative instruments. The convertible component is achieved by investing in securities or instruments such as warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a single market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore, the “market value” of a synthetic convertible security is the sum of the values of its income-producing component and its convertible component. For this reason, the values of a synthetic convertible security and a traditional convertible security may respond differently to market fluctuations.

More flexibility is possible in the assembly of a synthetic convertible security than in the purchase of a convertible security. Although synthetic convertible securities may be selected where the two components are issued by a single issuer, thus making the synthetic convertible security similar to the traditional convertible security, the character of a synthetic convertible security allows the combination of components representing distinct issuers, when the Specialist Manager believes that such a combination may better achieve a Portfolio’s investment objective. A synthetic convertible security also is a more flexible investment in that its two components may be purchased separately. For example, a Portfolio may purchase a warrant for inclusion in a synthetic convertible security but temporarily hold short-term investments while postponing the purchase of a corresponding bond pending development of more favorable market conditions.

 

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A holder of a synthetic convertible security faces the risk of a decline in the price of the security or the level of the index involved in the convertible component, causing a decline in the value of the security or instrument, such as a call option or warrant, purchased to create the synthetic convertible security. Should the price of the stock fall below the exercise price and remain there throughout the exercise period, the entire amount paid for the call option or warrant would be lost. Because a synthetic convertible security includes the income-producing component as well, the holder of a synthetic convertible security also faces the risk that interest rates will rise, causing a decline in the value of the income-producing instrument.

A Portfolio also may purchase synthetic convertible securities created by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity, and are typically issued by investment banks. Convertible structured notes have the attributes of a convertible security; however, the investment bank that issues the convertible note, rather than the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated with the underlying investment, and the Portfolio in turn assumes credit risk associated with the convertible note.

BANK CAPITAL SECURITIES. The Portfolios may invest in bank capital securities. Bank capital securities are issued by banks to help fulfill their regulatory capital requirements. There are two common types of bank capital: Tier I and Tier II. Bank capital is generally, but not always, of investment grade quality. Tier I securities often take the form of trust preferred securities. Tier II securities, commonly thought of as hybrids of debt and preferred stock, are often perpetual (with no maturity date), callable and under certain conditions, allow for the issuer bank to withhold payment of interest until a later date.

TRUST PREFERRED SECURITIES. The Portfolios may invest in trust preferred securities. Trust preferred securities have the characteristics of both subordinated debt and preferred stock. Generally, trust preferred securities are issued by a trust that is wholly-owned by a financial institution or other corporate entity, typically a bank holding company. The financial institution creates the trust and owns the trust’s common securities. The trust uses the sale proceeds of its common securities to purchase subordinated debt issued by the financial institution. The financial institution uses the proceeds from the subordinated debt sale to increase its capital while the trust receives periodic interest payments from the financial institution for holding the subordinated debt. The trust uses the funds received to make dividend payments to the holders of the trust preferred securities. The primary advantage of this structure is that the trust preferred securities are treated by the financial institution as debt securities for tax purposes and as equity for the calculation of capital requirements.

Trust preferred securities typically bear a market rate coupon comparable to interest rates available on debt of a similarly rated issuer. Typical characteristics include long-term maturities, early redemption by the issuer, periodic fixed or variable interest payments, and maturities at face value. Holders of trust preferred securities have limited voting rights to control the activities of the trust and no voting rights with respect to the financial institution. The market value of trust preferred securities may be more volatile than those of conventional debt securities. Trust preferred securities may be issued in reliance on Rule 144A under the 1933 Act and subject to restrictions on resale. There can be no assurance as to the liquidity of trust preferred securities and the ability of holders, such as a Portfolio to sell their holdings. In identifying the risks of the trust preferred securities, the Specialist Manager will look to the condition of the financial institution as the trust typically has no business operations other than to issue the trust preferred securities. If the financial institution defaults on interest payments to the trust, the trust will not be able to make dividend payments to holders of its securities, such as a Portfolio.

