Statement of Additional Information
June [ ], 2013
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Harborside Financial Center
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General Marketing and
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3200 Plaza 5
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Shareholder Information
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Jersey City, NJ 07311-4992
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(800) 858-8850
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SunAmerica Series, Inc. (the “Fund”) consists of seven different portfolios: Focused Large-Cap
Growth Portfolio, Focused Small-Cap Growth Portfolio, Focused Small-Cap Value Portfolio, Focused Dividend Strategy Portfolio, SunAmerica Strategic Value Portfolio, Focused Balanced Strategy Portfolio and Focused Multi-Asset Strategy Portfolio. This
Statement of Additional Information (“SAI”) relates only to five of the portfolios: Focused Large-Cap Growth Portfolio (“Large-Cap Growth Portfolio”), Focused Small-Cap Growth Portfolio (“Small-Cap Growth Portfolio”),
Focused Small-Cap Value Portfolio (“Small-Cap Value Portfolio”), Focused Dividend Strategy Portfolio (“Dividend Strategy Portfolio”) and SunAmerica Strategic Value Portfolio (“Strategic Value Portfolio”) (each, a
“Portfolio” and collectively, the “Portfolios”). Each Portfolio has distinct investment objectives.
This SAI is not a Prospectus, but should be read in conjunction with the Portfolios’ Prospectus dated June
[ ], 2013. The SAI expands upon and supplements the information contained in the current Prospectus of the Fund, and should be read in conjunction with the Prospectus. The Prospectus is incorporated by reference into this SAI
and this SAI is incorporated by reference into the Prospectus. The Fund’s audited Financial Statements from the Fund’s Annual Report have been incorporated by reference into this SAI. You may request a copy of the Prospectus or Annual
Report at no charge by calling 800-858-8850. Capitalized terms used herein but not defined have the meanings assigned to them in the Prospectus.
Each Portfolio is managed by SunAmerica Asset Management Corp. (“SunAmerica” or the “Adviser”).
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Class
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Focused Large-
Cap Growth
Portfolio
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Focused
Dividend Strategy
Portfolio
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Focused Small-
Cap Growth
Portfolio
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Focused Small-
Cap Value
Portfolio
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SunAmerica
Strategic Value
Portfolio
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Ticker Symbols
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Ticker Symbols
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Ticker Symbols
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Ticker Symbols
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Ticker Symbols
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A Shares
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SSFAX
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FDSAX
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NSKAX
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SSSAX
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SFVAX
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B Shares
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SSFBX
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FDSBX
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NBSCX
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SSSBX
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SFDBX
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C Shares
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SSFTX
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FDSTX
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NCSCX
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SSSTX
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SFVTX
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I Shares
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NSKIX
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W Shares
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[ ]
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Z Shares
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SSFZX
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TABLE OF CONTENTS
No dealer, salesperson or other person has been authorized to give any information or to make any
representations, other than those contained in this Statement of Additional Information or in the Prospectus, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Portfolio,
SunAmerica Asset Management Corp. or SunAmerica Capital Services, Inc. This Statement of Additional Information and the Prospectus do not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction in which such an offer to sell or solicitation of an offer to buy may not lawfully be made.
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HISTORY OF THE FUND
The Fund, organized as a Maryland corporation on July 3, 1996, is an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the “1940 Act”). The Fund consists of seven Portfolios, each of which is non-diversified, except for the Dividend Strategy Portfolio, and Strategic Value Portfolio, which are diversified, as that
term is defined in the 1940 Act. Each Portfolio offers different classes, including Class A, Class B, Class C, Class I and Class Z shares. Class A and Class B shares of the Mid-Cap Growth Portfolio, Aggressive Growth Portfolio and the
Value Portfolio commenced offering on November 19, 1996. Class C shares of those Portfolios commenced offering March 6, 1997. Class A, Class B and Class C shares of the Large-Cap Growth Portfolio, the Large-Cap Blend Portfolio, the
Large-Cap Value Portfolio and Small-Cap Value Portfolio commenced offering October 15, 1997. On March 31, 1998, the Directors approved the creation of the Focus Portfolio, which commenced offering on June 1, 1998. On December 1,
1998, Class C shares of each of the Portfolios except Focus Portfolio were redesignated as Class II shares. On April 1, 1999, the Large-Cap Blend Portfolio changed its name to the Focused Growth and Income Portfolio. On October 19, 1999,
the Directors approved the creation of the Focused Value Portfolio, which commenced offering on November 1, 1999. Effective on February 28, 2001, the Focus Portfolio changed its name to the Focused Growth Portfolio and the Aggressive
Growth Portfolio changed its name to the Multi-Cap Growth Portfolio. The Multi-Cap Growth Portfolio, Large-Cap Value Portfolio, Multi-Cap Value Portfolio, Small-Cap Value Portfolio and Focused Growth Portfolio each also offer Class Z shares. The
Class Z shares of the Multi-Cap Growth Portfolio, Large-Cap Value Portfolio, Value Portfolio and Small-Cap Value Portfolio commenced offering on April 1, 1998. The Class Z shares of the Focused Growth Portfolio commenced offering on
April 1, 1999. On February 17, 2000, the Directors approved the creation of the Focused TechNet Portfolio, which commenced offering on May 1, 2000. The Class Z shares of the Focused TechNet Portfolio commenced offering on
October 3, 2000. The Class X shares of the Focused Growth and Income Portfolio and Focused Multi-Cap Growth commenced offering on January 30, 2002 and August 1, 2002 respectively.
On August 22, 2001, the Board of Directors of the Fund (the “Board” or “Directors”) approved the renaming of the
Value Portfolio to the Multi-Cap Value Portfolio, effective November 16, 2001, the creation of the Small-Cap Growth Portfolio, effective November 16, 2001, offering Classes A, B, II and I; and authorized Class I for all Portfolios. The
Small-Cap Growth Portfolio was the survivor of a reorganization with Small Cap Growth Fund of North American Funds (the “Prior Small Cap Growth Fund”), which was consummated on November 16, 2001. The Directors also approved the
creation of the Focused International Portfolio and authorized Classes A, B, II, I and Z; the Fund commenced offering Classes A, B and II on November 1, 2001. Class I of the Multi-Cap Value Portfolio commenced on November 16, 2001. On
November 16, 2001, the International Equity Portfolio reorganized with the International Equity Fund of SunAmerica Equity Funds and three series of North American Funds. Shares of the International Equity Portfolio of the Fund are no longer
offered.
On April 11, 2002 the Board called a shareholder meeting for the purposes of reorganizing the Large Cap Growth
Portfolio into the Focused Large-Cap Growth Portfolio, and the Mid-Cap Growth Portfolio into the Focused Multi-Cap Growth Portfolio. On April 11, 2002, the Board approved the renaming of certain portfolios of the Fund as follows: The Large-Cap
Value Portfolio to the “Focused Large-Cap Value Portfolio,” the Small-Cap Value Portfolio to the “Focused 2000 Value Portfolio,” the Multi-Cap Value Portfolio to the “SunAmerica Value Fund,” the Small-Cap Growth
Portfolio to the “Focused 2000 Growth Portfolio,” the Multi-Cap Growth Portfolio to the “Focused Multi-Cap Growth Portfolio,” the Focused Value Portfolio to the “Focused Multi-Cap Value Portfolio,” the Focused
International Portfolio to the “Focused International Equity Portfolio,” and the Focused Growth Portfolio to the “Focused Large-Cap Growth Portfolio.”
On September 6, 2002, the Large-Cap Growth Portfolio and the Mid-Cap Growth Portfolio reorganized into the Focused Large-Cap Growth Portfolio and Focused Multi-Cap Growth Portfolios, respectively.
Shares of the Large-Cap Growth and Mid-Cap Growth Portfolios are no longer offered. On October 30, 2003, the Directors approved the reorganization of the SunAmerica Value Fund into the SunAmerica Value Fund of SunAmerica Equity Funds. On
October 30, 2003, the Directors approved the creation of the Focused Dividend Strategy Portfolio offering Classes A, B, II and I. The Focused Dividend Strategy Portfolio is the survivor of a reorganization with the Focused Dividend Strategy
Portfolio of SunAmerica Equity Funds (the “Prior Focused Dividend Strategy Portfolio”), was consummated on February 20, 2004.
At a meeting of the Fund’s Board held on October 30, 2003, the Board approved a name change for the Fund: Effective January 1, 2004, the name SunAmerica Style Select Series, Inc. was
changed to SunAmerica Focused Series, Inc.
On January 15, 2004, the Board approved the redesignation of Class II shares
as Class C shares for each of the Portfolios, to be effective on February 20, 2004. On December 1, 2004, the Directors approved the establishment of the Focused Mid-Cap Growth Portfolio and the Focused Mid-Cap Value Portfolio both of which
commenced offering on August 3, 2005. On December 1, 2004 the Board approved changing the names of the Focused 2000 Value Portfolio and the Focused 2000 Growth Portfolio to the Focused Small-Cap Value and the Focused Small-Cap Growth
Portfolio, respectively.
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On August 30, 2005, the Board approved the liquidation of Class X shares of both the
Focused Growth and Income Portfolio and the Focused Multi-Cap Growth Portfolio. On November 9, 2006, the Board approved the redesignation of the names of the Focused Multi-Cap Growth Portfolio and the Focused Multi-Cap Value Portfolio to the
Focused Growth Portfolio and the Focused Value Portfolio, respectively.
On January 22, 2007, the Directors approved the
establishment of the Focused StarALPHA Portfolio.
On October 24, 2007, the Board approved the termination of sales of I
Class shares of each of the Focused Mid-Cap Growth and Focused Mid-Cap Value Portfolios. Effective October 25, 2007 Class I shares of these Portfolios are no longer offered for sale.
On August 26, 2008, the Directors approved the reorganization of the Focused International Equity Portfolio into the International
Equity Fund, a series of SunAmerica Equity Funds. The reorganization was approved by shareholders of the Focused International Equity Portfolio on December 16, 2008, and became effective on January 12, 2009.
On June 9, 2009, the Board of Directors of the Fund approved the creation of Class I shares of the Growth and Income Portfolio.
Class I of the Growth and Income Portfolio commenced offering on August 28, 2009.
On June 2, 2009, the Directors
approved the reorganization of the Focused Large-Cap Value Portfolio into the SunAmerica Value Fund, a series of SunAmerica Equity Funds. The reorganization was approved by shareholders of the Focused Large-Cap Value Portfolio on October 16,
2009, and became effective on October 26, 2009.
On June 2, 2009, the Directors approved the reorganization of the
Focused Mid-Cap Value Portfolio into the SunAmerica Small-Cap Value Portfolio, a series of SunAmerica Series, Inc. The reorganization was approved by shareholders of the Focused Mid-Cap Value Portfolio on October 16, 2009, and became effective
on October 26, 2009.
On June 2, 2009, the Directors approved the reorganization of the Focused Mid-Cap Growth
Portfolio into the Focused Small-Cap Growth Portfolio, a series of SunAmerica Series, Inc. The reorganization was approved by shareholders of the Focused Mid-Cap Growth Portfolio on October 16, 2009, and became effective on December 7,
2009.
On December 6, 2010, the Directors approved the renaming of the Focused Value Portfolio to the SunAmerica
Strategic Value Portfolio, effective February 28, 2011.
On December 6, 2010 the Directors approved the renaming of
the Fund from SunAmerica Focused Series, Inc. to SunAmerica Series, Inc., effective February 28, 2011.
On March 6,
2012 the Directors approved the reorganization of each of the Focused Growth Portfolio, Focused Technology Portfolio and Focused StarALPHA Portfolio into SunAmerica Focused Alpha Growth Fund, a series of SunAmerica Specialty Series, and approved the
reorganization of Focused Growth and Income Portfolio into SunAmerica Focused Alpha Large-Cap Fund, also a series of SunAmerica Specialty Series. The organizations were approved by the shareholders on July 31, 2012 and became effective on
August 13, 2012.
On February 26, 2013 the Board of Directors approved the creation of Class W shares of the Focused
Dividend Strategy Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Portfolios are described in the Fund’s Prospectus. Certain types of securities
in which the Portfolios may invest and certain investment practices that the Portfolios may employ are described under “More Information about the Portfolios – Investment Strategies” in the Prospectus, and are discussed more fully
below. Unless otherwise specified, each Portfolio may invest in the following securities. The stated percentage limitations are applied to an investment at the time of purchase unless indicated otherwise.
Warrants and Rights
Each Portfolio may invest in warrants, which give the holder of the warrant a right to purchase a given number of shares of a particular issue at a specified price until expiration. Such investments
generally can provide a greater potential for profit or loss than investments of equivalent amounts in the underlying common stock. The prices of warrants do not necessarily move with the prices of the underlying securities. If the holder does not
sell the warrant, he risks the loss of his entire investment if the market price of the underlying stock does not, before the expiration date, exceed the exercise price of
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the warrant plus the cost thereof. Investment in warrants is a speculative activity. Warrants pay no dividends and confer no rights (other than the right to purchase the underlying stock) with
respect to the assets of the issuer. Rights represent a preemptive right of stockholders to purchase additional shares of a stock at the time of a new issuance before the stock is offered to the general public, allowing the stockholder to retain the
same ownership percentage after the new stock offering.
Convertible Securities and Preferred Stocks
Convertible securities may be debt securities or preferred stock with a conversion feature. Traditionally, convertible securities have
paid dividends or interest at rates higher than common stocks but lower than non-convertible securities. They generally participate in the appreciation or depreciation of the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertibles have been developed that combine higher or lower current income with options and other features. Certain convertible securities may be rated below investment grade. Generally, preferred stock has a specified dividend
and ranks after bonds and before common stocks in its claim on income for dividend payments and on assets should the company be liquidated. While most preferred stocks pay a dividend, each Portfolio may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend. Such investments would be made primarily for their capital appreciation potential.
Investment in Small, Unseasoned Companies
As described in the
Prospectus, each Portfolio except for Dividend Strategy Portfolio may invest in the securities of small companies. These securities may have a limited trading market, which may adversely affect their disposition and can result in their being priced
lower than might otherwise be the case. It may be difficult to obtain reliable information and financial data on such companies and the securities of these small companies may not be readily marketable, making it difficult to dispose of shares when
desirable. A risk of investing in smaller, emerging companies is that they often are at an earlier stage of development and therefore have limited product lines, market access for such products, financial resources and depth in management as
compared to larger, more established companies, and their securities may be subject to more abrupt or erratic market movements than securities of larger, more established companies or the market averages in general. In addition, certain smaller
issuers may face difficulties in obtaining the capital necessary to continue in operation and may go into bankruptcy, which could result in a complete loss of an investment. Smaller companies also may be less significant factors within their
industries and may have difficulty withstanding competition from larger companies. If other investment companies and investors who invest in such issuers trade the same securities when a Portfolio attempts to dispose of its holdings, the Portfolio
may receive lower prices than might otherwise be obtained. While smaller companies may be subject to these additional risks, they may also realize more substantial growth than larger, more established companies.
Mid-Cap Companies may also suffer more significant losses as well as realize more substantial growth than larger, more established
issuers. Thus, investments in such companies tend to be more than those in volatile Large-Cap Companies.
Foreign Securities
Investments in foreign securities offer potential benefits not available from investments made solely in securities of
domestic issuers by offering the opportunity to invest in foreign issuers that appear to offer growth potential, or in foreign countries with economic policies or business cycles different from those of the U.S., or to reduce fluctuations in
portfolio value by taking advantage of foreign stock markets that do not move in a manner parallel to U.S. markets. Each Portfolio, except for Dividend Strategy Portfolio, is authorized to invest in foreign securities. A Portfolio may purchase
securities issued by issuers in any country.
Each Portfolio may invest in securities of foreign issuers in the form of
American Depositary Receipts (ADRs). Each Portfolio may also invest in securities of foreign issuers in the form of European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) or other similar securities convertible into securities of
foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. The Portfolios may invest in non-U.S. dollar denominated securities of foreign companies. ADRs are
securities, typically issued by a U.S. financial institution, that evidence ownership interests in a security or a pool of securities issued by a foreign issuer and deposited with the depository. ADRs may be sponsored or unsponsored. A sponsored ADR
is issued by a depository that has an exclusive relationship with the issuer of the underlying security. An unsponsored ADR may be issued by any number of U.S. depositories. Holders of unsponsored ADRs generally bear all the costs associated with
establishing the unsponsored ADR. The depository of an unsponsored ADR is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through to the holders of the unsponsored ADR voting rights with
respect to the deposited securities or pool of securities. A Portfolio may invest in either type of ADR. Although the U.S. investor holds a substitute receipt of ownership rather than direct stock certificates, the use of the depository receipts in
the U.S. can reduce costs and delays as well as potential currency exchange and other difficulties. The Portfolio may purchase securities in local markets and direct delivery of these ordinary shares to the local depository of an ADR agent bank in
the foreign country.
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Simultaneously, the ADR agents create a certificate that settles at the Fund’s custodian in three days. The Portfolio may also execute trades on the U.S. markets using existing ADRs. A
foreign issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the U.S. as a domestic issuer. Accordingly, the information available to a U.S. investor will be limited to the information the foreign
issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer of the underlying security. For purposes of a Portfolio’s investment policies, the
Portfolio’s investments in these types of securities will be deemed to be investments in the underlying securities. Generally ADRs, in registered form, are dollar denominated securities designed for use in the U.S. securities markets, which
represent and may be converted into the underlying foreign security. EDRs, in bearer form, are designed for use in the European securities markets. Each Portfolio also may invest in securities denominated in European Currency Units (ECUs). An ECU is
a “basket” consisting of specified amounts of currencies of certain of the twelve member states of the European Community. In addition, each Portfolio may invest in securities denominated in other currency “baskets.”
Investments in foreign securities, including securities of emerging market countries, present special additional investment risks and
considerations not typically associated with investments in domestic securities, including reduction of income by foreign taxes; fluctuation in value of foreign portfolio investments due to changes in currency rates and control regulations
(
e.g.
, currency blockage); transaction charges for currency exchange; lack of public information about foreign issuers; lack of uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers;
less volume on foreign exchanges than on U.S. exchanges; greater volatility and less liquidity on foreign markets than in the U.S.; less regulation of foreign issuers, stock exchanges and brokers than the U.S.; greater difficulties in commencing
lawsuits; higher brokerage commission rates and custodian fees than the U.S.; increased possibilities (in some countries) of expropriation, confiscatory taxation, political, financial or social instability or adverse diplomatic developments; the
imposition of foreign taxes on investment income derived from such countries; and differences (which may be favorable or unfavorable) between the U.S. economy and foreign economies. An emerging market country is one that the World Bank, the
International Finance Corporation or the United Nations or its authorities has determined to have a low or middle income economy. Historical experience indicates that the markets of emerging market countries have been more volatile than more
developed markets; however, such markets can potentially provide higher rates of return to investors.
The performance of
investments in securities denominated in a foreign currency (“non-dollar securities”) will depend on, among other things, the strength of the foreign currency against the dollar and the interest rate environment in the country issuing the
foreign currency. Absent other events that could otherwise affect the value of non-dollar securities (such as a change in the political climate or an issuer’s credit quality), appreciation in the value of the foreign currency generally can be
expected to increase the value of a Portfolio’s non-dollar securities in terms of U.S. dollars. A rise in foreign interest rates or a decline in the value of foreign currencies relative to the U.S. dollar generally can be expected to depress
the value of the Portfolio’s non-dollar securities. Currencies are evaluated on the basis of fundamental economic criteria (
e.g.
, relative inflation levels and trends, growth rate forecasts, balance of payments status and economic
policies) as well as technical and political data.
Because the Portfolios may invest in securities that are listed primarily
on foreign exchanges that trade on weekends or other days when the Fund does not price its shares, the value of the Portfolios’ shares may change on days when a shareholder will not be able to purchase or redeem shares.
Investment Companies
The Portfolios may invest in the securities of other open-end or closed-end investment companies subject to the limitations imposed by set forth in the “Investment Restrictions” section of this
SAI, although it is each Portfolio’s policy that it will not acquire any securities of registered open-end investment companies or registered unit investment trusts in reliance on sections 12(d)(1)(F) or 12(d)(1)(G) under the 1940 Act. Under
the 1940 Act, a Portfolio may invest up to 10% of its assets in shares of other investment companies and up to 5% of its assets in any one investment company as long as the investment does not represent more than 3% of the outstanding voting stock
of the acquired investment company. The Portfolios will not invest in such investment companies unless, in the judgment of the Adviser, the potential benefits of such investments justify the payment of any associated fees and expenses. A Portfolio
will indirectly bear its proportionate share of any management fees and other expenses paid by an investment company in which it invests. The Portfolios may also invest in exchange traded funds (“ETFs”). Most ETFs are investment companies
and therefore, a Portfolio’s purchase of ETF shares generally are subject to the limitations on, and the risks of, an investment companies’ investments in other investment companies. Investing in index-based ETFs will give a Portfolio
exposure to the securities comprising the index on which the ETF is based and will expose the Portfolio to risks similar to those of investing directly in those securities. Unlike shares of typical mutual funds or unit investment trusts, shares of
ETFs are traded on an exchange and may trade throughout a trading day. ETFs are bought and sold based on market values and not at net asset value, and therefore may trade at either a premium or discount to net asset value. However, the trading
prices of index-based ETFs tend to closely track the actual net asset value
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of the underlying portfolios. A Portfolio will generally gain or lose value on holdings of an ETF consistent with the performance of the index on which the ETF is based. A Portfolio will pay
brokerage commissions in connection with the purchase and sale of shares of ETFs.