INVESTMENT RESTRICTIONS

In addition to the investment objectives and policies of the Portfolios, each Portfolio is subject to certain investment restrictions both in accordance with various provisions of the Investment Company Act and guidelines adopted by the Board. These investment restrictions are summarized below. The following investment restrictions (1 though 11) are fundamental and cannot be changed with respect to any Portfolio without the affirmative vote of a majority of the Portfolio’s outstanding voting securities as defined in the Investment Company Act.

A PORTFOLIO MAY NOT:

 

1. With the exception of The Real Estate Securities Portfolio, no portfolio may purchase the securities of any issuer, if as a result of such purchase, more than 5% of the total assets of the Portfolio would be invested in the securities of that issuer, or purchase any security if, as a result of such purchase, a Portfolio would hold more than 10% of the outstanding voting securities of an issuer, provided that up to 25% of the value of the Portfolio’s assets may be invested without regard to this limitation, and provided further that this restriction shall not apply to investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, repurchase agreements secured by such obligations, or securities issued by other investment companies.

 

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2. Borrow money, except that a Portfolio (i) may borrow amounts, taken in the aggregate, equal to up to 5% of its total assets, from banks for temporary purposes (but not for leveraging or investment) and (ii) may engage in reverse repurchase agreements for any purpose, provided that (i) and (ii) in combination do not exceed 33 1/3% of the value of the Portfolio’s total assets (including the amount borrowed) less liabilities (other than borrowings).

 

3. Mortgage, pledge or hypothecate any of its assets except in connection with any permitted borrowing, provided that this restriction does not prohibit escrow, collateral or margin arrangements in connection with a Portfolio’s permitted use of options, futures contracts and similar derivative financial instruments described in the Trust’s Prospectuses.

 

4. Issue senior securities, as defined in the Investment Company Act, provided that this restriction shall not be deemed to prohibit a Portfolio from making any permitted borrowing, mortgage or pledge, and provided further that the permitted use of options, futures contracts, forward contracts and similar derivative financial instruments described in the Trust’s Prospectuses shall not constitute issuance of a senior security.

 

5. Underwrite securities issued by others, provided that this restriction shall not be violated in the event that the Portfolio may be considered an underwriter within the meaning of the Securities Act of 1933 in the disposition of portfolio securities.

 

6. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments, provided that this shall not prevent a Portfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business.

 

7. With the exception of the Commodity Returns Strategy Portfolio, purchase or sell commodities or commodity contracts, unless acquired as a result of ownership of securities or other instruments, provided that a Portfolio may purchase and sell futures contracts relating to financial instruments and currencies and related options in the manner described in the Trust’s Prospectuses.

 

8. With respect to The Commodity Returns Strategy Portfolio, purchase or sell commodities or commodity contracts, unless acquired as a result of ownership of securities or other instruments, except to the extent the Portfolio may do so as described in the Portfolio’s Prospectus and Statement of Additional Information and provided that a Portfolio may purchase and sell futures contracts relating to financial instruments and currencies and related options in the manner described in the Trust’s Prospectuses.

 

9. Make loans to others, provided that this restriction shall not be construed to limit (a) purchases of debt securities or repurchase agreements in accordance with a Portfolio’s investment objectives and policies; and (b) loans of portfolio securities in the manner described in the Trust’s Prospectuses.

 

10. With the exception of The Real Estate Securities Portfolio and The Commodity Returns Strategy Portfolio, no Portfolio may invest more than 25% of the market value of its assets in the securities of companies engaged in any one industry provided that this restriction does not apply to obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, repurchase agreements secured by such obligations or securities issued by other investment companies.

 

11. With respect to The Intermediate Term Municipal Bond Portfolio, invest, under normal circumstances, less than 80% of its net assets in Municipal Securities.

The following investment restrictions (12 through 16) reflect policies that have been adopted by the Trust, but which are not fundamental and may be changed by the Board, without shareholder vote.

 

12. A Portfolio may not make short sales of securities, maintain a short position, or purchase securities on margin, provided that this restriction shall not preclude the Trust from obtaining such short-term credits as may be necessary for the clearance of purchases and sales of its portfolio securities, and provided further that this restriction will not be applied to limit the use by a Portfolio of options, futures contracts and similar derivative financial instruments in the manner described in the Trust’s Prospectuses. For the purposes of this restriction, the posting of margin deposits or other forms of collateral in connection with swap agreements is not considered purchasing securities on margin.

 

13. A Portfolio may not invest in securities of other investment companies except as permitted under the Investment Company Act.

 

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14. Assets of any Portfolio that are allocated to a passive index strategy shall be invested in a manner that replicates the performance of the benchmark index assigned to that Portfolio, provided that derivative instruments may be used in order to gain market exposure pending investment in accordance with such strategy, and provided further that adherence to such passive index strategy shall not require the acquisition of any security if such acquisition would result in a violation of any investment restriction to which the Portfolio is otherwise subject or any provision of the Investment Company Act or rule promulgated thereunder.

 

15. A Portfolio may not invest more than 15% of the value of its net assets in illiquid securities (including repurchase agreements, as described under “Repurchase Agreements,” above).

 

16. The Portfolios listed below have non-fundamental investment policies obligating such a Portfolio to commit, under normal market conditions, at least 80% of its assets in the type of investment suggested by the Portfolio’s name. For purposes of such an investment policy, “assets” includes the Portfolio’s net assets, as well as any amounts borrowed for investment purposes. The Board has adopted a policy to provide investors with at least 60 days’ notice of any intended change. Each such notice will contain, in bold-face type and placed prominently in the document, the following statement: “Important Notice Regarding Change in Investment Policy.” This statement will also appear on the envelope in which such notice is delivered.

 

  a. The Value Equity Portfolio, The Growth Equity Portfolio, The Institutional Value Equity Portfolio and The Institutional Growth Equity Portfolio will each invest at least 80% of its assets in equity securities.

 

  b. The Small Capitalization Equity Portfolio will invest at least 80% of its assets in equity securities of small capitalization issuers, as defined in the Trust’s Prospectuses.

 

  c. The Real Estate Securities Portfolio will invest at least 80% of its assets in equity and debt securities issued by U.S. and non-U.S. real estate-related companies, as defined in the Trust’s Prospectus.

 

  d. The International Equity Portfolio will invest at least 80% of its assets in equity securities of issuers located in at least three countries other than the United States.

 

  e. The Emerging Markets Portfolio will, under normal market conditions, invest at least 80% of its assets in securities of issuers domiciled or, in the view of the Specialist Manager, deemed to be doing material amounts of business in countries determined by the Specialist Manager to have a developing or emerging economy or securities market.

 

  f. The Institutional Small Capitalization Equity Portfolio will invest at least 80% of its assets in equity securities of small capitalization issuers, as defined in the Trust’s Prospectuses.

 

  g. The Institutional International Equity Portfolio will invest at least 80% of its assets in equity securities of issuers located in at least three countries other than the United States.

 

  h. The Core Fixed Income Portfolio will invest at least 80% of its assets in fixed income securities that, at the time of purchase, are rated in one of four highest rating categories assigned by one of the major independent rating agencies, or deemed of comparable quality.

 

  i. The Fixed Income Opportunity Portfolio will invest at least 80% of its assets in fixed income securities and at least 50% of its assets in those fixed income securities (sometimes referred to as “junk bonds”) that, at the time of purchase, are rated below the fourth highest category assigned by one of the major independent rating agencies, or of comparable quality.

 

  j. The Short-Term Municipal Bond Portfolio will invest at least 80% of its assets in municipal bonds.

 

  k. The Intermediate Term Municipal Bond Portfolio and The Intermediate Term Municipal Bond II Portfolio will each invest at least 80% of their respective assets in intermediate-term fixed income securities the interest on which is exempt from regular Federal income tax.