Each Portfolio, except Dividend
Strategy Portfolio and Strategic Value Portfolio, may invest in domestic closed-end investment companies that invest in certain foreign markets, including developing countries or emerging markets. The Portfolios also may invest in foreign investment
companies that invest in such markets. Some of the countries in which the Portfolios invest may not permit direct investment by foreign investors such as the Portfolios. Investments in such countries may be permitted only through foreign
government-approved or authorized investment vehicles, which may include other investment companies. In addition, it may be less expensive and more expedient for the Portfolios to invest in investment companies in a country that permits direct
foreign investment. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to limitations under the 1940 Act. Under the 1940 Act, a Portfolio may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company as long as the investment does not represent more than 3% of the outstanding voting stock of the acquired investment company. The Portfolios will not invest in such
investment companies unless, in the judgment of the Adviser, the potential benefits of such investments justify the payment of any associated fees and expenses.
Additionally, all of the Portfolios except the Dividend Strategy Portfolio and Strategic Value Portfolio may invest in passive foreign investment companies (“PFICs”), which are any foreign
corporations that generate certain amounts of passive income or hold certain amounts of assets for the production of passive income. Passive income includes dividends, interest, royalties, rents and annuities. To the extent that a Portfolio invests
in PFICs, income tax regulations may require the Portfolio to elect to recognize income associated with the PFIC prior to the actual receipt of any such income in order to avoid adverse tax consequences.
Fixed Income Securities
Each of the Portfolios may invest in debt securities that the Adviser expects have the potential for capital appreciation and which are rated as low as “BBB” by Standard & Poor’s
Corporation, a division of The McGraw-Hill Companies (“Standard & Poor’s”), or “Baa” by Moody’s Investors Service, Inc. (“Moody’s”) or, if unrated, determined by the Adviser to be of equivalent
quality; provided, however, that the Dividend Strategy Portfolio and Strategic Value Portfolio do not intend to invest in fixed income securities except as otherwise provided under “Short-Term Debt Securities” below.
Each of the Portfolios may also invest up to 20% of its total assets in debt securities rated below “BBB” or “Baa”
or, if unrated, determined by the Adviser to be of equivalent quality (junk bonds).
Fixed income securities are broadly
characterized as those that provide for periodic payments to the holder of the security at a stated rate. Most fixed income securities, such as bonds, represent indebtedness of the issuer and provide for repayment of principal at a stated time in
the future. Others do not provide for repayment of a principal amount, although they may represent a priority over common stockholders in the event of the issuer’s liquidation. Many fixed income securities are subject to scheduled retirement,
or may be retired or “called” by the issuer prior to their maturity dates. The interest rate on certain fixed income securities, known as “variable rate obligations,” is determined by reference to or is a percentage of an
objective standard, such as a bank’s prime rate, the 90-day Treasury bill rate, or the rate of return on commercial paper or bank certificates of deposit, and is periodically adjusted. Certain variable rate obligations may have a demand feature
entitling the holder to resell the securities at a predetermined amount. The interest rate on certain fixed income securities, called “floating rate instruments,” changes whenever there is a change in a designated base rate.
The market values of fixed income securities tend to vary inversely with the level of interest rates — when interest rates rise,
their values will tend to decline; when interest rates decline, their values generally will tend to rise. The potential for capital appreciation with respect to variable rate obligations or floating rate instruments will be less than with respect to
fixed-rate obligations. Long-term instruments are generally more sensitive to these changes than short-term instruments. The market value of fixed income securities and therefore their yield are also affected by the perceived ability of the issuer
to make timely payments of principal and interest.
“Investment grade” is a designation applied to intermediate and
long-term corporate debt securities rated within the highest four rating categories assigned by Standard & Poor’s (AAA, AA, A or BBB including the + or – designations) or by Moody’s (Aaa, Aa, A or Baa including the + or
– designations), or, if unrated, considered by the Adviser to be of comparable quality. The ability of the issuer of an investment grade debt security to pay interest and to repay principal is considered to vary from extremely strong (for the
highest ratings) through adequate (for the lowest ratings given above), although the lower-rated investment grade securities may be viewed as having speculative elements as well.
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Those debt securities rated “BBB” or “Baa,” while considered to be
“investment grade,” may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade
bonds. As a consequence of the foregoing, the opportunities for income and gain may be limited. While the Portfolios have no stated policy with respect to the disposition of securities whose ratings fall below investment grade, each occurrence is
examined by the Adviser to determine the appropriate course of action.
Risks of Investing in Lower Rated Bonds
As described above, debt securities in which the Portfolios may invest may be in the lower rating categories of recognized rating agencies
(that is, ratings of Ba or lower by Moody’s or BB or lower by Standard & Poor’s (and comparable unrated securities) (commonly known as “junk bonds”). For a description of these and other rating categories, see Appendix.
These types of securities can be expected to provide higher yields, but may be subject to greater market price fluctuations
and risk of loss of principal than lower yielding, higher rated fixed income securities. High yield bonds may be issued by less creditworthy companies or by larger, highly leveraged companies. It should be noted that lower-rated securities are
subject to risk factors such as: (a) vulnerability to economic downturns and changes in interest rates; (b) sensitivity to adverse economic changes and corporate developments; (c) redemption or call provisions that may be exercised at
inopportune times; (d) difficulty in accurately valuing or disposing of such securities; (e) federal legislation that could affect the market for such securities; and (f) special adverse tax consequences associated with investments in
certain high yield, high-risk bonds.
High yield bonds, like other bonds, may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, the Portfolio would have to replace the security with a lower yielding security, resulting in lower return for investors. Conversely, a high yield bond’s value will decrease
in a rising interest rate market.
There is a thinly traded market for high yield bonds, and recent market quotations may not
be available for some of these bonds. Market quotations are generally available only from a limited number of dealers and may not represent firm bids from such dealers or prices for actual sales. As a result, a Portfolio may have difficulty valuing
the high yield bonds in their portfolios accurately and disposing of these bonds at the time or price desired. Under such conditions, judgment may play a greater role in valuing certain of the Portfolio’s portfolio securities than in the case
of securities trading in a more liquid market.
Ratings assigned by Moody’s and Standard & Poor’s to high
yield bonds, like those assigned to other bonds, attempt to evaluate the safety of principal and interest payments on those bonds. However, such ratings do not assess the risk of a decline in the market value of those bonds. In addition, ratings may
fail to reflect recent events in a timely manner and are subject to change. If a rating with respect to a portfolio security is changed, the Adviser will determine whether the security will be retained based upon the factors the Adviser considers in
acquiring or holding other securities in the portfolio. Investment in high yield bonds may make achievement of a Portfolio’s objective more dependent on the Adviser’s own credit analysis than is the case for higher-rated bonds.
Market prices for high yield bonds tend to be more sensitive than those for higher-rated securities due to many of the factors described
above, including the credit-worthiness of the issuer, redemption or call provisions, the liquidity of the secondary trading market and changes in credit ratings, as well as interest rate movements and general economic conditions. In addition, yields
on such bonds will fluctuate over time. An economic downturn could severely disrupt the market for high yield bonds. In addition, legislation impacting high yield bonds may have a materially adverse effect on the market for such bonds. For example,
federally insured savings and loan associations have been required to divest their investments in high yield bonds.
The risk
of default in payment of principal and interest on high yield bonds is significantly greater than with higher-rated debt securities because high yield bonds are generally unsecured and are often subordinated to other obligations of the issuer, and
because the issuers of high yield bonds usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates. Upon a default, bondholders may incur additional expenses in
seeking recovery.
As a result of all these factors, the net asset value of a Portfolio, to the extent it invests in high
yield bonds, is expected to be more volatile than the net asset value of funds that invest solely in higher-rated debt securities. This volatility may result in an increased number of redemptions from time to time. High levels of redemptions in turn
may cause a Portfolio to sell its portfolio securities at inopportune times and decrease the asset base upon which expenses can be spread.
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Corporate Debt Instruments
These instruments, such as bonds, represent the obligation of the issuer to repay a principal amount of indebtedness at a stated time in
the future and, in the usual case, to make periodic interim payments of interest at a stated rate. The Portfolios may purchase corporate obligations that mature or that may be redeemed in one year or less. These obligations originally may have been
issued with maturities in excess of one year.
U.S. Government Securities
Each Portfolio may invest in U.S. Treasury securities, including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. government and, as such, are backed by the “full faith and credit” of the U.S. They differ primarily in their interest rates, the lengths of their maturities and the dates of
their issuances. For these securities, the payment of principal and interest is unconditionally guaranteed by the U.S. government. They are of the highest possible credit quality. These securities are subject to variations in market value due to
fluctuations in interest rates, but if held to maturity, are guaranteed by the U.S. government to be paid in full.
Each
Portfolio may also invest in securities issued by agencies of the U.S. government or instrumentalities of the U.S. government. These obligations, including those guaranteed by federal agencies or instrumentalities, may or may not be backed by the
“full faith and credit” of the U.S. Obligations of the Government National Mortgage Association (“GNMA”), the Farmer’s Home Administration (“FMHA”) and the Export-Import Bank are backed by the full faith and credit
of the U.S.
Each Portfolio may also invest in securities issued by U.S. government instrumentalities and certain federal
agencies that are neither direct obligations of, nor are they guaranteed by, the U.S. Treasury. However, they involve federal sponsorship in one way or another. For example, some are backed by specific types of collateral; some are supported by the
issuer’s right to borrow from the Treasury; some are supported by the discretionary authority of the Treasury to purchase certain obligations of the issuer; and others are supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not limited to, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), and Federal Land Banks, Central Bank
for Cooperatives, Federal Intermediate Credit Banks and Federal Home Loan Banks. In the case of securities not backed by the full faith and credit of the U.S., a Portfolio must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the U.S. if the agency or instrumentality does not meet its commitments.
Mortgage-Backed Securities
Each Portfolio, except the Dividend Strategy Portfolio and Strategic Value Portfolio, may, in addition to the U.S. government securities noted above, invest in mortgage-backed securities, such as GNMA,
FNMA or FHLMC certificates (as further described below), which represent an undivided ownership interest in a pool of mortgages. The mortgages backing these securities include conventional thirty-year fixed-rate mortgages, fifteen-year fixed-rate
mortgages, graduated payment mortgages and adjustable rate mortgages. The U.S. government or the issuing agency guarantees the payment of interest and principal of these securities. However, the guarantees do not extend to the securities’ yield
or value, which are likely to vary inversely with fluctuations in interest rates. These certificates are in most cases pass-through instruments, through which the holder receives a share of all interest and principal payments, including prepayments,
on the mortgages underlying the certificate, net of certain fees. Each Portfolio, except for the Dividend Strategy Portfolio and Strategic Value Portfolio, may also invest in privately issued mortgage-backed securities, which are not backed by the
U.S. Government or guaranteed by any issuing agency. As discussed below under the heading “Recent Market Events,” recent volatility in the market for privately issued mortgage-backed securities and concomitant issues regarding the value
and liquidity of these instruments may adversely impact the assets of the Portfolios.
The yield on mortgage-backed securities
is based on the average expected life of the underlying pool of mortgage loans. Because the prepayment characteristics of the underlying mortgages vary, it is not possible to predict accurately the average life of a particular issue of pass-through
certificates. Mortgage-backed securities are often subject to more rapid repayment than their stated maturity date would indicate, as a result of the pass-through of prepayments of principal on the underlying mortgage obligations. Thus, the actual
life of any particular pool will be shortened by any unscheduled or early payments of principal and interest. Principal prepayments generally result from the sale of the underlying property or the refinancing or foreclosure of underlying mortgages.
The occurrence of prepayments is affected by a wide range of economic, demographic and social factors. Yield on such pools is usually computed by using the historical record of prepayments for that pool, or, in the case of newly issued mortgages,
the prepayment history of similar pools. The actual prepayment experience of a pool of mortgage loans may cause the yield realized by the Portfolio to differ from the yield calculated on the basis of the expected average life of the pool.
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Prepayments tend to increase during periods of falling interest rates, while during periods
of rising interest rates prepayments will most likely decline. When prevailing interest rates rise, the value of a pass-through security may decrease as does the value of other debt securities, but, when prevailing interest rates decline, the value
of a pass-through security is not likely to rise on a comparable basis with other debt securities because of the prepayment feature of pass-through securities. The reinvestment of scheduled principal payments and unscheduled prepayments that the
Portfolio receives may occur at higher or lower rates than the original investment, thus affecting the yield of the Portfolio. Monthly interest payments received by the Portfolio have a compounding effect, which may increase the yield to
shareholders more than debt obligations that pay interest semi-annually. Because of those factors, mortgage-backed securities may be less effective than U.S. Treasury bonds of similar maturity at maintaining yields during periods of declining
interest rates. Accelerated prepayments adversely affect yields for pass-through securities purchased at a premium (
i.e.
, at a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may
not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-through securities purchased at a discount. A Portfolio may purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates, the most widely available mortgage-backed securities:
GNMA Certificates
GNMA Certificates are mortgage-backed securities that evidence an undivided interest in a pool or pools of mortgages. GNMA Certificates
that a Portfolio may purchase are the modified pass-through type, which entitle the holder to receive timely payment of all interest and principal payments due on the mortgage pool, net of fees paid to the issuer and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration (“FHA”) or the FMHA, or guaranteed by the Veterans Administration (“VA”). The GNMA guarantee is authorized by the National Housing Act and is backed by
the full faith and credit of the U.S. The GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially shorter than the original maturity of the mortgages underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosure will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Portfolio has purchased the certificates at a premium in the secondary market. As prepayment rates of the individual mortgage pools vary widely, it is not possible to predict
accurately the average life of a particular issue of GNMA Certificate.
The coupon rate of interest of GNMA Certificates is
lower than the interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the GNMA Certificates by the amount of the fees paid to GNMA and the issuer. The coupon rate by itself, however, does not indicate the yield which will be
earned on GNMA Certificates. First, GNMA Certificates may trade in the secondary market at a premium or discount. Second, interest is earned monthly, rather than semiannually, as with traditional bonds; monthly compounding raises the effective yield
earned. Finally, the actual yield of a GNMA certificate is influenced by the prepayment experience of the mortgage pool underlying it. For example, if the higher-yielding mortgages from the pool are prepaid, the yield on the remaining pool will be
reduced.
FHLMC Certificates
The FHLMC issues two types of mortgage pass-through securities: mortgage participation certificates (“PCs”) and guaranteed mortgage certificates (“GMCs”) (collectively, “FHLMC
Certificates”). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. Like GNMA Certificates, PCs are assumed to be prepaid fully in their twelfth
year. The FHLMC guarantees timely monthly payment of interest (and, under certain circumstances, principal) of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semiannually and return principal once a year in guaranteed minimum payments. The expected average
life of these securities is approximately ten years. The FHLMC guarantee is not backed by the full faith and credit of the U.S. government.
FNMA Certificates
FNMA issues guaranteed mortgage pass-through certificates (“FNMA Certificates”). FNMA Certificates represent a pro rata share of
all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest and principal on FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit of
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the U.S. government. However, FNMA guarantees timely payment of interest on FNMA Certificates and on the full return of principal.
Conventional mortgage pass-through securities (“Conventional Mortgage Pass-Throughs”) represent participation interests in
pools of mortgage loans that are issued by trusts formed by originators of the institutional investors in mortgage loans (or represent custodial arrangements administered by such institutions). These originators and institutions include commercial
banks, savings and loans associations, credit unions, savings banks, insurance companies, investment banks or special purpose subsidiaries of the foregoing. For federal income tax purposes, such trusts are generally treated as grantor trusts or real
estate mortgage investment conduits (“REMICs”) and, in either case, are generally not subject to any significant amount of federal income tax at the entity level.
The mortgage pools underlying Conventional Mortgage Pass-Throughs consist of conventional mortgage loans evidenced by promissory notes secured by first mortgages or first deeds of trust or other similar
security instruments creating a first lien on residential or mixed residential and commercial properties. Conventional Mortgage Pass-Throughs (whether fixed or adjustable rate) provide for monthly payments that are a “pass-through” of the
monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees or other amount paid to any guarantor, administrator and/or servicer of the underlying mortgage loans.
A trust fund with respect to which a REMIC election has been made may include regular interests in other REMICs, which in turn will ultimately evidence interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of interest than government and government-related pools because of the absence
of any direct or indirect government or agency payment guarantees. However, timely payment of interest and principal of mortgage loans in these pools may be supported by various forms of insurance or guarantees, including individual loans, title,
pool and hazard insurance and letters of credit. The insurance and guarantees may be issued by private insurers and mortgage poolers. Although the market for such securities is becoming increasingly liquid, mortgage-related securities issued by
private organizations may not be readily marketable.
In September 2008, FNMA and FHLMC were placed into conservatorship by
their regulator, the Federal Housing Finance Agency. It is unclear what effect this conservatorship will have on the securities issued or guaranteed by FNMA or FHLMC. Although the U.S. government has provided financial support to FNMA and FHLMC,
there can be no assurance that it will support these or other government-sponsored enterprises in the future.
Collateralized Mortgage
Obligations (“CMOs”)
Another type of mortgage-backed security in which each Portfolio, with the exception
of Dividend Strategy Portfolio and Strategic Value Portfolio, may invest is a collateralized mortgage obligation (“CMO”). CMOs are fully collateralized bonds that are the general obligations of the issuer thereof (
e.g.
, the U.S.
government, a U.S. government instrumentality, or a private issuer). Such bonds generally are secured by an assignment to a trustee (under the indenture pursuant to which the bonds are issued) of collateral consisting of a pool of mortgages.
Payments with respect to the underlying mortgages generally are made to the trustee under the indenture. Payments of principal and interest on the underlying mortgages are not passed through to the holders of the CMOs as such (
i.e.
, the
character of payments of principal and interest is not passed through, and therefore payments to holders of CMOs attributable to interest paid and principal repaid on the underlying mortgages do not necessarily constitute income and return of
capital, respectively, to such holders), but such payments are dedicated to payment of interest on and repayment of principal of the CMOs. CMOs often are issued in two or more classes with varying maturities and stated rates of interest. Because
interest and principal payments on the underlying mortgages are not passed through to holders of CMOs, CMOs of varying maturities may be secured by the same pool of mortgages, the payments on which are used to pay interest on each class and to
retire successive maturities in sequence. Unlike other mortgage-backed securities, CMOs are designed to be retired as the underlying mortgages are repaid. In the event of prepayment on such mortgages, the class of CMO first to mature generally will
be paid down. Therefore, although in most cases the issuer of CMOs will not supply additional collateral in the event of such prepayment, there will be sufficient collateral to secure CMOs that remain outstanding.
Principal and interest on the underlying mortgage assets may be allocated among the several classes of CMOs in various ways. In certain
structures (known as “sequential pay” CMOs), payments of principal, including any principal prepayments, on the mortgage assets generally are applied to the classes of CMOs in the order of their respective final distribution dates. Thus,
no payment of principal will be made on any class of sequential pay CMOs until all other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs include, among others, “parallel pay” CMOs. Parallel pay CMOs are structured to apply principal payments and prepayments of the mortgage assets to two or more
classes concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each class.
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Principal prepayments on the underlying mortgages may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
A wide variety of CMOs may be issued in the
parallel pay or sequential pay structures. These securities include accrual certificates (also known as “Z-Bonds”), which accrue interest at a specified rate only until all other certificates having an earlier final distribution date have
been retired and are converted thereafter to an interest-paying security, and planned amortization class (“PAC”) certificates, which are parallel pay CMOs that generally require that specified amounts of principal be applied on each
payment date to one or more classes of CMOs (the “PAC Certificates”), even though all other principal payments and prepayments of the mortgage assets are then required to be applied to one or more other classes of the certificates. The
scheduled principal payments for the PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls, if any, are added to the amount
payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be created to absorb
most of the volatility in the underlying mortgage assets. These tranches tend to have market prices and yields that are much more volatile than the PAC classes.
Stripped Mortgage-Backed Securities
All Portfolios but Dividend
Strategy Portfolio and Strategic Value Portfolio may also invest in stripped mortgage-backed securities. Stripped mortgage-backed securities are often structured with two classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. Stripped mortgage-backed securities have greater market volatility than other types of U.S. government securities in which a Portfolio invests. A common type of stripped mortgage-backed security has one
class receiving some of the interest and all or most of the principal (the “principal only” class) from the mortgage pool, while the other class will receive all or most of the interest (the “interest only” class). The yield to
maturity on an interest only class is extremely sensitive not only to changes in prevailing interest rates, but also to the rate of principal payments, including principal prepayments, on the underlying pool of mortgage assets, and a rapid rate of
principal payment may have a material adverse effect on a Portfolio’s yield. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment in these
securities even if the securities have received the highest rating by a nationally recognized statistical rating organization. While interest-only and principal-only securities are generally regarded as being illiquid, such securities may be deemed
to be liquid if they can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of a Portfolio’s net asset value per share. Only U.S. government interest only and principal only
securities backed by fixed-rate mortgages and determined to be liquid under guidelines and standards established by the Directors may be considered liquid securities not subject to a Portfolio’s limitation on investments in illiquid securities.
Certain Additional Risk Factors Relating to High-Yield Bonds Sensitivity to Interest Rate and Economic Changes
High-yield bonds are very sensitive to adverse economic changes and corporate developments. During an economic downturn or substantial
period of rising interest rates, highly leveraged issuers may experience financial stress that would adversely affect their ability to service their principal and interest payment obligations, to meet projected business goals, and to obtain
additional financing. If the issuer of a bond defaults on its obligations to pay interest or principal or enters into bankruptcy proceedings, a Portfolio may incur losses or expenses in seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and changes can be expected to result in increased volatility of market prices of high-yield bonds and the Portfolio’s net asset value.
Payment Expectation
High-yield bonds may contain redemption or
call provisions. If an issuer exercises these provisions in a declining interest rate market, a Portfolio would have to replace the security with a lower yielding security, resulting in a decreased return for investors. Conversely, a high-yield
bond’s value will decrease in a rising interest rate market, as will the value of the Portfolio’s assets. If the Portfolio experiences unexpected net redemptions, this may force it to sell high-yield bonds without regard to their
investment merits, thereby decreasing the asset base upon which expenses can be spread and possibly reducing the Portfolio’s rate of return.