 

  l. The U.S. Government Fixed Income Securities Portfolio will each invest at least 80% of its assets in fixed income securities issued or fully guaranteed by the U.S. Government, Federal Agencies, or sponsored agencies.

 

  m. The U.S. Corporate Fixed Income Securities Portfolio will invest at least 80% of its assets in fixed income securities issued by U.S. corporations.

 

  n. The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio will invest at least 80% of its assets in a portfolio of publicly issued, U.S. mortgage and asset backed securities.

 

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An investment restriction applicable to a particular Portfolio shall not be deemed violated as a result of a change in the market value of an investment, the net or total assets of that Portfolio, or any other later change provided that the restriction was satisfied at the time the relevant action was taken. In order to permit the sale of its shares in certain states, the Trust may make commitments more restrictive than those described above. Should the Trust determine that any such commitment may no longer be appropriate, the Board will consider whether to revoke the commitment and terminate sales of its shares in the state involved.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The Trust reserves the right in its sole discretion to suspend the continued offering of the Trust’s shares and to reject purchase orders in whole or in part when in the judgment of the Board such action is in the best interest of the Trust. Payments to shareholders for shares of the Trust redeemed directly from the Trust will be made as promptly as possible but no later than seven days after receipt by the Trust’s transfer agent of the written request in proper form, with the appropriate documentation as stated in the Prospectuses, except that the Trust may suspend the right of redemption or postpone the date of payment during any period when (a) trading on the NYSE is restricted as determined by the SEC or such exchange is closed for other than weekends and holidays; (b) an emergency exists as determined by the SEC making disposal of portfolio securities or valuation of net assets of the Trust not reasonably practicable; or (c) for such other period as the SEC may permit for the protection of the Trust’s shareholders. Each of the Portfolios reserves the right, if conditions exist which make cash payments undesirable, to honor any request for redemption or repurchase of the Trust’s shares by making payment in whole or in part in readily marketable securities chosen by the Trust and valued in the same way as they would be valued for purposes of computing each Portfolio’s net asset value. If such payment were made, an investor may incur brokerage costs in converting such securities to cash. The value of shares on redemption or repurchase may be more or less than the investor’s cost, depending upon the market value of the Trust’s portfolio securities at the time of redemption or repurchase.

PORTFOLIO TRANSACTIONS AND VALUATION

PORTFOLIO TRANSACTIONS. Subject to the general supervision of the Board, the Specialist Managers of the respective Portfolios are responsible for placing orders for securities transactions for each of the Portfolios. Securities transactions involving stocks will normally be conducted through brokerage firms entitled to receive commissions for effecting such transactions. In placing portfolio transactions, a Specialist Manager will use its best efforts to choose a broker or dealer capable of providing the services necessary to obtain the most favorable price and execution available. The full range and quality of services available will be considered in making these determinations, such as the size of the order, the difficulty of execution, the operational facilities of the firm involved, the firm’s risk in positioning a block of securities, and other factors. In placing brokerage transactions, the respective Specialist Managers may, however, consistent with the interests of the Portfolios they serve, select brokerage firms on the basis of the investment research, statistical and pricing services they provide to the Specialist Manager, which services may be used by the Specialist Manager in serving any of its investment advisory clients. In such cases, a Portfolio may pay a commission that is higher than the commission that another qualified broker might have charged for the same transaction, providing the Specialist Manager involved determines in good faith that such commission is reasonable in terms either of that transaction or the overall responsibility of the Specialist Manager to the Portfolio and such manager’s other investment advisory clients. Transactions involving debt securities and similar instruments are expected to occur primarily with issuers, underwriters or major dealers acting as principals. Such transactions are normally effected on a net basis and do not involve payment of brokerage commissions. The price of the security, however, usually includes a profit to the dealer. Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. When securities are purchased directly from or sold directly to an issuer, no commissions or discounts are paid. The table below reflects the aggregate dollar amount of brokerage commissions paid by each of the Portfolios of the Trust during the fiscal years indicated (amounts in thousands).