Liquidity and Valuation
There may be little trading in the
secondary market for particular bonds, which may affect adversely a Portfolio’s ability to value accurately or dispose of such bonds. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin market. If a Portfolio is not able to obtain precise or accurate market quotations for a particular security, it will become more difficult for the Directors to value such
Portfolio’s investment Portfolio and the Portfolio’s Directors may have to use a greater degree of judgment in making such valuations.
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Asset-Backed Securities
Each Portfolio may invest in asset-backed securities. These securities, issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan receivables, representing the obligations of a number of different parties.
Asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of automobile receivables permit the servicer to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders
of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support
payments on these securities.
Asset-backed securities are often backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by obligors to make payments on underlying assets, the securities may contain elements of credit support that fall into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default ensures payment through insurance policies or letters of credit obtained by the issuer or sponsor from third parties. A
Portfolio will not pay any additional or separate fees for credit support. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit support could adversely affect the return on an investment in such a security.
Instruments backed by pools of receivables are subject to unscheduled prepayments of principal prior to maturity. When the obligations are prepaid, a Portfolio must reinvest the prepaid amounts in
securities the yields of which reflect interest rates prevailing at the time. Therefore, a Portfolio’s ability to maintain a portfolio which includes high-yielding asset-backed securities will be adversely affected to the extent that
prepayments of principal must be reinvested in securities which have lower yields than the prepaid obligations. Moreover, prepayments of securities purchased at a premium could result in a realized loss.
Zero Coupon Bonds, Step-Coupon Bonds, Deferred Interest Bonds and PIK Bonds
Fixed income securities in which all Portfolios except Dividend Strategy Portfolio and Strategic Value Portfolio may invest also include
zero coupon bonds, step-coupon bonds, deferred interest bonds and bonds on which the interest is payable in kind (“PIK bonds”). Zero coupon and deferred interest bonds are debt obligations issued or purchased at a significant discount from
face value. A step-coupon bond is one in which a change in interest rate is fixed contractually in advance. PIK bonds are debt obligations that provide that the issuer thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments may experience greater volatility in market value due to changes in interest rates and other factors than debt obligations that make regular payments of interest. A Portfolio will accrue income on such
investments for tax and accounting purposes, as required, that is distributable to shareholders and which, because no cash is received at the time of accrual, may require the liquidation of other portfolio securities under disadvantageous
circumstances to satisfy the Portfolio’s distribution obligations.
Loan Participations
Each Portfolio may invest in loan participations. Loan participations are loans sold by the lending bank to an investor. The loan
participant borrower may be a company with highly-rated commercial paper that finds it can obtain cheaper funding through a loan participation than with commercial paper and can also increase the company’s name recognition in the capital
markets. Loan participations often generate greater yield than commercial paper.
The borrower of the underlying loan will be
deemed to be the issuer except to the extent the Portfolio derives its rights from the intermediary bank that sold the loan participations. Because loan participations are undivided interests in a loan made by the issuing bank, the Portfolio may not
have the right to proceed against the loan participations borrower without the consent of other holders of the loan participations. In addition, loan participations will be treated as illiquid if, in the judgment of the Adviser, they cannot be sold
within seven days.
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Short-Term Debt Securities
In addition to its primary investments, each Portfolio, except the Dividend Strategy Portfolio and Strategic Value Portfolio, may invest
up to 25% of its total assets in both U.S. and non-U.S. dollar denominated money market instruments: (a) for liquidity purposes (to meet redemptions and expenses) or (b) to generate a return on idle cash held in a Portfolio’s
portfolio during periods when an Adviser is unable to locate favorable investment opportunities. For temporary defensive purposes, each Portfolio, except the Dividend Strategy Portfolio and Strategic Value Portfolio, may invest up to 100% of its
total assets in cash and short-term fixed income securities, including corporate debt obligations and money market instruments rated in one of the two highest categories by a nationally recognized statistical rating organization (or determined by
the Adviser to be of equivalent quality). The types of short-term and temporary defensive investments in which a Portfolio may invest are described below.
The Dividend Strategy Portfolio and the Strategic Value Portfolio may invest in money market investments, such as short-term U.S. government obligations, repurchase agreements, commercial paper,
bankers’ acceptances and certificates of deposit, to manage cash in connection with pending investments into the securities selected for each Portfolio. The portfolio manager for the Dividend Strategy Portfolio and Strategic Value Portfolio may
also, in his discretion, maintain a cash position in these Portfolios for general cash management purposes (e.g., for liquidity purposes to meet redemptions and expenses), which may be invested in money market instruments. The Dividend Strategy
Portfolio and Strategic Value Portfolio do not intend to invest in money market instruments for temporary defensive purposes, nor do they intend to invest in fixed income securities, as described under “Fixed Income Securities,” above,
unless such fixed income securities are of the type of short-term investments described below.
Money Market Securities
Money market securities may include securities issued or guaranteed by the U.S. government, its agencies or instrumentalities,
repurchase agreements, commercial paper, bankers’ acceptances, time deposits and certificates of deposit. In addition, Janus Capital Management LLC (“Janus”) may invest idle cash of the assets of the Portfolios that they advise in
money market mutual funds or similarly managed private funds that they manage. Such an investment may entail additional fees.
Commercial Bank Obligations
Certificates of deposit (interest-bearing time deposits), including Eurodollar certificates of deposit (certificates of deposit issued by domestic or foreign banks located outside the U.S.) and Yankee
certificates of deposit (certificates of deposit issued by branches of foreign banks located in the U.S.), domestic and foreign bankers’ acceptances (time drafts drawn on a commercial bank where the bank accepts an irrevocable obligation to pay
at maturity) and documented discount notes (corporate promissory discount notes accompanied by a commercial bank guarantee to pay at maturity) representing direct or contingent obligations of commercial banks with total assets in excess of $1
billion, based on the latest published reports. A Portfolio may also invest in obligations issued by U.S. commercial banks with total assets of less than $1 billion if the principal amount of these obligations owned by the Portfolio is fully insured
by the Federal Deposit Insurance Corporation (“FDIC”). A Portfolio may also invest in notes and obligations issued by foreign branches of U.S. and foreign commercial banks.
Savings Association Obligations
Certificates of deposit
(interest-bearing time deposits) issued by mutual savings banks or savings and loan associations with assets in excess of $1 billion and whose deposits are insured by the FDIC. A Portfolio may also invest in obligations issued by mutual savings
banks or savings and loan associations with total assets of less than $1 billion if the principal amount of these obligations owned by the Portfolio is fully insured by the FDIC.
Commercial Paper
Short-term notes (up to 12 months) issued by
domestic and foreign corporations or governmental bodies. A Portfolio may purchase commercial paper only if judged by the Adviser to be of suitable investment quality. This includes commercial paper that is (a) rated in the two highest
categories by Standard & Poor’s and by Moody’s, or (b) other commercial paper deemed on the basis of the issuer’s creditworthiness to be of a quality appropriate for the Portfolio. See the Appendix for a description of
the ratings. A Portfolio will not purchase commercial paper described in (b) above if such paper would in the aggregate exceed 15% of its total assets after such purchase. The commercial paper in which a Portfolio may invest includes variable
amount master demand notes. Variable amount master demand notes permit a Portfolio to invest varying amounts at fluctuating rates of interest pursuant to the agreement in the master note. These are direct lending obligations between the lender and
borrower, they are generally not traded, and there is no secondary market. Such instruments are payable with
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accrued interest in whole or in part on demand. The amounts of the instruments are subject to daily fluctuations as the participants increase or decrease the extent of their participation.
Investments in these instruments are limited to those that have a demand feature enabling the Portfolio unconditionally to receive the amount invested from the issuer upon seven or fewer days’ notice. In connection with master demand note
arrangements, the Adviser, subject to the direction of the Directors, monitors on an ongoing basis the earning power, cash flow and other liquidity ratios of the borrower, and its ability to pay principal and interest on demand. The Adviser also
considers the extent to which the variable amount master demand notes are backed by bank letters of credit. These notes generally are not rated by Moody’s or Standard & Poor’s and a Portfolio may invest in them only if it is
determined that at the time of investment the notes are of comparable quality to the other commercial paper in which the Portfolio may invest. Master demand notes are considered to have a maturity equal to the repayment notice period unless the
Adviser has reason to believe that the borrower could not make timely repayment upon demand.
Corporate Bonds and Notes
A Portfolio may purchase corporate obligations that mature or that may be redeemed in one year or less. These obligations
originally may have been issued with maturities in excess of one year. A Portfolio may invest only in corporate bonds or notes of issuers having outstanding short-term securities rated in the top two rating categories by Standard &
Poor’s and Moody’s. See the Appendix for a description of investment-grade ratings by Standard & Poor’s and Moody’s.
Government Securities
Debt securities maturing within one year of
the date of purchase include adjustable-rate mortgage securities backed by GNMA, FNMA, FHLMC and other non-agency issuers. Although certain floating or variable rate obligations (securities whose coupon rate changes at least annually and generally
more frequently) have maturities in excess of one year, they are also considered short-term debt securities. See “U.S. Government Securities” above. A Portfolio may also purchase securities issued or guaranteed by a foreign government, its
agencies or instrumentalities. See “Foreign Securities” above.
Repurchase Agreements
A Portfolio may enter into repurchase agreements involving only securities in which it could otherwise invest and with selected banks,
brokers and securities dealers whose financial condition is monitored by the Adviser. In such agreements, the seller agrees to repurchase the security at a mutually agreed-upon time and price. The period of maturity is usually quite short, either
overnight or a few days, although it may extend over a number of months. The repurchase price is in excess of the purchase price by an amount that reflects an agreed-upon rate of return effective for the period of time a Portfolio’s money is
invested in the security. Whenever a Portfolio enters into a repurchase agreement, it obtains collateral having a value equal to at least 102% (100% if such collateral is in the form of cash) of the repurchase price, including accrued interest. The
instruments held as collateral are valued daily and if the value of the instruments declines, the Portfolio will require additional collateral. If the seller under the repurchase agreement defaults, the Portfolio may incur a loss if the value of the
collateral securing the repurchase agreements has declined and may incur disposition costs in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization of
the collateral by the Portfolio may be delayed or limited. A Portfolio will not invest in repurchase agreements maturing in more than seven days if the aggregate of such investments along with other illiquid securities exceeds 15% of the value of
its net assets. However, there is no limit on the amount of a Portfolio’s net assets that may be subject to repurchase agreements having a maturity of seven days or less for temporary defensive purposes.
Disciplined Strategy
The Dividend Strategy Portfolio and Strategic Value Portfolio will not deviate from their strategies, which entail buying and holding stocks selected through the selection criteria described in the
Prospectus. The Portfolios will not generally sell stocks in their portfolios and buy different stocks except during their annual rebalancings or as otherwise set forth in the Prospectus, even if there are adverse developments concerning a
particular stock, company or industry. There can be no assurance that the strategy will be successful. In addition, as noted in the Prospectus, twenty of the stocks in the Dividend Strategy Portfolio will be selected from the Russell 1000 Index,
although stocks in the financials and utilities sectors will generally be excluded from this twenty stock selection process. For purposes of determining whether a stock is considered to be in the financials or utilities sector, the Dividend Strategy
Portfolio will use the classification assigned to the stock by the Global Industry Classification Standard
(GICS)
SM
developed and administered by Morgan Stanley
Capital International (MSCI) and Standard & Poor’s (S&P) or the classification assigned by another unaffiliated third party data provider.
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In the event a corporate transaction such as a reorganization, merger, acquisition or
bankruptcy affects the issuer of securities held by Dividend Strategy Portfolio’s or Strategic Value Portfolio’s portfolio, the Portfolios generally will not alter their portfolio holdings unless the new security received by the Portfolio
does not meet the Portfolio’s selection criteria. For example, if as a result of a merger, a stock held in Dividend Strategy Portfolio’s or Strategic Value Portfolio’s portfolio is automatically exchanged for a stock of another
company, the Portfolio would generally continue to hold the newly received stock if it met its selection criteria. If the newly received stock did not meet the selection criteria, the portfolio manager would generally dispose of such stock and
replace it with a stock that did meet its selection criteria. In the event that the Dividend Strategy Portfolio or Strategic Value Portfolio were to receive cash in exchange for their entire position in an issuer upon a corporate event, each
Portfolio would generally replace the issuer in its portfolio.
Diversification
Each Portfolio, except the Dividend Strategy Portfolio and Strategic Value Portfolio, is classified as “non-diversified” for
purposes of the 1940 Act, which means that it is not limited by the 1940 Act with regard to the portion of assets that may be invested in the securities of a single issuer. To the extent any such Portfolio makes investments in excess of 5% of its
assets in the securities of a particular issuer, its exposure to the risks associated with that issuer is increased.
Because
each Portfolio, except the Dividend Strategy Portfolio and Strategic Value Portfolio, may invest in a limited number of issuers, the performance of particular securities may adversely affect the Portfolio’s performance or subject the Portfolio
to greater price volatility than that experienced by diversified investment companies. Each Portfolio intends to maintain the required level of diversification and otherwise conduct its operations in order to qualify as a “regulated investment
company” for purposes of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a regulated investment company under the Code, a Portfolio must, among other things, diversify its holdings so that, at the end of each
quarter of the taxable year: (i) at least 50% of the market value of the Portfolio’s assets is represented by cash, U.S. government securities, the securities of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an amount not greater than 5% of the value of the Portfolio’s total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies), any two or more issuers of which the Portfolio owns 20% or more of
the voting stock and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships.
In the unlikely event application of a Portfolio’s strategy would result in a violation of these requirements of the Code, the
Portfolio would be required to deviate from its strategy to the extent necessary to avoid losing its status as a regulated investment company.
Derivatives Strategies
Each Portfolio, except Dividend Strategy Portfolio and Strategic Value Portfolio, may write (
i.e.
, sell) call options (“calls”) on securities that are traded on U.S. and foreign
securities exchanges and over-the-counter markets to enhance income through the receipt of premiums from expired calls and any net profits from closing purchase transactions. After writing a call, up to 25% of the Portfolio’s total assets may
be subject to calls. All such calls written by the Portfolio must be “covered” while the call is outstanding (
i.e.
, the Portfolio must own the securities subject to the call or other securities acceptable for applicable escrow
requirements). If a call written by the Portfolio is exercised, the Portfolio forgoes any profit from any increase in the market price above the call price of the underlying investment on which the call was written.
In addition, the Portfolio could experience capital losses, which might cause previously distributed short-term capital gains to be
re-characterized as a non-taxable return of capital to shareholders.
The Portfolios, except Dividend Strategy Portfolio and
Strategic Value Portfolio, may also write put options (“puts”), which give the holder of the option the right to sell the underlying security to the Portfolio at the stated exercise price. The Portfolio will receive a premium for writing a
put option that increases the Portfolio’s return. The Portfolio writes only covered put options, which means that so long as the Portfolio is obligated as the writer of the option it will, through its custodian, have deposited and maintained
cash or liquid securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities.
Primarily for hedging purposes, and from time to time for income enhancement, each Portfolio, except for Dividend Strategy Portfolio and
Strategic Value Portfolio and as otherwise described below, may use interest rate futures contracts, foreign currency futures contracts, stock and bond index futures contracts and futures contracts on U.S. government securities (together,
“Futures”); Forward Contracts on foreign currencies (“Forward Contracts”); and call and put options on equity and
B-16
debt securities, Futures, stock and bond indices and foreign currencies. Puts and calls on securities, interest rate Futures or stock and bond index Futures or options on such Futures purchased
or sold by a Portfolio will normally be listed on either: (1) a national securities or commodities exchange or (2) over-the-counter markets. However, each such Portfolio may also buy and sell options and Futures on foreign equity indexes
and foreign fixed income securities. Because the markets for these instruments are relatively new and still developing, the ability of such a Portfolio to engage in such transactions may be limited. Derivatives may be used to attempt to:
(i) protect against possible declines in the market value of a Portfolio’s securities resulting from downward trends in the equity and debt securities markets (generally due to a rise in interest rates); (ii) protect a
Portfolio’s unrealized gains in the value of its equity and debt securities that have appreciated; (iii) facilitate selling securities for investment reasons; (iv) establish a position in the equity and debt securities markets as a
temporary substitute for purchasing particular equity and debt securities; or (v) reduce the risk of adverse currency fluctuations.
A Portfolio might use Eurodollar futures contracts and options thereon to hedge against changes in a foreign prime lending interest rate to which many interest swaps and fixed income securities are
linked.
For each Portfolio except Dividend Strategy Portfolio and Strategic Value Portfolio, forward foreign currency
exchange contracts, currency options and currency swaps may be entered into for non-hedging purposes when an Adviser anticipates that a foreign currency will appreciate or depreciate in value, but securities denominated in that currency do not
present attractive investment opportunities or are not included in such portfolio. These Portfolios may use currency contracts and options to cross-hedge, which involves selling or purchasing instruments in one currency to hedge against changes in
exchange rates for a different currency with a pattern of correlation. To limit any leverage in connection with currency contract transactions for non-hedging purposes, a Portfolio will segregate cash or liquid securities in an amount sufficient to
meet its payment obligations in these transactions or otherwise “cover” the obligation. Initial margin deposits made in connection with currency futures transactions or premiums paid for currency options traded over-the-counter or on a
commodities exchange may each not exceed 5% of a Portfolio’s total assets in the case of non-bona fide hedging transactions. Each such Portfolio may enter into currency swaps. Currency swaps involve the exchange by a Portfolio with another
party of their respective rights to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Therefore, the
entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. A Portfolio will segregate, cash or liquid securities equal to the net amount, if any, of the
excess of the Portfolio’s obligations over its entitlement with respect to swap transactions. To the extent that the net amount of a swap is held in a segregated account consisting of cash or liquid securities, the Fund believes that swaps do
not constitute senior securities under the 1940 Act and, accordingly, they will not be treated as being subject to the Portfolio’s borrowing restrictions. The use of currency swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio securities transactions. If an Adviser is incorrect in its forecasts of market values and currency exchange rates, the investment performance of a Portfolio would be less
favorable than it would have been if this investment technique were not used.
Eurodollar Instruments
If and to the extent authorized to do so, a Portfolio may make investments in Eurodollar instruments, which are typically
dollar-denominated futures contracts or options on those contracts that are linked to the LIBOR (the London Inter-Bank Offer Rate, the interest rate that banks charge each other for loans) , although foreign currency denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for the lending of funds and sellers to obtain a fixed rate for borrowings. A Portfolio might use Eurodollar futures contracts and options thereon to
hedge against changes in LIBOR, to which many interest rate swaps and fixed income instruments are linked.
A Portfolio’s
use of Futures and options on Futures will be incidental to its activities in the underlying cash market. When hedging to attempt to protect against declines in the market value of the portfolio, to permit a Portfolio to retain unrealized gains in
the value of portfolio securities that have appreciated, or to facilitate selling securities for investment reasons, a Portfolio could: (i) sell Futures; (ii) purchase puts on such Futures or securities; or (iii) write calls on
securities held by it or on Futures. When hedging to attempt to protect against the possibility that portfolio securities are not fully included in a rise in value of the debt securities market, a Portfolio could: (i) purchase Futures, or
(ii) purchase calls on such Futures or on securities. When hedging to protect against declines in the dollar value of a foreign currency-denominated security, a Portfolio could: (i) purchase puts on that foreign currency and on foreign
currency Futures (currently no Portfolio uses this strategy); (ii) write calls on that currency or on such Futures; or (iii) enter into Forward Contracts on foreign currencies at a lower rate than the spot (“cash”) rate. Dividend
Strategy Portfolio and Strategy Value Portfolio do not intend to use this strategy. Additional information about the derivatives the Portfolio may use is provided below.
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Options
Options on Securities
As noted above, each Portfolio may write,
and may purchase, call and put options (including yield curve options) on equity and debt securities except Dividend Strategy Portfolio and Strategic Value Portfolio. Each Portfolio may write puts and calls, or purchase put options only if the
Portfolio owns the underlying security.
When a Portfolio writes a call on a security, it receives a premium and agrees to
sell the underlying security to a purchaser of a corresponding call on the same security during the call period (usually not more than 9 months) at a fixed price (which may differ from the market price of the underlying security), regardless of
market price changes during the call period. In such instance, the Portfolio retains the risk of loss, which can be significant if the Portfolio does not own the securities subject to the call, should the price of the underlying security increase
during the call period, which may be offset to some extent by the premium.
To terminate its obligation on a call it has
written, the Portfolio may purchase a corresponding call in a “closing purchase transaction.” A profit or loss will be realized, depending upon whether the net of the amount of the option transaction costs and the premium received on the
call written was more or less than the price of the call subsequently purchased. A profit may also be realized if the call expires unexercised, because the Portfolio retains the underlying security and the premium received. If the Portfolio could
not effect a closing purchase transaction due to lack of a market, it would hold the callable securities until the call expired or was exercised.
When a Portfolio purchases a call (other than in a closing purchase transaction), it pays a premium and has the right to buy the underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price.
A Portfolio benefits only if the call is sold at a profit or if,
during the call period, the market price of the underlying investment is above the sum of the call price plus the transaction costs and the premium paid and the call is exercised. If the call is not exercised or sold (whether or not at a profit), it
will become worthless at its expiration date and a Portfolio will lose its premium payment and the right to purchase the underlying investment.
A put option on securities gives the purchaser the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period. Writing a put covered by
segregated liquid assets equal to the exercise price of the put has the same economic effect to a Portfolio as writing a covered call. The premium a Portfolio receives from writing a put option represents a profit as long as the price of the
underlying investment remains above the exercise price. However, a Portfolio has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even though the value of the
investment may fall below the exercise price. If the put expires unexercised, a Portfolio (as the writer of the put) realizes a gain in the amount of the premium. If the put is exercised, a Portfolio must fulfill its obligation to purchase the
underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, a Portfolio may incur a loss, equal to the sum of the sale price of the underlying investment and the premium
received minus the sum of the exercise price and any transaction costs incurred.
A Portfolio may effect a closing purchase
transaction to realize a profit on an outstanding put option it has written or to prevent an underlying security from being put. Furthermore, effecting such a closing purchase transaction will permit a Portfolio to write another put option to the
extent that the exercise price thereof is secured by the deposited assets, or to utilize the proceeds from the sale of such assets for other investments by the Portfolio. A Portfolio will realize a profit or loss from a closing purchase transaction
if the cost of the transaction is less or more than the premium received from writing the option.
When a Portfolio purchases
a put, it pays a premium and has the right to sell the underlying investment to a seller of a corresponding put on the same investment during the put period at a fixed exercise price. Buying a put on an investment a Portfolio owns enables the
Portfolio to protect itself during the put period against a decline in the value of the underlying investment below the exercise price by selling such underlying investment at the exercise price to a seller of a corresponding put. If the market
price of the underlying investment is equal to or above the exercise price and as a result the put is not exercised or resold, the put will become worthless at its expiration date, and the Portfolio will lose its premium payment and the right to
sell the underlying investment pursuant to the put. The put may, however, be sold prior to expiration (whether or not at a profit).
Buying a put on an investment a Portfolio does not own permits the Portfolio either to resell the put or buy the underlying investment and sell it at the exercise price. The resale price of the put will
vary inversely with the price of the underlying investment. If the market price of the underlying investment is above the exercise price and as a result the put is
B-18
not exercised, the put will become worthless on its expiration date. In the event of a decline in the stock market, a Portfolio could exercise or sell the put at a profit to attempt to offset
some or all of its loss on its portfolio securities.
When writing put options on securities, to secure its obligation to pay
for the underlying security, a fund will segregate liquid assets with a value equal to or greater than the exercise price of the underlying securities. A fund therefore forgoes the opportunity of investing the segregated assets or writing calls
against those assets. As long as the obligation of a fund as the put writer continues, it may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring a fund to take delivery of the underlying security against
payment of the exercise price. A fund has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This
obligation terminates upon expiration of the put, or such earlier time at which a fund effects a closing purchase transaction by purchasing a put of the same series as that previously sold. Once a fund has been assigned an exercise notice, it is
thereafter not allowed to effect a closing purchase transaction.
Each Portfolio except Dividend Strategy Portfolio and
Strategic Value Portfolio may use spread transactions for any lawful purpose consistent with the Portfolio’s investment objective. A Portfolio may purchase covered spread options from securities dealers. Such covered spread options are not
presently exchange-listed or exchange-traded. The purchase of a spread option gives a Portfolio the right to put, or sell, a security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that the Portfolio
does not own, but which is used as a benchmark. The risk to a Portfolio in purchasing covered spread options is the cost of the premium paid for the spread option and any transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used to protect a Portfolio against adverse changes in prevailing credit quality spreads,
i.e.
, the yield spread between high quality and lower quality securities. Such
protection is provided only during the life of the spread option.
Options on Foreign Currencies
Each Portfolio except Dividend Strategy Portfolio and Strategic Value Portfolio may write and purchase puts and calls on foreign
currencies. A call written on a foreign currency by the Portfolio is “covered” if the Portfolio owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration which is segregated by the Portfolio) upon conversion or exchange of other foreign currency held in its portfolio. A put option is “covered” if the Portfolio segregates
cash or liquid securities with a value at least equal to the exercise price of the put option. A call written by the Portfolio on a foreign currency is for cross-hedging purposes if it is not covered, but is designed to provide a hedge against a
decline in the U.S. dollar value of a security the Portfolio owns or has the right to acquire and is denominated in the currency underlying the option due to an adverse change in the exchange rate. In such circumstances, the Portfolio collateralizes
the option by segregating cash or liquid securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to-market daily.
As with other kinds of option transactions, the writing of an option on currency will constitute only a partial hedge, up to the amount of the premium received. The Portfolios may be required to purchase
or sell currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on currency may constitute an effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to
the Fund’s position, the Fund may forfeit the entire amount of the premium plus related transaction costs.
Options on Securities
Indices
As noted above under “Derivatives Strategies,” the Portfolios may write, and each Portfolio may
purchase, call and put options on securities indices. Puts and calls on broadly-based securities indices are similar to puts and calls on securities except that all settlements are in cash and gain or loss depends on changes in the index in question
(and thus on price movements in the securities market generally) rather than on price movements in individual securities or Futures. When a Portfolio buys a call on a securities index, it pays a premium. During the call period, upon exercise of a
call by a Portfolio, a seller of a corresponding call on the same investment will pay the Portfolio an amount of cash to settle the call if the closing level of the securities index upon which the call is based is greater than the exercise price of
the call. That cash payment is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (the “multiplier”) which determines the total dollar value for each point of
difference. When a Portfolio buys a put on a securities index, it pays a premium and has the right during the put period to require a seller of a corresponding put, upon the Portfolio’s exercise of its put, to deliver to the Portfolio an amount
of cash to settle the put if the closing level of the securities index upon which the put is based is less than the exercise price of the put. That cash payment is determined by the multiplier, in the same manner as described above as to calls.
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Futures Contracts and Options on Futures
Futures Contracts
Upon entering into a Futures transaction, a Portfolio will be required to deposit an initial margin payment with the futures commission
merchant (the “futures broker”). The initial margin will be deposited with the Portfolio’s custodian in an account registered in the futures broker’s name; however the futures broker can gain access to that account only under
specified conditions. As the Future is marked-to-market to reflect changes in its market value, subsequent margin payments, called variation margin, will be paid to or by the futures broker on a daily basis. If the Portfolio is required to increase
its variation margin when the Portfolio has insufficient cash, the Portfolio may need to sell securities or other assets, including at disadvantageous times to meet such margin requirements. Prior to expiration of the Future, if a Portfolio elects
to close out its position by taking an opposite position, a final determination of variation margin is made, additional cash is required to be paid by or released to the Portfolio, and any loss or gain is realized for tax purposes. All Futures
transactions are effected through a clearinghouse associated with the exchange on which the Futures are traded.
The risks
associated with a Portfolio’s use of futures contracts include: (i) the risk that due to market conditions, there may not always be a liquid market for a futures contract and, as a result, the Portfolio may be unable to close out its
futures contracts at a time which is advantageous; (ii) changes in the price of a futures contract may not always track the changes in market value of the underlying reference asset; and (iii) trading restrictions or limitations may be
imposed by an exchange, and government regulations may restrict trading in futures contracts.
Interest rate futures contracts
are purchased or sold for hedging purposes to attempt to protect against the effects of interest rate changes on a Portfolio’s current or intended investments in fixed-income securities. For example, if a Portfolio owned long-term bonds and
interest rates were expected to increase, that Portfolio might sell interest rate futures contracts. Such a sale would have much the same effect as selling some of the long-term bonds in that Portfolio’s portfolio. However, since the Futures
market is more liquid than the cash market, the use of interest rate futures contracts as a hedging technique allows a Portfolio to hedge its interest rate risk without having to sell its portfolio securities. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of that Portfolio’s interest rate futures contracts would be expected to increase at approximately the same rate, thereby keeping the net asset value of that Portfolio
from declining as much as it otherwise would have. On the other hand, if interest rates were expected to decline, interest rate futures contracts may be purchased to hedge in anticipation of subsequent purchases of long-term bonds at higher prices.
Since the fluctuations in the value of the interest rate futures contracts should be similar to that of long-term bonds, a Portfolio could protect itself against the effects of the anticipated rise in the value of long-term bonds without actually
buying them until the necessary cash became available or the market had stabilized. At that time, the interest rate futures contracts could be liquidated and that Portfolio’s cash reserves could then be used to buy long-term bonds on the cash
market.
Purchases or sales of stock or bond index futures contracts are used for hedging purposes to attempt to protect a
Portfolio’s current or intended investments from broad fluctuations in stock or bond prices. For example, a Portfolio may sell stock or bond index futures contracts in anticipation of or during a market decline to attempt to offset the decrease
in market value of the Portfolio’s securities portfolio that might otherwise result. If such decline occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the Futures position. When a Portfolio is not
fully invested in the securities market and anticipates a significant market advance, it may purchase stock or bond index futures contracts in order to gain rapid market exposure that may, in part or entirely, offset increases in the cost of
securities that the Portfolio intends to purchase. As such purchases are made, the corresponding positions in stock or bond index futures contracts will be closed out.
As noted above, each Portfolio except Dividend Strategy Portfolio and Strategic Value Portfolio may purchase and sell foreign currency futures contracts for hedging to attempt to protect its current or
intended investments from fluctuations in currency exchange rates. Such fluctuations could reduce the dollar value of portfolio securities denominated in foreign currencies, or increase the cost of foreign-denominated securities to be acquired, even
if the value of such securities in the currencies in which they are denominated remains constant. The Portfolio may sell futures contracts on a foreign currency, for example, when it holds securities denominated in such currency and it anticipates a
decline in the value of such currency relative to the dollar. In the event such decline occurs, the resulting adverse effect on the value of foreign-denominated securities may be offset, in whole or in part, by gains on the Futures contracts.
However, if the value of the foreign currency increases relative to the dollar, the Portfolio’s loss on the foreign currency futures contract may or may not be offset by an increase in the value of the securities since a decline in the price of
the security stated in terms of the foreign currency may be greater than the increase in value as a result of the change in exchange rates.
Conversely, the Portfolios could protect against a rise in the dollar cost of foreign-denominated securities to be acquired by purchasing Futures contracts on the relevant currency, which could offset, in
whole or in part, the increased cost of such securities resulting from a rise in the dollar value of the underlying currencies. When a portfolio purchases futures contracts under such circumstances, however, and the price of securities to be
acquired instead declines as a result of
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appreciation of the dollar, the portfolio will sustain losses on its futures position which could reduce or eliminate the benefits of the reduced cost of portfolio securities to be acquired.
Options on Futures
As noted above, the Portfolios, except Dividend Strategy Portfolio and Strategic Value Portfolio, may write, and all the Portfolios may purchase and write, options on interest rate futures contracts,
stock and bond index futures contracts, Forward Contracts and foreign currency futures contracts (the Portfolios will not purchase or write options on foreign currency futures contracts.) Unless otherwise specified, options on interest rate futures
contracts, options on stock and bond index futures contracts and options on foreign currency futures contracts are collectively referred to as “Options on Futures.”
The writing of a call option on a Futures contract constitutes a partial hedge against declining prices of the securities in the Portfolio. If the Futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the portfolio holdings. The writing of a put option on a Futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments required to be delivered under the terms of the Futures contract. If the Futures price at expiration of the put option is higher than the exercise price, the Portfolio
will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities the Portfolio intends to purchase. If a put or call option the Portfolio has written is exercised, the Portfolio will
incur a loss that will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its Options on Futures positions, the
Portfolio’s losses from exercised Options on Futures may to some extent be reduced or increased by changes in the value of portfolio securities.
A Portfolio may purchase Options on Futures for hedging purposes, instead of purchasing or selling the underlying Futures contract. For example, where a decrease in the value of portfolio securities is
anticipated as a result of a projected market-wide decline or changes in interest or exchange rates, a Portfolio could, in lieu of selling a Futures contract, purchase put options thereon. In the event that such decrease occurs, it may be offset, in
whole or part, by a profit on the option. If the market decline does not occur, the Portfolio will suffer a loss equal to the price of the put. Where it is projected that the value of securities to be acquired by a Portfolio will increase prior to
acquisition, due to a market advance or changes in interest or exchange rates, a Portfolio could purchase call Options on Futures, rather than purchasing the underlying Futures contract. If the market advances, the increased cost of securities to be
purchased may be offset by a profit on the call. However, if the market declines, the Portfolio will suffer a loss equal to the price of the call but the securities the Portfolio intends to purchase may be less expensive.
Limitations on entering into Futures Contracts
Each Portfolio has an operating policy which provides that it will not enter into Futures contracts or write put or call options with respect to Futures contracts unless such transactions are either
“covered” or subject to appropriate asset segregation requirements. The Portfolios base their asset segregation policies on methods permitted by the SEC staff and may modify these policies in the future to comply with any changes in the
guidance articulated from time to time by the SEC or its staff. Generally, these require that a Portfolio segregate an amount of assets equal to its obligations relative to the position involved, adjusted daily on a mark-to-market basis. With
respect to Futures contracts that are not contractually required to “cash-settle,” each Portfolio covers its open positions by setting aside liquid assets equal to the contracts’ full, notional value. With respect to Futures contracts
that are contractually required to “cash-settle,” however, each Portfolio sets aside liquid assets in an amount equal to that Portfolio’s daily marked-to-market (net) obligation (
i.e.
, the Portfolio’s daily net liability,
if any), rather than the notional value. By setting aside assets equal to its net obligation under cash-settled futures, each Portfolio may employ leverage to a greater extent than if the Portfolio has an operating policy which provides that it
would cover its open positions in cash-settled futures by setting aside assets equal to the contracts’ full notional value.
Forward Contracts on Foreign Currencies
Each Portfolio except Dividend Strategy Portfolio and Strategic Value Portfolio may engage in Forward Contracts on foreign currency. A Forward Contract on foreign currencies involves bilateral obligations
of one party to purchase, and another party to sell, a specific currency at a future date (which may be any fixed number of days from the date of the contract agreed upon by the parties), at a price set at the time the contract is entered into.
These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. No price is paid or received upon the purchase or sale of a Forward Contract on foreign currencies.
The Portfolios do not intend to utilize Forward Contracts on foreign currencies other than for bona fide hedging purposes.
A
Portfolio may use Forward Contracts on foreign currencies to protect against uncertainty in the level of future exchange rates. The use of Forward Contracts on foreign currencies does not eliminate fluctuations in the prices of the underlying
securities a Portfolio owns or intends to acquire, but it does fix a rate of exchange in advance. In addition,
B-21
although Forward Contracts on foreign currencies limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result
should the value of the currencies increase.
A Portfolio may enter into Forward Contracts on foreign currencies with respect
to specific transactions. For example, when a Portfolio enters into a contract for the purchase or sale of a security denominated in or exposed to a foreign currency, or when a Portfolio anticipates receipt of dividend payments in a foreign
currency, the Portfolio may desire to “lock-in” the U.S. dollar price of the security or the U.S. dollar equivalent of such payment by entering into a Forward Contract on foreign currencies, for a fixed amount of U.S. dollars per unit of
foreign currency, for the purchase or sale of the amount of foreign currency involved in the underlying transaction. A Portfolio will thereby be able to protect itself 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.
A Portfolio may also use Forward Contracts on foreign currencies to lock in the U.S. dollar value of portfolio positions (“position
hedge”). In a position hedge, for example, when a Portfolio believes that foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a Forward Contract on foreign currencies to sell an amount of that foreign
currency approximating the value of some or all of the portfolio securities denominated in (or affected by fluctuations in, in the case of ADRs) such foreign currency, or when a Portfolio believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, it may enter into a Forward Contract on foreign currencies to buy that foreign currency for a fixed dollar amount. In this situation a Portfolio may, in the alternative, enter into a Forward Contract on foreign
currencies to sell a different foreign currency for a fixed U.S. dollar amount where the Portfolio believes that the U.S. dollar value of the currency to be sold pursuant to the Forward Contract will fall whenever there is a decline in the U.S.
dollar value of the currency in which portfolio securities of the Portfolio are denominated (“cross-hedged”). A Portfolio, except for Dividend Strategy Portfolio and Strategic Value Portfolio, may also hedge investments denominated in a
foreign currency by entering into forward currency contracts with respect to a foreign currency that is expected to correlate to the currency in which the investments are denominated (“proxy hedging”).
The Portfolio will cover outstanding forward currency contracts by maintaining liquid portfolio securities denominated in the currency
underlying the Forward Contract or the currency being hedged. To the extent that a Portfolio is not able to cover its forward currency positions with underlying portfolio securities, the Portfolio will segregate cash or liquid securities having a
value equal to the aggregate amount of the Portfolio’s commitments under Forward Contracts on foreign currencies entered into with respect to position hedges and cross-hedges. If the value of the segregated securities declines, additional cash
or securities will be segregated on a daily basis so that the value of the segregated assets will equal the amount of the Portfolio’s commitments with respect to such contracts. As an alternative to segregating assets, a Portfolio may purchase
a call option permitting the Portfolio to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the Forward Contract on foreign currencies price or the Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a forward purchase contract at a price as high or higher than the Forward Contract on foreign currencies price. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such contracts.
The precise matching of the Forward
Contract on foreign currencies 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 these
securities between the date the Forward Contract on foreign currencies is entered into and the date it is sold. Accordingly, it may be necessary for a Portfolio to purchase additional foreign currency on the spot (
i.e.
, cash) on the spot
market (and bear the expense of such purchase), if the market value of the security is less than the amount of foreign currency a 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 a 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 on foreign currencies involve the risk that anticipated currency
movements will not be accurately predicted, causing a Portfolio to sustain losses on these contracts and transactions costs.
Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of
great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation
of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to a Portfolio if it is unable to deliver or receive currency or monies in settlement of obligations and could
also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Buyers and sellers of currency futures contracts are subject to the same risks that apply to the use of futures
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contracts generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out positions on these options is subject to the maintenance of a liquid market that may not always be available. Currency exchange rates may fluctuate based on factors extrinsic to
that country’s economy.
At or before the maturity of a Forward Contract on foreign currencies requiring a 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, a Portfolio may close out a Forward Contract on foreign currencies, requiring it to purchase a
specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. A Portfolio would realize a gain or loss as a result of entering into such an offsetting
Forward Contract on foreign currencies under either circumstance to the extent the exchange rate or rates between the currencies involved moved between the execution dates of the first contract and offsetting contract.
The cost to a Portfolio of engaging in Forward Contracts on foreign currencies varies with factors such as the currencies involved, the
length of the contract period and the market conditions then prevailing. Because Forward Contracts on foreign currencies are usually entered into on a principal basis, no fees or commissions are involved. Because such contracts are not traded on an
exchange, a Portfolio must evaluate the credit and performance risk of each particular counterparty under a Forward Contract on foreign currencies.
Although a Portfolio values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Portfolio may convert foreign
currency from time to time, and investors should be aware of the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they
buy and sell 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.
Additional Information About Options
The Fund’s custodian, or a securities depository acting for the custodian, will act as the Portfolios’ escrow agent, through the facilities of the Options Clearing Corporation (“OCC”),
as to the securities on which the Portfolio has written options or as to other acceptable escrow securities, so that no margin will be required for such transaction. OCC will release the securities on the expiration of the option or upon a
Portfolio’s entering into a closing transaction.
A Portfolio’s ability to close out its position as a purchaser or
seller of a call or put option is dependent, in part, upon the liquidity of the particular option market. Among the possible reasons for the absence of a liquid option market on an exchange are: (1) insufficient trading interest in certain
options, (2) restrictions on transactions imposed by an exchange, (3) trading halts, suspensions or other restrictions imposed with respect to particular classes or series of options or underlying securities, including reaching daily price
limits, (4) interruption of the normal operations of an exchange, (5) inadequacy of the facilities of an exchange to handle current trading volume or (6) a decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the relevant market for that option on that exchange would cease to exist, although any such outstanding options on that exchange would continue to be exercisable in accordance with their terms.
An option position may be closed out only on a market that provides secondary trading for options of the same series, and
there is no assurance that a liquid secondary market will exist for any particular option. A Portfolio’s option activities may affect its turnover rate and brokerage commissions. The exercise by a Portfolio of puts on securities will result in
the sale of related investments, increasing portfolio turnover. Although such exercise is within a Portfolio’s control, holding a put might cause the Portfolio to sell the related investments for reasons that would not exist in the absence of
the put. A Portfolio will pay a brokerage commission each time it buys a put or call, sells a call, or buys or sells an underlying investment in connection with the exercise of a put or call. Such commissions may be higher than those that would
apply to direct purchases or sales of such underlying investments. Premiums paid for options are small in relation to the market value of the related investments, and consequently, put and call options offer large amounts of leverage. The leverage
offered by trading in options could result in a Portfolio’s net asset value being more sensitive to changes in the value of the underlying investments.
Over-the-counter (“OTC”) options are purchased from or sold to securities dealers, financial institutions or other parties (collectively referred to as “Counterparties” and are
individually referred to as a “Counterparty”) through a direct bilateral agreement with the Counterparty. In contrast to exchange-listed options, which generally have standardized terms and performance mechanics, all of the terms of an OTC
option, including such terms as method of settlement, term, exercise
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price, premium, guaranties and security, are determined by negotiation of the parties. It is anticipated that any Portfolio authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required to do so.
Unless the parties provide for it,
no central clearing or guaranty function is involved in an OTC option. As a result, if a Counterparty fails to make or take delivery of the security, currency or other instrument underlying an OTC option it has entered into with a Portfolio or fails
to make a cash settlement payment due in accordance with the terms of that option, the Portfolio will lose any premium it paid for the option as well as any anticipated benefit of the transaction. Thus, the Adviser must assess the creditworthiness
of each such Counterparty or any guarantor or credit enhancement of the Counterparty’s credit to determine the likelihood that the terms of the OTC option will be met. A Portfolio will enter into OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York as “primary dealers,” or broker-dealers, domestic or foreign banks, or other financial institutions that are deemed creditworthy by the Adviser. In the
absence of a change in the current position of the staff of the Securities and Exchange Commission (“SEC”), OTC options purchased by a Portfolio and the amount of the Portfolio’s obligation pursuant to an OTC option sold by the
Portfolio (the cost of the sell-back plus the in-the-money amount, if any) or the value of the assets held to cover such options will be deemed illiquid.