 

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PORTFOLIO

   YEAR ENDED
June 30, 2012
     YEAR ENDED
June 30, 2011
    YEAR ENDED
June 30, 2010
 

The Value Equity Portfolio

   $ 388       $ 461      $ 483   

The Institutional Value Equity Portfolio

   $ 620       $ 734      $ 622   

The Growth Equity Portfolio

   $ 370       $ 474      $ 568   

The Institutional Growth Equity Portfolio

   $ 488       $ 697      $ 593   

The Small Capitalization Equity Portfolio

   $ 128       $ 162      $ 767   

The Institutional Small Capitalization Equity Portfolio

   $ 316       $ 304      $ 688   

The Real Estate Securities Portfolio

   $ 189       $ 342      $ 228   

The Commodity Returns Strategy Portfolio

   $ 467       $ 375      $ 41 (a) 

The International Equity Portfolio

   $ 1,384       $ 1,330      $ 1,785   

The Institutional International Equity Portfolio

   $ 2,210       $ 2,166      $ 1,017 (b) 

The Emerging Markets Portfolio

   $ 1,220       $ 879      $ 580 (c) 

The Core Fixed Income Portfolio

   $ 0       $ 77      $ 113   

The Fixed Income Opportunity Portfolio

   $ 4       $ 2      $ 0   

The U.S. Government Fixed Income Securities Portfolio

   $ 0       $ 0 (d)      *   

The U.S. Corporate Fixed Income Securities Portfolio

   $ 0       $ 0 (d)      *   

The U.S. Mortgage/Asset Backed Fixed Income Securities Portfolio

   $ 0       $ 1 (d)      *   

The Short-Term Municipal Bond Portfolio

   $ 0       $ 0      $ 0   

The Intermediate Term Municipal Bond Portfolio

   $ 0       $ 0      $ 0   

The Intermediate Term Municipal Bond II Portfolio

   $ 0       $ 0 (e)      *   

 

* The applicable Portfolios were not operational during these periods.
(a) For the period June 8, 2010 (commencement of operations) through June 30, 2010.
(b) Not Annualized for the Period November 20, 2009 (commencement of operations) through June 30, 2010.
(c) Not Annualized for the Period December 10, 2009 (commencement of operations) through June 30, 2010.
(d) For the period December 6, 2010 (commencement of operations) through June 30, 2011.
(e) For the period July 13, 2010 (commencement of operations) through June 30, 2011.

The Trust has adopted procedures pursuant to which each Portfolio is permitted to allocate brokerage transactions to affiliates of the various Specialist Managers. Under such procedures, commissions paid to any such affiliate must be fair and reasonable compared to the commission, fees or other remuneration paid to other brokers in connection with comparable transactions. Several of the Trust’s Specialist Managers are affiliated with brokerage firms to which brokerage transactions may, from time to time, be allocated.

The following table reflects the aggregate dollar amount of brokerage commissions paid by each Portfolio to any broker/dealer with which such Portfolio may be deemed to be an affiliate during the Trust’s last three fiscal years. Information shown is expressed both as a percentage of the total amount of commission dollars paid by each Portfolio and as a percentage of the total value of all brokerage transactions effected on behalf of each Portfolio. “NA” indicates that during the relevant period, the indicated broker was not considered an affiliate of the specified Portfolio. None of the Income Portfolios paid any brokerage commissions during the relevant periods.

 

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     Commissions paid ($)      % of Commissions Paid     % of Transactions Effected  
     2012      2011      2010      2012     2011     2010     2012     2011     2010  

Value Equity

                     

Sanford Bernstein

   $ 3,722       $ 5,540       $ —           0.96     1.20     0.00     1.19     1.59     0.00

State Street

   $ —         $ 266       $ 367         0.00     0.06     0.08     0.00