Regulatory Aspects of Derivatives and Hedging Instruments
Transactions in options by a Portfolio are subject to limitations established by the CFTC and each of the exchanges governing the maximum
number of options that may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or different exchanges or are held in one or more accounts or through
one or more exchanges or brokers. Thus, the number of options a Portfolio may write or hold may be affected by options written or held by other entities, including other investment companies having the same or an affiliated investment adviser.
Position limits also apply to futures and economically equivalent derivatives contracts. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions. Due to requirements under
the 1940 Act, when a Portfolio purchases a Future, the Portfolio will segregate cash or liquid securities in an amount equal to the market value of the securities underlying such Future, less the margin deposit applicable to it.
Each Portfolio is operated by persons who have claimed an exclusion, granted to operators of registered investment companies like the
Portfolios, from registration as a “commodity pool operator” with respect to the Portfolio under the Commodity Exchange Act (the “CEA”), and, therefore, are not subject to registration or regulation with respect to the Portfolios
under the CEA. As a result, effective December 31, 2012, each Portfolio is limited in its ability to use commodity futures (which include futures on broad-based securities indexes and interest rate futures) or options on commodity futures,
engage in certain swaps transactions or make certain other investments (whether directly or indirectly through investments in other investment vehicles) for purposes other than “bona fide hedging,” as defined in the rules of the Commodity
Futures Trading Commission. With respect to transactions other than for bona fide hedging purposes, either: (1) the aggregate initial margin and premiums required to establish a Portfolio’s positions in such investments may not exceed 5%
of the liquidation value of its portfolio (after accounting for unrealized profits and unrealized losses on any such investments); or (2) the aggregate net notional value of such instruments, determined at the time the most recent position was
established, may not exceed 100% of the liquidation value of its portfolio (after accounting for unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, each Fund may not
market itself as a commodity pool or otherwise as a vehicle for trading in the futures, options or swaps markets.
Possible Risk Factors
in Hedging
Participation in the options or Futures markets and in currency exchange transactions involves investment
risks and transaction costs to which a Portfolio would not be subject absent the use of these strategies. If the Adviser’s predictions of movements in the direction of the securities, foreign currency and interest rate markets are inaccurate,
the adverse consequences to a Portfolio may leave the Portfolio in a worse position than if such strategies were not used. There is also a risk in using short hedging by selling Futures to attempt to protect against decline in value of the portfolio
securities (due to an increase in interest rates) that the prices of such Futures will correlate imperfectly with the behavior of the cash (
i.e
.
,
market value) prices of the Portfolio’s securities. The ordinary spreads between
prices in the cash and Futures markets are subject to distortions due to differences in the natures of those markets. First, all participants in the Futures markets are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close Futures contracts through offsetting transactions that could distort the normal relationship between the cash and Futures markets. Second, the liquidity of the Futures markets depends on
participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the Futures markets could be reduced, thus producing distortion. Third, from the
point-of-view of speculators, the deposit
B-24
requirements in the Futures markets are less onerous than margin requirements in the securities markets. Therefore, increased participation by speculators in the Futures markets may cause
temporary price distortions.
If a Portfolio establishes a position in the debt securities markets as a temporary substitute
for the purchase of individual debt securities (long hedging) by buying Futures and/or calls on such Futures or on debt securities, it is possible that the market may decline; if the Adviser then determines not to invest in such securities at that
time because of concerns as to possible further market decline or for other reasons, the Portfolio will realize a loss on the derivatives that is not offset by a reduction in the price of the debt securities purchased.
When conducted outside the U.S., hedging and other strategic transactions may not be regulated as rigorously as in the U.S., may not
involve a clearing mechanism and related guarantees, and will be subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities, currencies and other instruments. The value of positions taken as part of
non-U.S. hedging and other strategic transactions also could be adversely affected by: (1) other complex foreign political, legal and economic factors, (2) lesser availability of data on which to make trading decisions than in the U.S.,
(3) delays in a Portfolio’s ability to act upon economic events occurring in foreign markets during non-business hours in the U.S., (4) the imposition of different exercise and settlement terms and procedures and margin requirements
than in the U.S. and (5) lower trading volume and liquidity.
Other Derivatives Strategies
In the future, each Portfolio may employ strategies that are not presently contemplated but which may be developed, to the extent such
investment methods are consistent with a Portfolio’s investment objectives, legally permissible and adequately disclosed.
Illiquid
and Restricted Securities
No more than 15% of the value of a Portfolio’s net assets determined as of the date of
purchase may be invested in illiquid securities, including repurchase agreements that have a maturity of longer than seven days, stripped mortgage securities, inverse floaters, interest-rate swaps, currency swaps, caps, floors and collars, or in
other securities that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. Historically, illiquid securities have included securities subject to contractual or legal restrictions on
resale because they have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), securities that are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days.
Repurchase agreements subject to demand are deemed to have a maturity equal to the notice period. Securities that have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. There will generally be a lapse of time between a mutual
fund’s decision to sell an unregistered security and the registration of such security promoting sale. Adverse market conditions could impede a public offering of such securities. When purchasing unregistered securities, each of the Portfolios
will seek to obtain the right of registration at the expense of the issuer (except in the case of Rule 144A securities, as described below).
In recent years, a large institutional market has developed for certain securities that are not registered under the Securities Act, including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer’s ability to honor a demand for repayment. The fact
that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
For example, restricted securities that the Board, or the Adviser pursuant to guidelines established by the Board, has determined to be marketable, such as securities eligible for sale under Rule 144A
promulgated under the Securities Act, or certain private placements of commercial paper issued in reliance on an exemption from such Act pursuant to Section 4(2) thereof, may be deemed to be liquid for purposes of this restriction. This
investment practice could have the effect of increasing the level of illiquidity in the Portfolio to the extent that qualified institutional buyers (as defined in Rule 144A) become for a time uninterested in purchasing these restricted securities.
In addition, a repurchase agreement that by its terms can be liquidated before its nominal fixed-term on seven days or less notice is regarded as a liquid instrument. The Adviser will monitor the liquidity of such restricted securities subject to
the supervision of the Directors. In reaching liquidity decisions the Adviser will consider,
inter alia
, pursuant to guidelines and procedures established by the Directors, the following factors: (1) the frequency of trades and quotes
for the security; (2) the number of dealers wishing to purchase or
B-25
sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the
marketplace trades (
e.g.
, the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). Subject to the applicable limitation on illiquid securities investments, a Portfolio may acquire
securities issued by the U.S. government, its agencies or instrumentalities in a private placement.
Commercial paper issues
in which a Portfolio’s net assets may be invested include securities issued by major corporations without registration under the Securities Act in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and
commercial paper issued in reliance on the so-called private placement exemption from registration afforded by Section 4(2) of the Securities Act (“Section 4(2) paper”). Section 4(2) paper is restricted as to disposition under
the federal securities laws in that any resale must similarly be made in an exempt transaction. Section 4(2) paper is normally resold to other institutional investors through or with the assistance of investment dealers who make a market in
Section 4(2) paper, thus providing liquidity. Section 4(2) paper that is issued by a company that files reports under the Securities Exchange Act of 1934 is generally eligible to be sold in reliance on the safe harbor of Rule 144A
described above. A Portfolio’s 15% limitation on investments in illiquid securities includes Section 4(2) paper other than Section 4(2) paper that the Adviser has determined to be liquid pursuant to guidelines established by the
Directors. The Directors have delegated to the Adviser the function of making day-to-day determinations of liquidity with respect to Section 4(2) paper, pursuant to guidelines approved by the Directors that require the Adviser to take into
account the same factors described above for other restricted securities and require the Adviser to perform the same monitoring and reporting functions. The staff of the SEC has taken the position that purchased over-the-counter (“OTC”)
options and the assets used as “cover” for written OTC options are illiquid. The assets used as cover for OTC options written by a Portfolio will be considered illiquid unless the OTC options are sold to qualified dealers who agree that
the Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure will be considered illiquid only to the extent that
the maximum repurchase price under the option formula exceeds the intrinsic value of the option.
Short Sales
The Portfolios, except Dividend Strategy Portfolio and Strategy Value Portfolio, may sell a security it does not own in anticipation of a
decline in the market value of that security (short sales). To complete such a transaction, a Portfolio must borrow the security to make delivery to the buyer. The Portfolio then is obligated to replace the security borrowed by purchasing it at
market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Portfolio. Until the security is replaced, the Portfolio is required to pay to the lender any dividends or
interest that accrue during the period of the loan. To borrow the security, the Portfolio also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to
the extent necessary to meet margin requirements, until the short position is closed out. Until the Portfolio replaces a borrowed security, the Portfolio will segregate and maintain daily, cash or liquid securities, at such a level that the amount
segregated plus the amount deposited with the broker as collateral will equal the current value of the security sold short. A Portfolio will incur a loss as a result of the short sale if the price of the security increases between the date of the
short sale and the date on which the Portfolio replaces the borrowed security. A Portfolio will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest the Portfolio may be required to pay in connection with a short sale.
Each Portfolio, except Dividend Strategy Portfolio and Strategy Value Portfolio, may make “short sales against the box.” A
short sale is against the box to the extent that the Portfolio contemporaneously owns, or has the right to obtain without payment, securities identical to those sold short. Generally, gain, but not loss, must be recognized for federal income tax
purposes upon entering into a short sale against the box. A Portfolio may not enter into a short sale, including a short sale against the box, if, as a result, more than 25% of its net assets would be subject to such short sales.
Hybrid Instruments (Indexed/Structured Securities)
Hybrid instruments, including indexed or structured securities, combine the elements of futures contracts or options with those of debt, preferred equity or a depository instrument. Generally, a hybrid
instrument will be a debt security, preferred stock, depository share, trust certificate, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal or stated amount payable at
maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, articles or commodities (collectively “Underlying Assets”) or by
another objective index, economic factor or other measure, such as interest rates, currency exchange rates, commodity indices, and securities indices (collectively “Benchmarks”). Thus, hybrid instruments may take a variety of forms,
including, but not limited to, debt instruments with interest or principal payments or
B-26
redemption terms determined by reference to the value of a currency or commodity or securities index at a future point in time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms related to a particular commodity.
Hybrid
instruments can be an efficient means of creating exposure to a particular market, or segment of a market, with the objective of enhancing total return. For example, a Portfolio may wish to take advantage of expected declines in interest rates in
several European countries, but avoid the transactions costs associated with buying and currency-hedging the foreign bond positions. One solution would be to purchase a U.S. dollar-denominated hybrid instrument whose redemption price is linked to
the average three-year interest rate in a designated group of countries. The redemption price formula would provide for payoffs of greater than par if the average interest rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Portfolio could limit the downside risk of the security by establishing a minimum redemption price so that the principal paid at maturity could not be below a predetermined minimum level if interest
rates were to rise significantly. The purpose of this arrangement, known as a structured security with an embedded put option, would be to give the Portfolio the desired European bond exposure while avoiding currency risk, limiting downside market
risk, and lowering transactions costs. Of course, there is no guarantee that the strategy will be successful and the Portfolio could lose money if, for example, interest rates do not move as anticipated or credit problems develop with the issuer of
the hybrid.
The risks of investing in hybrid instruments reflect a combination of the risks of investing in securities,
options, futures and currencies. Thus, an investment in a hybrid instrument may entail significant risks that are not associated with a similar investment in a traditional debt instrument that has a fixed principal amount, is denominated in U.S.
dollars or bears interest either at a fixed rate or a floating rate determined by reference to a common, nationally published Benchmark. The risks of a particular hybrid instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the Benchmarks or the prices of Underlying Assets to which the instrument is linked. Such risks generally depend upon factors unrelated to the operations or credit quality of the
issuer of the hybrid instrument and which may not be readily foreseen by the purchaser, such as economic and political events, the supply and demand for the Underlying Assets and interest rate movements. In recent years, various Benchmarks and
prices for Underlying Assets have been highly volatile, and such volatility may be expected in the future. Reference is also made to the discussion of futures, options, and Forward Contracts herein for a discussion of the risks associated with such
investments.
Hybrid instruments are potentially more volatile and carry greater market risks than traditional debt
instruments. Depending on the structure of the particular hybrid instrument, changes in a Benchmark may be magnified by the terms of the hybrid instrument and have an even more dramatic and substantial effect upon the value of the hybrid instrument.
Also, the prices of the hybrid instrument and the Benchmark or Underlying Asset may not move in the same direction or at the same time.
Hybrid instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market rates but bear an
increased risk of principal loss (or gain). The latter scenario may result if “leverage” is used to structure the hybrid instrument. Leverage risk occurs when the hybrid instrument is structured so that a given change in a Benchmark or
Underlying Asset is multiplied to produce a greater value change in the hybrid instrument, thereby magnifying the risk of loss as well as the potential for gain.
Hybrid instruments may also carry liquidity risk since the instruments are often “customized” to meet the portfolio needs of a particular investor, and, therefore, the number of investors that
are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt securities. Under certain conditions, the redemption (or sale) value of such an investment could be zero. In addition, because
the purchase and sale of hybrid instruments could take place in an over-the-counter market without the guarantee of a central clearing organization or in a transaction between the Portfolio and the issuer of the hybrid instrument, the
creditworthiness of the counterparty or issuer of the hybrid instrument would be an additional risk factor the Portfolio would have to consider and monitor. Hybrid instruments also may not be subject to regulation of the CFTC, which generally
regulates the trading of commodity futures by U.S. persons, the SEC, which regulates the offer and sale of securities by and to U.S. persons, or any other governmental regulatory authority.
The various risks discussed above, particularly the market risk of such instruments, may in turn cause significant fluctuations in the
net asset value of the Portfolio. Accordingly, each Portfolio will limit its investments in hybrid instruments to 10% of total assets at the time of purchase. However, because of their volatility, it is possible that a Portfolio’s investment in
hybrid instruments will account for more than 10% of the Portfolio’s return (positive or negative).
When-Issued Securities and
Firm Commitment Agreements
Each Portfolio may purchase or sell securities on a “when-issued” or
“delayed delivery” basis and may purchase securities on a firm commitment basis. “When-issued” or “delayed delivery” refers to securities whose terms and indenture
B-27
are available and for which a market exists, but which are not available for immediate delivery. Although a Portfolio will enter into such transactions for the purpose of acquiring securities for
its portfolio or for delivery pursuant to options contracts it has entered into, the Portfolio may dispose of a commitment prior to settlement. When such transactions are negotiated, the price (which is generally expressed in yield terms) is fixed
at the time the commitment is made, but delivery and payment for the securities take place at a later date. During the period between commitment by a Portfolio and settlement (generally within two months but not to exceed 120 days), no payment is
made for the securities purchased by the purchaser, and no interest accrues to the purchaser from the transaction. Such securities are subject to market fluctuation, and the value at delivery may be less than the purchase price. A Portfolio will
designate cash or liquid securities at least equal to the value of purchase commitments until payment is made. A Portfolio will likewise designate liquid assets in respect of securities sold on a delayed delivery basis.
A Portfolio will engage in when-issued transactions in order to secure what is considered to be an advantageous price and yield at the
time of entering into the obligation. When a Portfolio engages in when-issued or delayed delivery transactions, it relies on the buyer or seller, as the case may be, to consummate the transaction. Failure to do so may result in a Portfolio losing
the opportunity to obtain a price and yield considered to be advantageous. If a Portfolio chooses to: (i) dispose of the right to acquire a when-issued security prior to its acquisition or (ii) dispose of its right to deliver or receive
against a firm commitment, it may incur a gain or loss. (At the time a Portfolio makes a commitment to purchase or sell a security on a when-issued or firm commitment basis, it records the transaction and reflects the value of the security
purchased, or if a sale, the proceeds to be received in determining its net asset value.)
To the extent a Portfolio engages
in when-issued and delayed delivery transactions, it will do so for the purpose of acquiring or selling securities consistent with its investment objectives and policies and not for the purposes of investment leverage. A Portfolio enters into such
transactions only with the intention of actually receiving or delivering the securities, although when-issued securities and firm commitments may be sold prior to the settlement date. In addition, changes in interest rates in a direction other than
that expected by the Adviser before settlement of a purchase will affect the value of such securities and may cause a loss to a Portfolio.
When-issued transactions and firm commitments may be used to offset anticipated changes in interest rates and prices. For instance, in periods of rising interest rates and falling prices, a Portfolio
might sell securities in its portfolio on a forward commitment basis to attempt to limit its exposure to anticipated falling prices. In periods of falling interest rates and rising prices, a Portfolio might sell portfolio securities and purchase the
same or similar securities on a when issued or forward commitment basis, thereby obtaining the benefit of currently higher cash yields. One form of when-issued or delayed delivery security that each Portfolio may purchase is a “to be
announced” or “TBA” mortgage-backed security. A TBA mortgage-backed security transaction arises when a mortgage-backed security is purchased or sold with the specific pools to be announced on a future settlement date.
Borrowing and Leverage
In seeking to enhance investment performance, each Portfolio may increase its ownership of securities by borrowing at fixed rates of interest up to the maximum extent permitted under the 1940 Act
(presently 50% of net assets) and investing the borrowed funds, subject to the restrictions stated in the respective Prospectus. Any such borrowing will be made only pursuant to the requirements of the 1940 Act and will be made only to the extent
that the value of each Portfolio’s assets less its liabilities, other than borrowings, is equal to at least 300% of all borrowings including the proposed borrowing. If the value of a Portfolio’s assets, so computed, should fail to meet the
300% asset coverage requirement, the Portfolio is required, within three business days, to reduce its bank debt to the extent necessary to meet such requirement and may have to sell a portion of its investments at a time when independent investment
judgment would not dictate such sale. Interest on money borrowed is an expense the Portfolio would not otherwise incur, so that it may have little or no net investment income during periods of substantial borrowings. Since substantially all of a
Portfolio’s assets fluctuate in value, but borrowing obligations are fixed when the Portfolio has outstanding borrowings, the net asset value per share of a Portfolio correspondingly will tend to increase and decrease more when the
Portfolio’s assets increase or decrease in value than would otherwise be the case. A Portfolio’s policy regarding use of leverage is a fundamental policy, which may not be changed without approval of the shareholders of the Portfolio.
Loans of Portfolio Securities
Consistent with applicable regulatory requirements, each Portfolio may lend portfolio securities in amounts up to 33 1/3% of total assets to brokers, dealers and other financial institutions, provided,
that such loans are callable at any time by the Portfolio and are at all times secured by cash or equivalent collateral. In lending its portfolio securities, a Portfolio receives income while retaining the securities’ potential for capital
appreciation. The advantage of such loans is that a Portfolio continues to receive the interest and dividends on the loaned securities while at the same time earning interest on the collateral, which will be invested in high-quality short-term debt
securities, including repurchase agreements. A loan may be
B-28
terminated by the borrower on one business day’s notice or by a Portfolio at any time. If the borrower fails to maintain the requisite amount of collateral, the loan automatically
terminates, and the Portfolio could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some
cases even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will be made only to firms deemed by the Adviser to be creditworthy. On termination of the loan, the
borrower is required to return the securities to a Portfolio; and any gain or loss in the market price of the loaned security during the loan would inure to the Portfolio. Each Portfolio will pay reasonable finders’, administrative and
custodial fees in connection with a loan of its securities or may share the interest earned on collateral with the borrower.
Since voting or consent rights that accompany loaned securities pass to the borrower, each Portfolio will follow the policy of calling
the loan, in whole or in part as may be appropriate, to permit the exercise of such rights if the matters involved would have a material effect on the Portfolio’s investment in the securities that are the subject of the loan.
Reverse Repurchase Agreements
A Portfolio may enter into reverse repurchase agreements with brokers, dealers, domestic and foreign banks or other financial institutions that have been determined by the Adviser to be creditworthy. In a
reverse repurchase agreement, the Portfolio sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. It may also be viewed as the borrowing of money
by the Portfolio. The Portfolio’s investment of the proceeds of a reverse repurchase agreement is the speculative factor known as leverage. A Portfolio will enter into a reverse repurchase agreement only if the interest income from investment
of the proceeds is expected to be greater than the interest expense of the transaction and the proceeds are invested for a period no longer than the term of the agreement. The Portfolio will segregate cash or liquid securities in an amount at least
equal to its purchase obligations under these agreements (including accrued interest). In the event that the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Portfolio’s repurchase obligation, and the Portfolio’s use of proceeds of the agreement may effectively be restricted pending such decision.
Dollar Rolls
Each Portfolio may enter into “dollar rolls” in which the Portfolio sells mortgage or other asset-backed securities (“Roll
Securities”) for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period, the Portfolio forgoes principal and
interest paid on the Roll Securities. The Portfolio is compensated by the difference between the current sales price and the lower forward price for the future purchase (often referred to as the “drop”) as well as by the interest earned on
the cash proceeds of the initial sale. The Portfolio also could be compensated through the receipt of fee income equivalent to a lower forward price. A “covered roll” is a specific type of dollar roll for which there is an offsetting cash
position or a cash equivalent security position that matures on or before the forward settlement date of the dollar roll transaction. The Portfolio will enter into only covered rolls.
Dollar rolls involve certain risks including the following: if the broker-dealer to whom the Portfolio sells the security becomes
insolvent, the Portfolio’s right to purchase or repurchase the security subject to the dollar roll may be restricted and the instrument the Portfolio is required to repurchase may be worth less than an instrument the Portfolio originally held.
Successful use of dollar rolls will depend upon the Adviser’s ability to predict correctly interest rates and in the case of mortgage dollar rolls, mortgage prepayments. For these reasons, there is no assurance that dollar rolls can be
successfully employed.
Standby Commitments
Standby commitments are put options that entitle holders to same day settlement at an exercise price equal to the amortized cost of the underlying security plus accrued interest, if any, at the time of
exercise. A Portfolio may acquire standby commitments to enhance the liquidity of portfolio securities, but only when the issuers of the commitments present minimal risk of default. Ordinarily, the Portfolio may not transfer a standby commitment to
a third party, although it could sell the underlying municipal security to a third party at any time. A Portfolio may purchase standby commitments separate from or in conjunction with the purchase of securities subject to such commitments. In the
latter case, the Portfolio would pay a higher price for the securities acquired, thus reducing their yield to maturity. Standby commitments will not affect the dollar-weighted average maturity of the Portfolio, or the valuation of the securities
underlying the commitments. Issuers or financial intermediaries may obtain letters of credit or other guarantees to support their ability to buy securities on demand. The Adviser may rely upon its evaluation of a bank’s credit in determining
whether to support an instrument supported by a letter of credit. Standby commitments are subject to certain risks, including the ability of issuers of standby commitments to
B-29
pay for securities at the time the commitments are exercised; the fact that standby commitments are not marketable by the Portfolio; and the possibility that the maturities of the underlying
securities may be different from those of the commitments.
Interest-Rate Swaps, Mortgage Swaps, Caps, Collars and Floors
In order to protect the value of portfolios from interest rate fluctuations and to hedge against fluctuations in the fixed
income market in which certain of the Portfolios’ investments are traded, the Portfolio may enter into interest-rate swaps and mortgage swaps or purchase or sell interest-rate caps, floors or collars. The Portfolio will enter into these hedging
transactions primarily to preserve a return or spread on a particular investment or portion of the portfolio and to protect against any increase in the price of securities the Portfolio anticipates purchasing at a later date. The Portfolio may also
enter into interest-rate swaps for non-hedging purposes. Interest-rate swaps are individually negotiated, and the Portfolio expects to achieve an acceptable degree of correlation between its portfolio investments and interest-rate positions. A
Portfolio will enter into interest-rate swaps only on a net basis, which means that the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. Interest-rate swaps do
not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest-rate swaps is limited to the net amount of interest payments that the Portfolio is contractually obligated to make.
If the other party to an interest-rate swap defaults, the Portfolio’s risk of loss consists of the net amount of interest payments that the Portfolio is contractually entitled to receive. The use of interest-rate swaps is a highly specialized
activity, which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. All of these investments may be deemed to be illiquid for purposes of the Portfolio’s limitation on
investment in such securities. Inasmuch as these investments are entered into for good faith hedging purposes, and inasmuch as the Adviser will segregate assets with respect to such transactions, SunAmerica believes such obligations do not
constitute senior securities and accordingly will not treat them as being subject to its borrowing restrictions. The net amount of the excess, if any, of the Portfolio’s obligations over its entitlements with respect to each interest-rate swap
will be accrued on a daily basis and an amount of cash or liquid securities having an aggregate net asset value at least equal to the accrued excess will be maintained by a custodian in a manner that satisfies the requirements of the 1940 Act. The
Portfolio will also segregate cash or liquid securities with respect to its total obligations under any interest-rate swaps that are not entered into on a net basis and with respect to any interest-rate caps, collars and floors that are written by
the Portfolio.
A Portfolio will enter into these transactions only with banks and recognized securities dealers believed by
the Adviser to present minimal credit risk. If there is a default by the other party to such a transaction, the Portfolio will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
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. Caps, collars and floors are more recent innovations for which documentation is less standardized, and accordingly, they are less liquid
than swaps.
Mortgage swaps are similar to interest-rate swaps in that they represent commitments to pay and receive interest.
The notional principal amount, upon which the value of the interest payments is based, is tied to a reference pool or pools of mortgages.
The purchase of an interest-rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from
the party selling such interest-rate cap. The purchase of an interest-rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest-rate floor.
Special Situations
A “special situation” arises when, in the opinion of the Adviser, the securities of a particular issuer will be recognized and
appreciate in value due to a specific development with respect to that issuer. Developments creating a special situation might include, among others, a new product or process, a technological breakthrough, a management change or other extraordinary
corporate event, or differences in market supply of and demand for the security. Investment in special situations may carry an additional risk of loss in the event that the anticipated development does not occur or does not attract the expected
attention.
Real Estate Investment Trusts (“REITs”)
Each Portfolio may invest in REITs. REITs are trusts that invest primarily in commercial real estate or real estate related loans. REITs
are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs
can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Like regulated investment
companies such as the Portfolios, REITs are not taxed on income distributed to shareholders
B-30
provided they comply with certain requirements under the Code. A Portfolio will indirectly bear its proportionate share of any expenses paid by REITs in which it invests in addition to the
expenses paid by a Portfolio.
Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in
the value of the underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified (except to the extent the Code requires), and are
subject to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and the possibilities of failing to qualify for the exemption from tax for distributed income under the Code and
failing to maintain their exemptions from the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks.
Initial Public Offerings
Each Portfolio may purchase securities of companies in initial public offerings (“IPOs”) or shortly thereafter. An IPO is a corporation’s first offering of stock to the public. Shares are
given a market value reflecting expectations for the corporation’s future growth. Special rules of the Financial Industry Regulatory Authority apply to the distribution of IPOs. Corporations offering stock in IPOs generally have limited
operating histories and may involve greater investment risk. The prices of these companies’ securities may be very volatile, rising and falling rapidly, sometimes based solely on investor perceptions rather than economic reasons.
Portfolio Turnover
A Portfolio may purchase and sell securities whenever necessary to seek to accomplish its investment objectives. Portfolio turnover generally involves some expense to a Portfolio and its shareholders,
including brokerage commissions and other transaction costs on the purchase and sale of securities and reinvestment in other securities.
Higher portfolio turnover may decrease the after tax return to shareholders if it results in the realization of net capital gains, which may be taxable when distributed to shareholders. A Portfolio’s
portfolio turnover rate would equal 100% if each security in the Portfolio were replaced once per year.
The significant
increase in the portfolio turnover rate of the Focused Large-Cap Growth Portfolio in the fiscal year ended October 31, 2012 as compared to the fiscal year ended October 31, 2011 was attributable to dramatic shifts in macroeconomic
conditions and sentiment, and substantial sector and individual stock rotation. Turnover in the portfolio rose in reaction to those underlying market conditions and, early in the year, to the ongoing impact of the portfolio manager change made late
in 2011.
Future Developments
Each Portfolio may invest in securities and other instruments that do not presently exist but may be developed in the future, provided that each such investment is consistent with the Portfolio’s
investment objectives, policies and restrictions and is otherwise legally permissible under federal and state laws. The Prospectus and SAI will be amended or supplemented as appropriate to discuss any such new investments.
INVESTMENT RESTRICTIONS
Each Portfolio is subject to a number of investment restrictions that are fundamental policies and may not be changed without the approval of the holders of a majority of that Portfolio’s outstanding
voting securities. A “majority of the outstanding voting securities” of a Portfolio for this purpose means the lesser of: (i) 67% of the shares of the Portfolio represented at a meeting at which more than 50% of the outstanding shares
are present in person or represented by proxy; or (ii) more than 50% of the outstanding shares. Unless otherwise indicated, all percentage limitations apply to each Portfolio on an individual basis, and apply only at the time the investment is
made; any subsequent change in any applicable percentage resulting from fluctuations in value will not be deemed an investment contrary to these restrictions.
Under these restrictions, no Portfolio (unless otherwise indicated) may:
1.
Invest more than 25% of the Portfolio’s total assets in the securities of issuers in the same industry, except that the Dividend Strategy Portfolio may invest more than 25% of its assets in the securities of issuers in the same industry to the
extent such investment would be selected according to its stock selection criteria. Obligations of the U.S. government, its agencies and instrumentalities are not subject to this 25% limitation on industry concentration.
2. Invest in real estate (including limited partnership interests but excluding securities of companies, such as real estate investment
trusts, that deal in real estate or interests therein); provided that a Portfolio may hold or sell real estate acquired as
B-31
a result of the ownership of securities, and the Dividend Strategy Portfolio may purchase and sell marketable securities secured by real estate and marketable securities that invest or deal in
real estate for speculative purposes.
3. Purchase or sell commodities or commodity contracts, except to the extent that the
Portfolio may do so in accordance with applicable law and the Prospectus and SAI, as they may be amended from time to time, and without registering as a commodity pool operator under the CEA. Any Portfolio may engage in transactions in put and call
options on securities, indices and currencies, spread transactions, forward and futures contracts on securities, indices and currencies, put and call options on such futures contracts, forward commitment transactions, forward foreign currency
exchange contracts, interest rate, mortgage and currency swaps and interest rate floors and caps and may purchase hybrid instruments.
4. Make loans to others except for: (a) the purchase of debt securities; (b) entering into repurchase agreements; (c) the lending of its portfolio securities; and (d) as otherwise
permitted by exemptive order of the SEC.
5. Borrow money, except that: (i) each Portfolio may borrow in amounts up to 33
1/3% of its total assets for temporary or emergency purposes, (ii) each Portfolio may borrow for investment purposes to the maximum extent permissible under the 1940 Act (
i.e.
, presently 50% of net assets), and (iii) a Portfolio may
obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. This policy shall not prohibit a Portfolio from engaging in reverse repurchase agreements, dollar rolls and similar investment
strategies described in the Prospectus and SAI, as they may be amended from time to time.
6. Issue senior securities as
defined in the 1940 Act, except that each Portfolio may enter into repurchase agreements, reverse repurchase agreements, dollar rolls, lend its portfolio securities and borrow money, as described above, and engage in similar investment strategies
described in the Prospectus and SAI, as they may be amended from time to time.
7. Engage in underwriting of securities issued
by others, except to the extent that the Portfolio may be deemed to be an underwriter in connection with the disposition of portfolio securities of the Portfolio.
8. With respect to 75% of its total assets, invest more than 5% of its total assets (taken at market value at the time of each investment) in the securities of any one issuer or purchase more than 10% of
the outstanding voting securities of any one company or more than 10% of any class of a company’s outstanding securities, except that these restrictions shall not apply to securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities; provided that this restriction applies only to the Dividend Strategy Portfolio and Strategic Value Portfolio.
The following additional restrictions are not fundamental policies and may be changed by the Directors without a shareholder vote. No Portfolio may:
9. Purchase securities on margin, provided that margin deposits in connection with futures contracts, options on futures contracts and
other derivative instruments shall not constitute purchasing securities on margin.
10. The Dividend Strategy Portfolio may
borrow money to purchase securities as set forth in the Prospectus and SAI and may borrow for temporary or emergency purposes in amounts not exceeding 5% (taken at the lower of cost or current value) of its total assets (not including the amount
borrowed) and pledge its assets to secure such borrowings.
11. Pledge, mortgage or hypothecate its assets, except to the
extent necessary to secure permitted borrowings and, to the extent related to the segregation of assets in connection with the writing of covered put and call options and the purchase of securities or currencies on a forward commitment or
delayed-delivery basis and collateral and initial or variation margin arrangements with respect to Forward Contracts, options, futures contracts and options on futures contracts. In addition, a Portfolio may pledge assets in reverse repurchase
agreements, dollar rolls and similar investment strategies described in the Prospectus and SAI, as they may be amended from time to time. Further, to the extent that an investment technique engaged in by Dividend Strategy Portfolio requires pledging
of assets, that Portfolio may pledge assets in connection with such transactions.
12. Invest in securities of other
registered investment companies, except by purchases in the open market, involving only customary brokerage commissions and as a result of which not more than 10% of its total assets (determined at the time of investment) would be invested in such
securities, or except: (i) to the extent permitted by applicable law; and (ii) that Janus may invest uninvested cash balances of their respective component of each Portfolio in money market mutual funds that it manages to the extent
permitted by applicable law.
13. Enter into any repurchase agreement maturing in more than seven days or investing in any
other illiquid security if, as a result, more than 15% of a Portfolio’s net assets would be so invested. Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act that have a readily available market, and
commercial paper exempted from registration under the Securities Act pursuant to Section 4(2) of that Act that may be offered and sold to “qualified institutional buyers”
B-32
as defined in Rule 144A, which the Adviser has determined to be liquid pursuant to guidelines established by the Directors, will not be considered illiquid for purposes of this 15% limitation on
illiquid securities.
DIRECTORS AND OFFICERS
The following table lists the Directors and officers of the Fund, their ages, current position(s) held with the Fund, length of time
served, principal occupations during the past five years, number of funds overseen within the fund complex and other directorships/trusteeships held outside of the fund complex. Unless otherwise noted, the address of each executive officer and
Director is Harborside Financial Center, 3200 Plaza 5, Jersey City, New Jersey 07311-4992. Directors who are not deemed to be “interested persons” of the Fund as defined in the 1940 Act are referred to as “Disinterested
Directors.” Directors who are deemed to be “interested persons” of the Fund are referred to as “Interested Directors.” Directors and officers of the Fund are also directors or trustees and officers of some or all of the
other investment companies managed, administered or advised by SunAmerica and distributed by SunAmerica Capital Services, Inc. (“SACS” or the “Distributor”) and other affiliates of SunAmerica.
Disinterested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with
the
Fund
|
|
Term of Office
and Length of
Time
Served
1
|
|
Principal Occupation
During Past 5
years
|
|
Number
of
Portfolios in
Fund Complex
Overseen
by Director
2
|
|
Other
Directorships
Held by
Director
During
Past 5 Years
3
|
|
Dr. Judith L. Craven
Age: 67
|
|
Director
|
|
2001 to Present
|
|
Retired.
|
|
78
|
|
Director, Belo Corp. (1992 to present); Director, Sysco Corp. (1996 to present); Director, Luby’s, Inc. (1998 to present).
|
|
1
|
Directors serve until their successors are duly elected and qualified subject to the Directors’ Retirement Plan as discussed below.
|
|
2
|
The term “fund complex” means two or more registered investment companies that hold themselves out to investors as related companies for purposes of
investment services or have a common investment adviser or any investment adviser that is an affiliate of the Adviser. The “fund complex” includes the Fund (7 portfolios); SunAmerica Equity Funds, Inc. (3 funds); SunAmerica Money Market
Funds, Inc. (1 fund); SunAmerica Income Funds (4 funds); SunAmerica Specialty Series (5 funds); Anchor Series Trust (8 portfolios); SunAmerica Senior Floating Rate Fund, Inc. (1 fund); VALIC I (34 portfolios); VALIC II (15 portfolios); SunAmerica
Series Trust (38 portfolios); and Seasons Series Trust (21 portfolios).
|
|
3
|
Directorships of Companies required reporting to the SEC under the Securities Exchange Act of 1934, as amended (
i.e.
, “public companies”) or other
investment companies regulated under the 1940 Act other than those listed under the preceding column.
|
B-33
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with the
Fund
|
|
Term of Office
and Length of
Time Served
1
|
|
Principal Occupation
During Past 5
Years
|
|
Number of
Portfolios
in
Fund Complex
Overseen
by Director
2
|
|
Other Directorships
Held by Director During
Past 5 Years
3
|
|
William F. Devin
Age: 74
|
|
Director
|
|
2001 to Present
|
|
Retired.
|
|
78
|
|
None
|
|
|
|
|
|
|
|
|
Stephen J. Gutman
Age: 69
|
|
Director
|
|
1986 to Present
|
|
Senior Vice President and Associate Broker, The Corcoran Group (real estate) (2003 to Present); Managing Member, Beau Brummell-SoHo LLC (licensing of menswear specialty retailing)
(1995 to 2009); President, SJG Marketing Inc. (2009 to Present).
|
|
29
|
|
None
|
|
|
|
|
|
|
|
|
William J. Shea
Age:
65
|
|
Director
|
|
2004 to Present
|
|
Executive Chairman, Caliber ID, Inc. (medical devices) (2007 to Present); Managing Partner, DLB Capital LLC (private equity) (2006 to 2007).
|
|
29
|
|
Director, Boston Private Financial Holdings (2004 to present); Chairman, Demoulas Supermarkets (1999 to present)
|
|
|
|
|
|
|
|
|
Richard W. Grant
67
|
|
Chairman of the Board
|
|
2011 to Present
|
|
Retired. Prior to that, attorney and partner Morgan Lewis & Bockius LLP (1989 to 2011).
|
|
29
|
|
None
|
B-34
INTERESTED DIRECTORS
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with
Fund
|
|
Term of Office
Length of Time
Served
1
|
|
Principal Occupations
During Past 5 Years
|
|
Number of
Portfolios
in
Fund Complex
Overseen by
Director
2
|
|
Other
Directorships
Held by
Director During Past
5
Years
3
|
|
Peter A. Harbeck
4
Age:
59
|
|
Director
|
|
1995 to Present
|
|
President, CEO and Director, SunAmerica (1995 to present); Director, SACS (1993 to present); Chairman, Advisor Group, Inc. (2004 to present).
|
|
78
|
|
None
|
|
|
|
|
|
|
|
|
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with
the
Fund
|
|
Length of Time
Served
|
|
Principal Occupations
During Past 5 Years
|
|
Number of
Portfolios in
Fund Complex
Overseen by
Officer
|
|
Other
Directorships
Held
by
Officer
|
|
John T. Genoy
Age:
44
|
|
President
|
|
2007 to Present
|
|
Chief Financial Officer, SunAmerica (2002 to present); Senior Vice President, SunAmerica (2003 to present); Chief Operating Officer (2006 to present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
Donna M. Handel
Age:
46
|
|
Treasurer
|
|
2002 to Present
|
|
Senior Vice President, SunAmerica (2004 to present).
|
|
N/A
|
|
N/A
|
|
4
|
Mr. Harbeck is considered to be an Interested Director because he serves as President, CEO and Director of SunAmerica and Director of SACS.
|
B-35
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with the
Fund
|
|
Length of Time
Served
|
|
Principal Occupations
During Past 5 Years
|
|
Number of
Portfolios
in
Fund Complex
Overseen by
Officer
|
|
Other
Directorships
Held
by
Officer
|
|
Gregory N. Bressler
Age: 46
|
|
Secretary and Chief Legal Officer
|
|
2005 to Present
|
|
Senior Vice President and General Counsel, SunAmerica (2005 to present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
James Nichols
Age: Age:
46
|
|
Vice President
|
|
2006 to Present
|
|
Director, President and CEO, SACS (2006 to present); Senior Vice President, SACS (2002 to 2006); Senior Vice President, SunAmerica (2002 to present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
Timothy Pettee
Age:
54
|
|
Vice President
|
|
2008 to Present
|
|
Chief Investment Officer, SunAmerica (2003 to present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
Katherine Stoner
Age:
56
|
|
Vice President and Chief Compliance Officer
|
|
2011 to Present
|
|
Vice President, SunAmerica (2011 to present); Vice President, The Variable Annuity Life Insurance Company (“VALIC”), Western National Life Insurance Company
(“WNL”) and American General Distributors, Inc.(2006-present); Deputy General Counsel and Secretary, VALIC and WNL (2007 to May 2011); Vice President, VALIC Financial Advisors, Inc. (2010 to 2011) and VALIC Retirement Services Company
(2010-present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
Nori L. Gabert
Age:
59
|
|
Vice President and Assistant Secretary
|
|
2005 to Present
|
|
Vice President and Deputy General Counsel, SunAmerica (2005 to present).
|
|
N/A
|
|
N/A
|
B-36
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Age
|
|
Position(s)
Held with the
Fund
|
|
Length of Time
Served
|
|
Principal Occupations
During Past 5 Years
|
|
Number of
Portfolios
in
Fund Complex
Overseen by
Officer
|
|
Other
Directorships
Held
by
Officer
|
|
Gregory R. Kingston
Age: 47
|
|
Vice President and Assistant Treasurer
|
|
2002 to Present
|
|
Vice President, SunAmerica (2001 to present).
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
Matthew J. Hackethal
Age:
41
|
|
Anti- Money Laundering Compliance Officer
|
|
2006 to Present
|
|
Chief Compliance Officer, SunAmerica (2006 to present).
|
|
N/A
|
|
N/A
|
Leadership Structure of the Board of Directors
Overall responsibility for oversight of the Fund and its Portfolios rests with the Board. The Fund, on behalf of the Portfolios, has
engaged SunAmerica to manage the Portfolios on a day-to-day basis. The Board is responsible for overseeing SunAmerica and any other service providers in the operations of the Portfolios in accordance with the provisions of the 1940 Act, applicable
provisions of state and other laws, the Fund’s Articles of Incorporation and By-laws, and each Portfolio’s investment objectives and strategies. The Board is presently composed of six members, four of whom are Disinterested Directors. The
Board currently conducts regular in-person meetings at least quarterly and holds special in-person or telephonic meetings, or informal conference calls, to discuss specific matters that may arise or require action between regular Board meetings. The
Disinterested Directors also meet at least quarterly in executive session, at which no directors who are interested persons of the Portfolios are present. The Disinterested Directors have engaged independent legal counsel to assist them in
performing their oversight responsibilities. The Board has appointed Mr. Grant to serve as Chairman of the Board. The Chairman’s role is to preside at all meetings of the Board and to act as a liaison with service providers, including
SunAmerica, officers, attorneys, and other Directors generally, between meetings. The Chairman may also perform such other functions as may be delegated by the Board from time to time. The Board has established four committees,
i.e.
, Audit
Committee, Nomination and Compensation Committee, Ethics Committee, and Governance Committee (each, a “Committee”), to assist the Board in the oversight and direction of the business and affairs of the Portfolios, and from to time may
establish informal working groups to review and address the policies and practices of the Portfolios with respect to certain specified matters. The Committee system facilitates the timely and efficient consideration of matters by the Directors, and
facilitates effective oversight of compliance with legal and regulatory requirements and of the Portfolios’ activities and associated risks. The standing Committees currently conduct an annual review of their charters, which includes a review
of their responsibilities and operations. The Governance Committee and the Board as a whole also conduct an annual evaluation of the performance of the Board, including consideration of the effectiveness of the Board’s committee structure. The
Board has determined that the Board’s leadership structure is appropriate because it allows the Board to exercise informed and independent judgment over the matters under its purview and it allocates areas of responsibility among the Committees
and the full Board in a manner that enhances efficient and effective oversight.
The Portfolios are subject to a number of
risks, including, among others, investment, compliance, operational and valuation risks. Risk oversight forms part of the Board’s general oversight of the Portfolios and is addressed as part of various Board and Committee activities. Day-to-day
risk management functions are subsumed within the responsibilities of SunAmerica, who carries out the Portfolios’ investment management and business affairs, and other service providers in connection with the services it provides to the
Portfolios. Each of SunAmerica, the subadviser(s) and other service providers have their own, independent interest in risk management, and their policies and methods of risk management will depend on their functions and business models. As part of
its regular oversight of the Portfolios, the Board, directly and/or through a Committee, interacts with and reviews reports from, among others, SunAmerica and the Portfolios’ other service providers (including the Portfolios’ distributor,
servicing agent and transfer agent), the Portfolios’ Chief Compliance Officer, the independent registered public accounting firm for the Portfolios, legal counsel to the Portfolios, and internal auditors for SunAmerica or its affiliates, as
appropriate, relating to the operations of the Portfolios. The Board recognizes that it may not be possible to identify all of the risks that may affect the Portfolios or to develop processes and controls to eliminate or mitigate their occurrence or
effects. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight.
B-37
Board of Directors and Committees
Among the attributes common to all Directors are their ability to review critically, evaluate, question and discuss information provided
to them, to interact effectively with the other Directors, SunAmerica, other service providers, legal counsel and the independent registered public accounting firm, and to exercise effective business judgment in the performance of their duties as
Directors. A Director’s ability to perform his or her duties effectively may have been attained, as set forth below, through the Director’s executive, business, consulting, public service and/or academic positions; experience from service
as a Director of the Fund and the other funds in the Fund Complex (and/or in other capacities), other investment funds, public companies, or non-profit entities or other organizations; educational background or professional training; and/or other
life experiences.
Dr. Judith L. Craven. Dr. Craven has served as a director or trustee in the Fund Complex since 2001 and
serves as a Director of the Fund. She currently serves as a director or trustee with respect to 78 of the portfolios in the Fund Complex. In addition, she has more than 25 years of executive and business experience in various industries.
Dr. Craven also has corporate governance experience serving on the Boards of Directors of several public companies for more than 10 years.
William F. Devin. Mr. Devin has served as a director or trustee in the Fund Complex since 2001 and serves as a Director of the Fund. He currently
serves as a director or trustee with respect to of 78 of the portfolios in the Fund Complex. In addition, he has more than 30 years of business and executive experience primarily in the financial services industry, including with Fidelity.
Mr. Devin also has corporate governance experience serving on the Board of Directors of the Boston Options Exchange since 2001.
Richard
W. Grant. Mr. Grant has served as a director or trustee in the Fund Complex since March 2011 and as Chairman of the Board since April 2011. He currently serves as a director or trustee with respect to 29 of the portfolios in the Fund Complex.
Mr. Grant has more than 20 years of business and corporate governance experience serving as legal counsel to a number of registered investment companies and/or their independent directors/trustees, including to the Disinterested Directors of
the Fund.
Stephen J. Gutman. Mr. Gutman has served as a director or trustee in the Fund Complex since 1986 and serves as a Director of
the Fund. He currently serves as a director or trustee of 29 of the portfolios in the Fund Complex. In addition, he has more than 20 years of business and executive experience in the real estate and licensing industries.
William J. Shea. Mr. Shea has served as a director or trustee in the Fund Complex since 2004 and serves as a Director of the Fund. He currently
serves as a director or trustee of 29 of the portfolios in the Fund Complex. In addition, he has more than 20 years of business and executive experience primarily in the financial services industry. In addition, Mr. Shea has approximately 19
years of audit and accounting-related experience as a certified public accountant at a leading accounting firm. Mr. Shea also has corporate governance and audit committee experience serving on the Board of Directors and Audit Committees of
several public companies, including serving as Chairman of the Board of Directors of Royal and SunAlliance U.S.A., Inc. for two years.
Peter
A. Harbeck. Mr. Harbeck has served as a director or trustee in the Fund Complex since 1995 and serves as a Director of the Fund. He currently serves as a director or trustee of 78 of the portfolios in the Fund Complex. In addition, he has
served as President, CEO and Director of SunAmerica since 1995, Director of SACS since 1993 and as Chairman of Advisor Group, Inc, since 2004.
Each Disinterested Director and Mr. Grant serve on the Fund’s Audit Committee. The Audit Committee is charged with selecting, overseeing and setting the compensation of the Fund’s
independent registered public accounting firm. The Audit Committee is responsible for pre-approving all audit and non-audit services performed by the independent public accounting firm for the Fund and for pre-approving certain non-audit services
performed by the independent registered public accounting firm for SunAmerica and certain control persons of SunAmerica. The Audit Committee is also responsible for reviewing with the independent registered public accounting firm the audit plan and
results of the audit along with other matters. The members of the Audit Committee are Messrs. Devin, Grant, Gutman, Shea and Dr. Craven, with Mr. Shea serving as Chairman. Committee members each receive $2,888 per meeting for serving on
the Audit Committees of the SunAmerica Mutual Funds (“SAMF”)
1
, AST and SASFR. Mr. Shea receives a $5,775 annual retainer for serving as the Chairman of the Audit Committees for SAMF, SASFR and AST. The Audit Committee met 5 times during the fiscal year ending
October 31, 2012.
|
1
|
SAMF consists of the Trust, SAEF, SAIF, Specialty Series and SAMMF.
|
B-38
The Nominating and Compensation Committee (the “Nominating Committee”) recommends
to the Trustees those persons to be nominated by the Trustees as candidates to serve as Trustees and voted upon by shareholders and selects and proposes nominees for election by Trustees to the Board between shareholders’ meetings. The
Nominating Committee will consider candidates proposed by shareholders for election as Trustees. The members of the Nominating Committee are Messrs. Devin, Grant, Gutman, Shea, and Dr. Craven, with Mr. Gutman serving as Chairman.
Mr. Gutman receives a $1,733 annual retainer for serving as Chairman of the Nominating Committees of SAMF, AST and SASFR and Messrs. Devin, Grant and Shea and Dr. Craven each receive a $1,155 annual retainer for serving as a member of the
Nominating Committees of SAMF, AST and SASFR. Messrs. Devin, Grant and Shea and Dr. Craven each receive $578 per scheduled meeting ($289 for telephonic meetings) and Mr. Gutman, as Chairman, receives $693 per scheduled meeting ($347 per
telephonic meeting). The Nominating and Compensation Committee met 2 times during the fiscal year ended October 31, 2012.
The Ethics Committee is responsible for applying the Code of Ethics applicable to a Fund’s Principal Executive Officer and Principal
Accounting Officer to specific situations in which questions are presented to it and has the authority to interpret the Code of Ethics in any particular situation. The Ethics Committee will inform the Board of Trustees of violations or waivers to
the Trust’s Code of Ethics, as appropriate. The members of the Ethics Committee are Messrs. Devin, Grant, Gutman, Shea, and Dr. Craven, with Dr. Craven serving as Chairman. Dr. Craven receives a $1,733 annual retainer for serving
as Chairman of the Ethics Committees of SAMF, AST and SASFR and Messrs. Devin, Grant, Gutman, and Shea each receive a $1,155 annual retainer for serving on the Ethics Committee of SAMF, AST and SASFR. Messrs. Devin, Grant, Gutman and Shea each
receive $578 per scheduled meeting ($289 for telephonic meeting) and Dr. Craven, as Chairman, receives $693 per scheduled meeting ($347 per telephonic meeting). The Ethics Committee met once during the fiscal year ended October 31, 2012.
The Governance Committee reviews and makes recommendations with respect to the size and composition of the Board and its
committees and monitors and evaluates the functioning of the committees of the Board. The members of the Governance Committee are Messrs. Grant, Gutman, Devin, Shea, and Dr. Craven, with Mr. Devin serving as Chairman. Mr. Devin
receives a $1,733 annual retainer for serving as Chairman of the Governance Committees of SAMF, AST and SASFR, and Messrs. Grant, Gutman and Shea and Dr Craven each receive a $1,155 annual retainer for serving on the Governance Committees of SAMF,
AST and SASFR. Messrs. Grant, Gutman and Shea and Dr. Craven each receive $578 per scheduled meeting ($289 for telephonic meeting) and Mr. Devin, as Chairman, receives $693 per scheduled meeting ($347 per telephonic meeting). The
Governance Committee met once during the fiscal year ended October 31, 2012.
Director Ownership of Portfolio Shares
The following table shows the dollar range of shares beneficially owned by each Director as of December 31, 2012.
Disinterested Directors
|
|
|
|
|
|
|
Name of Director
|
|
Dollar Range of Equity
Securities in the Portfolio
1
|
|
Aggregate Dollar Range of
Equity Securities in All
Registered Investment
Companies Overseen by
Director in Family of
Investment Companies
2
|
|
Dr. Judith L. Craven
|
|
None
|
|
None
|
|
|
|
|
|
Richard W. Grant
|
|
None
|
|
None
|
|
|
|
|
|
William F. Devin
|
|
Focused Small-Cap Value $50,001-$100,000
Focused Small-Cap Growth $10,001-$50,000
|
|
over $100,000
|
|
|
|
|
|
Stephen J. Gutman
|
|
None
|
|
$1-$10,000
|
|
|
|
|
|
William J. Shea
|
|
None
|
|
None
|
|
1
|
Where a Portfolio is not listed with respect to a Director, the Director held no shares of the Portfolio.
|
|
2
|
Includes SAMF, AST, SASFR, SAST and SST.
|
B-39
Interested Director
|
|
|
|
|
|
|
Name of Director
|
|
Dollar Range of Equity
Securities in the Portfolio
1
|
|
Aggregate Dollar Range of
Equity Securities in all
Registered Investment
Companies Overseen by
Director in Family of
Investment Companies
2
|
|
Peter A. Harbeck
|
|
Focused Dividend Strategy Over $100,000
Focused Small-Cap Value Over $100,000
|
|
Over $100,000
|
|
1
|
Where a Portfolio is not listed with respect to a Director, the Director held no shares of the Portfolio.
|
|
2
|
Includes the SAMF (20 funds), AST (8 portfolios), and SASFR (1 fund), SunAmerica Series Trust (38 portfolios) and Seasons Series Trust (21 portfolios).
|
Director Compensation
The Fund pays each Disinterested Director’s annual compensation, in addition to reimbursement of out-of-pocket expenses, in connection with attendance at meetings of the Directors. Specifically, each
Disinterested Director receives from each fund within SAMF a pro rata portion (based upon the funds’ net assets) of $69,300 in annual compensation for acting as a director or trustee of SAMF ($103,950 in annual compensation for the Chairman of
the Board). Each Disinterested Director of SAMF receives an additional $5,775 per attended quarterly meeting ($8,663 for the Chairman of the Board). Each Disinterested Director of SASFR receives $1,040 for each quarterly meeting attended ($1,559 for
the Chairman of the Board) and $4,158 in annual compensation ($6,237 for the Chairman of the Board). In addition, each Disinterested Trustee of AST receives $23,100 in annual compensation for acting as Trustee to AST ($34,650 in annual compensation
for the Chairman of the Board). Each Trustee receives from each portfolio within SAMF, SASFR and AST a pro rata portion of $2,887.50 in compensation for attendance at each Special Board Meeting ($4,331.25 for the Chairman of the Board). This per
meeting fee will be allocated to each portfolio based upon such portfolio’s net assets and will also be allocated only to those portfolios that are subject to that meeting.
The Directors of the Fund have adopted the SunAmerica Disinterested Trustees’ and Directors’ Retirement
Plan (the “Retirement Plan”) effective January 1, 1993, as amended, for the Disinterested Directors. The Retirement Plan provides generally that a Disinterested Director may become a participant (“Participant”) in the
Retirement Plan if he or she has at least 10 years of consecutive service as a Disinterested Director of any of the adopting SunAmerica mutual funds (the “Adopting Funds”)
1
or has attained the age of 60 while a Disinterested Director and completed five (5) consecutive years of service
as a Director of any Adopting Fund (an “Eligible Director”). Pursuant to the Retirement Plan, an Eligible Director may receive benefits upon (i) his or her death or disability while a Director or (ii) the termination of his or
her tenure as a Director, other than removal for cause from each of the Adopting Funds with respect to which he or she is an Eligible Director.
As of each of the first 10 birthdays after becoming a Participant and on which he or she is both a Director and a Participant, each Eligible Director will be credited with an amount equal to 50% of his or
her regular fees (excluding committee fees) for services as a Disinterested Director of each Adopting Fund for the calendar year in which such birthday occurs. In addition, an amount equal to 8.50% of any amounts credited under the preceding
statement during prior years is added to each Eligible Director’s account. The rights of any Participant to benefits under the Retirement Plan shall be an unsecured claim against the assets of the Adopting Funds. An Eligible Director may
receive any benefits payable under the Retirement Plan, at his or her election, either in one lump sum or in up to 15 annual installments. Any undistributed amounts shall continue to accrue interest at 8.50%.
Effective December 3, 2008, the Retirement Plan was amended to, among other things: (1) freeze the Retirement Plan as to future
accruals for active Participants as of December 31, 2008; (2) prohibit Disinterested Directors from first becoming Participants in the Retirement Plan after December 31, 2008; and (3) permit active Participants to elect to
receive a distribution of their entire Retirement Plan account balance in 2009. The freeze on future accruals does not apply to Participants that have commenced receiving benefits under the Retirement Plan on or before December 31, 2008.
The following table sets forth information summarizing the compensation of each Disinterested Director for his/her services
as a Director to certain of the funds within the Fund Complex for the fiscal year ended October 31, 2012. Neither the
|
1
|
The SAMF, AST and SASFR have adopted the Retirement Plan.
|
B-40
Interested Director nor any officer of the Fund receives any compensation from the Fund for serving as a Director or an officer.
COMPENSATION TABLE
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Aggregate
Compensation
from
Registrant
|
|
|
Total Compensation
from Fund and
Fund Complex Paid
to Trustees*
|
|
|
Dr. Judith L. Craven **
|
|
$
|
47,067
|
|
|
$
|
307,047
|
|
|
William F. Devin **
|
|
$
|
47,067
|
|
|
$
|
345,047
|
|
|
Richard W. Grant
|
|
$
|
67,780
|
|
|
$
|
201,355
|
|
|
Stephen J. Gutman
|
|
$
|
47,189
|
|
|
$
|
141,447
|
|
|
William Shea
|
|
$
|
48,585
|
|
|
$
|
146,137
|
|
|
*
|
Information is as of October 31, 2012 for the investment companies in the complex that pay fees to these Directors. The investment companies are the SAMF, AST,
SASFR, VALIC I and VALIC II.
|
|
**
|
Mr. Devin and Dr. Craven are also Trustees of VALIC I and VALIC II.
|
As of January 31, 2013, the Directors and Officers of the Fund owned in the aggregate less than 1% of the total outstanding shares of each series and each class of each series’ total outstanding
shares.
The following shareholders owned of record or beneficially 5% or more of the indicated Portfolio’s Class’s
shares outstanding as of May [ ], 2013:
|
|
|
|
|
|
|
Portfolio Name and Class
|
|
Holder
|
|
Percentage
Owned of
Record
|
|
[Focused Large-Cap Growth Portfolio Class A
|
|
|
|
|
|
|
|
|
|
Focused Large-Cap Growth Portfolio Class C
|
|
|
|
|
|
|
|
|
|
Focused Large-Cap Growth Portfolio Class Z
|
|
|
|
|
B-41
|
|
|
|
|
|
|
|
|
|
|
|
|
Focused Small Cap Growth Portfolio Class A
|
|
|
|
|
|
|
|
|
|
Focused Small-Cap Growth Portfolio Class C
|
|
|
|
|
|
|
|
|
|
Focused Small-Cap Growth Portfolio Class I
|
|
|
|
|
B-42
|
|
|
|
|
|
|
|
|
|
|
|
|
SunAmerica Strategic Value Portfolio Class A
|
|
|
|
|
|
|
|
|
|
SunAmerica Strategic Value Portfolio Class B
|
|
|
|
|
|
|
|
|
|
SunAmerica Strategic Value Portfolio Class C
|
|
|
|
|
|
|
|
|
|
Focused Small Cap Value Portfolio Class A
|
|
|
|
|
|
|
|
|
|
Focused Small Cap Value Portfolio Class B
|
|
|
|
|
|
|
|
|
|
Focused Small-Cap Value Portfolio Class C
|
|
|
|
|
B-43
|
|
|
|
|
|
|
|
|
|
|
|
|
Focused Dividend Strategy Portfolio Class A
|
|
|
|
|
|
|
|
|
|
Focused Dividend Strategy Portfolio Class B
|
|
|
|
|
|
|
|
|
|
Focused Dividend Strategy Portfolio Class C
|
|
|
|
|
ADVISER, PERSONAL SECURITIES TRADING, DISTRIBUTOR AND ADMINISTRATOR
The Adviser
SunAmerica, which was organized as a Delaware corporation in 1982, is located at Harborside Financial Center, 3200 Plaza 5, Jersey City, New Jersey 07311-4992, and acts as adviser to each of the
Portfolios pursuant to the Investment Advisory and Management Agreement (the “Management Agreement”) with the Fund, on behalf of each Portfolio. As of December 31, 2012, SunAmerica managed, advised and/or administered approximately
$50.2 billion of assets. The Adviser is a wholly-owned subsidiary of American General Life Insurance Company and an indirect wholly-owned subsidiary of American International Group, Inc. (“AIG”).
Except to the extent otherwise specified in the Management Agreement, each Portfolio pays, or causes to be paid, all other expenses of
the Fund and each of the Portfolios, including, without limitation, charges and expenses of any registrar, custodian, transfer and dividend disbursing agent; brokerage commissions; taxes; engraving and printing of share certificates; registration
costs of the Portfolios and their shares under federal and state securities laws; the cost and expense of printing, including typesetting, and distributing Prospectuses and SAIs regarding the Portfolios, and supplements thereto, to the shareholders
of the Portfolios; all expenses of shareholders’ and Directors’ meetings and of preparing, printing and mailing
B-44
proxy statements and reports to shareholders; all expenses incident to any dividend, withdrawal or redemption options; fees and expenses of legal counsel and independent registered public
accounting firms; membership dues of industry associations; interest on borrowings of the Portfolios; postage; insurance premiums on property or personnel (including officers and Directors) of the Fund that inure to its benefit; extraordinary
expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification relating thereto); and all other costs of the Fund’s operation. The Management Agreement continues in effect with respect to each
Portfolio, for a period of two years from the date of execution unless terminated sooner, and thereafter from year to year, if approved at least annually by vote of a majority of the Directors or by the holders of a majority of the respective
Portfolio’s outstanding voting securities. Any such continuation also requires approval by a majority of the Disinterested Directors by vote cast in person at a meeting called for such purpose. The Management Agreement may be terminated with
respect to a Portfolio at any time, without penalty, on 60 days’ written notice by the Directors, by the holders of a majority of the respective Portfolio’s outstanding voting securities or by SunAmerica. The Management Agreement
automatically terminates with respect to each Portfolio in the event of its assignment (as defined in the 1940 Act and the rules thereunder).
Under the terms of the Management Agreement, SunAmerica is not liable to the Portfolios, or their shareholders, for any act or omission by it or for any losses sustained by the Portfolios or their
shareholders, except in the case of willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
Pursuant
to the Management Agreement, SunAmerica was paid an Advisory Fee that is based on the following annual percentages of each Portfolio’s average daily net assets:
|
|
|
|
|
|
|
Portfolio
|
|
Fee
|
|
|
Large-Cap Growth Portfolio
|
|
|
0.75
|
%
|
|
Small-Cap Growth Portfolio
|
|
|
0.75
|
%
|
|
Small-Cap Value Portfolio
|
|
|
0.75
|
%
|
|
Dividend Strategy Portfolio
|
|
|
0.35
|
%
|
|
Strategic Value Portfolio
|
|
|
0.75
|
%
|
The following tables set forth the total advisory fees received by SunAmerica from each Portfolio
pursuant to the Management Agreement for the fiscal years ended October 31, 2012, 2011 and 2010, and the total advisory fees waived by SunAmerica during the same periods.
Advisory Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PORTFOLIO
|
|
ADVISORY FEES
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Large-Cap Growth Portfolio
|
|
$
|
2,210,510
|
|
|
$
|
2,881,204
|
|
|
$
|
3,458,140
|
|
|
Small-Cap Growth Portfolio
|
|
$
|
1,097,870
|
|
|
$
|
1,334,150
|
|
|
$
|
1,439,915
|
|
|
Small-Cap Value Portfolio
|
|
$
|
832,615
|
|
|
$
|
1,151,081
|
|
|
$
|
1,141,334
|
|
|
Dividend Strategy Portfolio
|
|
$
|
6,484,744
|
|
|
$
|
2,455,415
|
|
|
$
|
820,024
|
|
|
Strategic Value Portfolio
|
|
$
|
1,165,529
|
|
|
$
|
1,586,663
|
|
|
$
|
2,265,681
|
|
Advisory Fees Waived
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PORTFOLIO
|
|
ADVISORY FEES WAIVED
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Large-Cap Growth Portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Small-Cap Growth
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Small-Cap Value Portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend Strategy Portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
B-45
Pursuant to an Expense Limitation Agreement, SunAmerica is contractually obligated to waive
its fees and reimburse expenses to the extent that the Total Annual Fund Operating Expenses exceed the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
(as a percentage of average daily net assets)
|
|
|
Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class I
|
|
|
Small-Cap Growth Portfolio
|
|
|
1.72
|
%
|
|
|
2.37
|
%
|
|
|
2.37
|
%
|
|
|
1.33
|
%
|
|
Small-Cap Value Portfolio
|
|
|
1.72
|
%
|
|
|
2.37
|
%
|
|
|
2.37
|
%
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
1.72
|
%
|
|
|
2.37
|
%
|
|
|
2.37
|
%
|
|
|
—
|
|
Any waivers or reimbursements made by SunAmerica with respect to the Portfolios are subject to recoupment
from the Portfolio within the following two years, provided that the portfolio is able to effect such payment to SunAmerica and remain in effect indefinitely, unless terminated by the Board of Trustees, including a majority of the Independent
Trustees.
These expense waivers and fee reimbursements will continue indefinitely, subject to termination by the Directors,
including the Disinterested Directors.
SunAmerica also may voluntarily waive or reimburse additional amounts to increase the
investment return to a Portfolio’s investors. Further, any waivers or reimbursements made by SunAmerica with respect to a Portfolio are subject to recoupment from that Portfolio within the following two years, provided that the Portfolio is
able to effect such payment to SunAmerica and remain in compliance with the expense caps in effect at the time the waiver or reimbursement occurred. Effective March 1, 2011, the Board of Directors approved the termination of the Expense
Limitation Agreement with respect to the Dividend Strategy Portfolio. Any waivers or reimbursements made by SunAmerica with respect to the Dividend Strategy Portfolio pursuant to the Expense Limitation Agreement continue to be subject to recoupment
from the Dividend Strategy Portfolio within the following two years, provided that the Dividend Strategy Portfolio is able to effect such payment to SunAmerica and to the extent that the Total Annual Fund Operating Expenses fall below 0.95%, 1.60%
and 1.60% for Class A, Class B and Class C shares, respectively. The potential reimbursements are accounted for as possible contingent liabilities that are not recordable on the balance sheet of a Portfolio until collection is probable, but
appear as footnote disclosure to each Portfolio’s financial statements. At such time as it appears probable that a Portfolio is able to effect such reimbursement and that SunAmerica intends to seek such reimbursement, the amount of the
reimbursement will be accrued as an expense of the Portfolio for that current period.
The following table sets forth the
expense (reimbursements)/recoupments other than advisory fees made to the Funds by SunAmerica for the fiscal year ended October 31, 2012.
Expense (Reimbursements)/Recoupments
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class I
|
|
|
Small-Cap Growth Portfolio
|
|
|
—
|
|
|
$
|
978
|
|
|
|
—
|
|
|
$
|
(8,705
|
)
|
|
Small-Cap Value Portfolio
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend Strategy
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
—
|
|
|
$
|
10,389
|
|
|
|
—
|
|
|
|
—
|
|
Additional Information about the Portfolio Managers
The following table indicates the type, name, and total assets of other accounts of which each Portfolio Manager has day-to-day
responsibilities as of October 31, 2012. These accounts include, Registered Investment Companies (“RIC”), Other Pooled Investments (“OPI”) (hedge funds, private institutional accounts, etc.), and Other Accounts
(“OA”).
B-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Accounts
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed and
Total Assets (in
millions) by Account
|
|
|
Number of Accounts and Total
Assets (in millions) for Which
Advisory Fee
Is
Performance Based
|
|
|
Portfolio
|
|
Advisers/
Subadviser
|
|
Portfolio
Manager
|
|
RIC
|
|
|
OPI
|
|
|
OA
|
|
|
RIC
|
|
|
OPI
|
|
|
OA
|
|
|
Large-Cap Growth Portfolio
|
|
SunAmerica
|
|
Janet Walsh
|
|
$
|
3
298
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Small-Cap Growth Portfolio
|
|
SunAmerica
|
|
Andrew Sheridan
|
|
$
|
3
78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Small-Cap Value Portfolio
|
|
SunAmerica
|
|
Timothy Pettee
|
|
$
|
5
2,304
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
SunAmerica
|
|
Jay Merchant
|
|
$
|
0
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Dividend Strategy Portfolio
|
|
SunAmerica
|
|
Brendan Voege
|
|
$
|
4
491
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
SunAmerica
|
|
Brendan Voege
|
|
$
|
4
3,065
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Portfolio Ownership
The following table indicates the dollar range of equity securities in the Portfolios beneficially owned by the portfolio managers and the value of those shares as of October 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
Name of Adviser
|
|
Name of
Portfolio Manager(s)
|
|
Dollar Range of
Equity
Securities in each
Fund managed
by the named Portfolio
Manager
|
|
|
Large-Cap Growth Portfolio
|
|
SunAmerica
|
|
Janet Walsh
|
|
$
|
50,000 – $100,000
|
|
|
Small-Cap Growth Portfolio
|
|
SunAmerica
|
|
Andrew Sheridan
|
|
|
None
|
|
|
Small-Cap Value Portfolio
|
|
SunAmerica
|
|
Timothy Pettee
Jay
Merchant
|
|
|
None
None
|
|
|
Dividend Strategy
|
|
SunAmerica
|
|
Brendan Voege
|
|
$
|
50,000.00 – $100,000.00
|
|
|
Strategic Value Portfolio
|
|
SunAmerica
|
|
Brendan Voege
|
|
|
None
|
|
SunAmerica’s Portfolio Manager Compensation
Compensation
.
Portfolio Manager compensation is comprised of a salary and, where eligible, an incentive compensation
component based on fund performance of the funds managed by the Portfolio Manager, as well as a short term incentive (STI) bonus component. The salary is a fixed annual salary, and is generally based on the Portfolio Managers’ responsibilities
and leadership role within the organization. The incentive compensation component is determined by performance of the funds managed by the Portfolio Manager. It is determined by the fund’s total return relative to the three-year and five-year
Lipper, Inc. rankings, where applicable. The STI is discretionary and based on both the individual’s performance and the organizational performance of SunAmerica Financial Group in the current compensation period. In addition, SunAmerica may
award long-term incentive (LTI) compensation to an eligible Portfolio Manager who consistently meets or exceeds relative performance criteria.
SunAmerica believes its compensation program is adequate to incentivize Portfolio Managers and analysts to seek maximum performance within risk parameters described in the Portfolios’ prospectuses.
As shown in the tables above, the portfolio managers are responsible for managing other accounts for multiple clients,
including affiliated clients (“Other Client Accounts”), in addition to the Portfolios. In certain instances, conflicts may arise in their management of a Portfolio and such Other Client Accounts. The portfolio managers aim to conduct their
activities in such a manner that permits them to deal fairly with each of their clients on an overall basis in accordance with applicable securities laws and fiduciary obligations.
B-47
|
•
|
|
Trade Allocations
. One situation where a conflict may arise between a Portfolio and Other Client Accounts is in the allocation of trades among
the Portfolio and the Other Client Accounts. For example, the Adviser may determine that there is a security that is suitable for a Portfolio as well as for Other Client Accounts which have a similar investment objective. Likewise, a particular
security may be bought for one or more clients when one or more other clients are selling that same security, which may adversely affect the value of securities held by the Portfolio. The Portfolios, the Adviser has adopted policies and procedures
regarding the allocation of trades and brokerage, which the Portfolio, the Adviser believes address the conflicts associated with managing multiple accounts for multiple clients (including affiliated clients). The policies and procedures generally
require that securities be allocated among the Portfolios and Other Client Accounts in a manner that is fair, equitable and consistent with their fiduciary obligations to each.
|
|
•
|
|
Allocation of Portfolio Managers’ Time
. The portfolio managers’ management of the Portfolios and Other Client Accounts may result in a
portfolio manager devoting a disproportionate amount of time and attention to the management of a Fund and Other Client Accounts if the Portfolios and Other Client Accounts have different objectives, benchmarks, time horizons, and fees. Generally,
the Adviser seeks to manage such competing interests for the time and attention of the portfolio managers. Although the Adviser does not track the time a portfolio manager spends on the Portfolio or a single Other Client Account, they do
periodically assess whether a portfolio manager has adequate time and resources to effectively manage all of such portfolio manager’s accounts. In certain instances, portfolio managers may be employed by two or more employers.
|
Personal Trading by Portfolio Managers
The management of personal accounts by a portfolio manager may give rise to potential conflicts of interest. While generally, the Adviser’s and subadviser’s Codes of Ethics will impose limits on
the ability of a portfolio manager to trade for his or her personal account, especially where such trading might give rise to a potential conflict of interest, there is no assurance that the Adviser’s and subadviser’s Codes of Ethics will
eliminate such conflicts.
Personal Securities Trading
The Fund, SunAmerica and the Distributor have adopted a written Code of Ethics (the “SunAmerica Code”), pursuant to Rule 17j-1 under the 1940 Act. These codes of ethics restrict the personal
investing by certain access persons of the Fund in securities that may be purchased or held by the Portfolios to ensure that such investments do not disadvantage the Portfolios. SunAmerica reports to the Board on a quarterly basis as to whether
there were any violations of the SunAmerica Code by Access Persons of the Fund or SunAmerica during the quarter. The SunAmerica Code is filed as an exhibit to the Portfolios’ registration statement and instructions concerning how these
documents can be obtained may be found on the back cover of the Portfolios’ Prospectus.
The Distributor
The Fund, on behalf of each Portfolio, has entered into a distribution agreement (the “Distribution Agreement”) with SACS, a
registered broker-dealer and an indirect wholly owned subsidiary of AIG, to act as the principal underwriter in connection with the continuous offering of each class of shares of each Portfolio. The address of the Distributor is Harborside Financial
Center, 3200 Plaza 5, Jersey City, NJ 07311-4992. The Distribution Agreement provides that the Distributor has the exclusive right to distribute shares of the Portfolios through its registered representatives and authorized broker-dealers. The
Distribution Agreement also provides that the Distributor will pay the promotional expenses, including the incremental cost of printing prospectuses, annual reports and other periodic reports respecting each Portfolio, for distribution to persons
who are not shareholders of such Portfolio and the costs of preparing and distributing any other supplemental sales literature. However, certain promotional expenses may be borne by the Portfolio (see “Distribution Plans” below).
SACS serves as Distributor of Class I, Class W and Class Z shares and incurs the expenses of distributing these shares
under the Distribution Agreement, none of which expenses are reimbursed or paid by the Fund.
The Distribution Agreement
continues in effect from year to year with respect to each Portfolio, if such continuance is approved at least annually by a vote of a majority of the Directors, including a majority of the Disinterested Directors. The Fund or the Distributor each
has the right to terminate the Distribution Agreement with respect to a Portfolio on 60 days’ written notice, without penalty. The Distribution Agreement automatically terminates with respect to each Portfolio in the event of its assignment (as
defined in the 1940 Act and the rules thereunder).
The Distributor may, from time to time, pay additional commissions or
promotional incentives to brokers, dealers or other financial services firms that sell shares of the Fund. In some instances, such additional commissions, fees or other incentives may be offered only to certain firms, including firms affiliated with
the Distributor, that sell or are expected to sell
B-48
during specified time periods certain minimum amounts of shares of the Fund, or of other funds underwritten
by the Distributor. In addition, the terms and conditions of any given promotional incentive may differ from firm to firm. Such differences will, nevertheless, be fair and equitable, and based on such factors as size, geographic location, or other
reasonable determinants, and will in no way affect the amount paid by any investor.
The Fund, on behalf of Class I shares
of each applicable Portfolio, has entered into an Administrative and Shareholder Services Agreement (the “Class I Service Agreement”) with SACS to provide additional shareholders services to Class I shareholders. Pursuant to the Class I
Service Agreement, SACS receives, as compensation for various services rendered, a fee from Class I shares of each Portfolio of 0.25% of daily net assets.
The Fund, on behalf of Class W shares of each applicable Portfolio, has entered into an Adminstration and Shareholder Services Agreement (the “Class W Service Agreement”) with SACS to provide
additional shareholder services to Class W shareholders. Pursuant to the Class W Service Agreement, as compensation for various services rendered, the Distributor receives a fee from each Portfolio of 0.15% of the daily net assets of the
Portfolio’s Class W shares.
Distribution Plans.
Rule 12b-1 under the 1940 Act permits an investment company directly or
indirectly to pay expenses associated with the distribution of its shares in accordance with a plan adopted by the investment company’s board of directors. Pursuant to this rule, the Portfolios have adopted Distribution Plans for Class A,
Class B, and Class C shares (hereinafter referred to as the “Class A Plan,” the “Class B Plan” and the “Class C Plan” and, collectively, as the “Distribution Plans”). There is no Distribution Plan in effect
for Class I, Class W or Z shares.
The sales charge and distribution fees of a particular class will not be used to
subsidize the sale of shares of any other class. Reference is made to “Shareholder Account Information” in the Prospectus for certain information with respect to the Distribution Plans.
Under the Class A Plan, the Distributor may receive payments from a Portfolio at an annual rate of 0.10% of average daily net assets
of such Portfolio’s Class A shares to compensate the Distributor and certain securities firms for providing sales and promotional activities for distributing that class of shares. Under the Class B and Class C Plans, the Distributor
receives payments from a Portfolio at the annual rate of 0.75% of the average daily net assets of such Portfolio’s Class B and Class C shares to compensate the Distributor and certain securities firms for providing sales and promotional
activities for distributing that class of shares. The distribution costs for which the Distributor may be reimbursed out of such distribution fees include fees paid to broker-dealers that have sold Portfolio shares, commissions and other expenses
such as sales literature, prospectus printing and distribution and compensation to wholesalers. It is possible that in any given year the amount paid to the Distributor under the Class A Plan, the Class B Plan or the Class C Plan will exceed
the Distributor’s distribution costs as described above. The Distribution Plans provide that each class of shares of each Portfolio may also pay the Distributor an account maintenance fee of 0.25% of the aggregate average daily net assets of
such class of shares for payments to SACS and certain securities firms for providing account maintenance services. In this regard, some payments are used to compensate broker-dealers with trail commissions or account maintenance and service fees in
an amount up to 0.25% per year of the assets maintained in a Portfolio by their customers.
The following table sets
forth the distribution and service fees the Distributor received from the Portfolios for each share
class 12b-1 Plan for the fiscal years ended October 31, 2012, 2011 and 2010.
Distribution and Service Maintenance Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PORTFOLIO
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Large-Cap Growth Portfolio
|
|
$
|
746,294
|
|
|
$
|
150,808
|
|
|
$
|
662,404
|
|
|
$
|
928,480
|
|
|
$
|
245,287
|
|
|
$
|
814,223
|
|
|
$
|
909,622
|
|
|
$
|
351,501
|
|
|
$
|
943,573
|
|
|
Small-Cap Growth Portfolio
|
|
$
|
421,128
|
|
|
$
|
89,457
|
|
|
$
|
167,850
|
|
|
$
|
497,022
|
|
|
$
|
132,517
|
|
|
$
|
222,576
|
|
|
$
|
518,400
|
|
|
$
|
150,778
|
|
|
$
|
239,225
|
|
|
Small-Cap Value Portfolio
|
|
$
|
292,927
|
|
|
$
|
61,602
|
|
|
$
|
211,618
|
|
|
$
|
396,968
|
|
|
$
|
94,377
|
|
|
$
|
306,206
|
|
|
$
|
404,097
|
|
|
$
|
103,341
|
|
|
$
|
263,875
|
|
|
Dividend Strategy Portfolio
|
|
$
|
4,540,819
|
|
|
$
|
837,611
|
|
|
$
|
4,716,461
|
|
|
$
|
1,673,211
|
|
|
$
|
402,202
|
|
|
$
|
1,832,665
|
|
|
$
|
508,638
|
|
|
$
|
190,818
|
|
|
$
|
698,855
|
|
|
Strategic Value Portfolio
|
|
$
|
364,679
|
|
|
$
|
88,176
|
|
|
$
|
423,923
|
|
|
$
|
417,803
|
|
|
$
|
146,241
|
|
|
$
|
550,953
|
|
|
$
|
463,246
|
|
|
$
|
248,664
|
|
|
$
|
693,457
|
|
During the fiscal year ended October 31, 2012, the Distributor incurred the following expenses in connection with its distribution of the Funds’ shares:
B-49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Cap Growth Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Compensation to sales personnel
|
|
$
|
13,604
|
|
|
$
|
4,627
|
|
|
$
|
4,309
|
|
|
Compensation to broker-dealers*
|
|
$
|
349,769
|
|
|
$
|
67,610
|
|
|
$
|
446,008
|
|
|
Advertising
|
|
$
|
39,733
|
|
|
$
|
2,796
|
|
|
$
|
12,252
|
|
|
Printing and mailing of prospectuses to other than current shareholders
|
|
$
|
1,825
|
|
|
$
|
110
|
|
|
$
|
538
|
|
|
Other Expenses#
|
|
$
|
81,513
|
|
|
$
|
15,193
|
|
|
$
|
32,299
|
|
|
Total
|
|
$
|
486,444
|
|
|
$
|
90,336
|
|
|
$
|
495,406
|
|
|
|
|
|
|
|
Small-Cap Growth Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Compensation to sales personnel
|
|
$
|
10,203
|
|
|
$
|
3,026
|
|
|
$
|
1,824
|
|
|
Compensation to broker-dealers*
|
|
$
|
178,175
|
|
|
$
|
43,637
|
|
|
$
|
113,499
|
|
|
Advertising
|
|
$
|
22,407
|
|
|
$
|
1,657
|
|
|
$
|
3,099
|
|
|
Printing and mailing of prospectuses to other than current shareholders
|
|
$
|
1,649
|
|
|
$
|
106
|
|
|
$
|
211
|
|
|
Other Expenses#
|
|
$
|
50,245
|
|
|
$
|
13,108
|
|
|
$
|
15,725
|
|
|
Total
|
|
$
|
262,679
|
|
|
$
|
61,534
|
|
|
$
|
134,358
|
|
|
|
|
|
|
|
Small-Cap Value Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Compensation to sales personnel
|
|
$
|
33,651
|
|
|
$
|
3,907
|
|
|
$
|
2,522
|
|
|
Compensation to broker-dealers*
|
|
$
|
106,855
|
|
|
$
|
34,689
|
|
|
$
|
133,478
|
|
|
Advertising
|
|
$
|
15,851
|
|
|
$
|
1,142
|
|
|
$
|
3,918
|
|
|
Printing and mailing of prospectuses to other than current shareholders
|
|
$
|
675
|
|
|
$
|
44
|
|
|
$
|
153
|
|
|
Other Expenses#
|
|
$
|
38,479
|
|
|
$
|
12,185
|
|
|
$
|
17,225
|
|
|
Total
|
|
$
|
195,511
|
|
|
$
|
51,967
|
|
|
$
|
157,296
|
|
|
|
|
|
|
|
Dividend Strategy Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Compensation to sales personnel
|
|
$
|
6,998,338
|
|
|
$
|
322,255
|
|
|
$
|
2,311,944
|
|
|
Compensation to broker-dealers*
|
|
$
|
1,980,258
|
|
|
$
|
2,301,078
|
|
|
$
|
5,279,227
|
|
|
Advertising
|
|
$
|
245,745
|
|
|
$
|
16,021
|
|
|
$
|
89,863
|
|
|
Printing and mailing of prospectuses to other than current shareholders
|
|
$
|
18,555
|
|
|
$
|
1,145
|
|
|
$
|
6,899
|
|
|
Other Expenses#
|
|
$
|
434,524
|
|
|
$
|
37,726
|
|
|
$
|
164,849
|
|
|
Total
|
|
$
|
9,677,420
|
|
|
$
|
2,678,225
|
|
|
$
|
7,852,782
|
|
|
|
|
|
|
|
Strategic Value Portfolio
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Compensation to sales personnel
|
|
$
|
19,450
|
|
|
$
|
1,663
|
|
|
$
|
2,702
|
|
|
Compensation to broker-dealers*
|
|
$
|
179,278
|
|
|
$
|
31,098
|
|
|
$
|
293,184
|
|
|
Advertising
|
|
$
|
19,718
|
|
|
$
|
1,645
|
|
|
$
|
7,899
|
|
|
Printing and mailing of prospectuses to other than current shareholders
|
|
$
|
981
|
|
|
$
|
64
|
|
|
$
|
348
|
|
|
Other Expenses#
|
|
$
|
44,893
|
|
|
$
|
13,071
|
|
|
$
|
24,283
|
|
|
Total
|
|
$
|
264,320
|
|
|
$
|
47,541
|
|
|
$
|
328,416
|
|
|
*
|
For Class B and Class C shares, these amounts include advance commissions paid out to broker-dealers, if any.
|
|
#
|
Other Expenses include miscellaneous printing and marketing overhead expenses.
|
Continuance of the Distribution Plans with respect to each Portfolio is subject to annual approval by vote of the Directors, including a majority of the Disinterested Directors. A Distribution Plan may
not be amended to increase materially the amount authorized to be spent thereunder with respect to a class of shares of a Portfolio, without approval of the shareholders of the affected class of shares of the Portfolio. In addition, all material
amendments to the Distribution Plans must be approved by the Directors in the manner described above. A Distribution Plan may be terminated at any time with respect to a Portfolio without payment of any penalty by vote of a majority of the
Disinterested Directors or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the affected class of shares of the Portfolio. So long as the Distribution Plans are in effect, the election and nomination of the
Disinterested Directors of the Fund shall be committed to the discretion of the Disinterested Directors. In the Directors’ quarterly review of the Distribution Plans, they will consider the continued appropriateness of, and the level of,
compensation provided in the Distribution Plans. In their consideration of the Distribution Plans with respect to a Portfolio, the Directors must consider all factors they deem relevant, including information as to the benefits of the Portfolio and
the shareholders of the relevant class of the Portfolio.
Payments to Financial Institutions
As described in the Prospectus, the Distributor, SunAmerica, or their affiliates may make payments to Financial Institutions, including certain
broker-dealers within the Advisor Group, Inc. and The Variable Annuity Life Insurance Company
B-50
(“VALIC”), affiliates of SunAmerica, other than the standard dealer concessions listed under “Calculation of Sales Charges” in the Prospectus, or the distribution or service
fees that may be made by the Distributor to Financial Institutions pursuant to the Distribution Plans. The additional payments may be made in the form of sales charge or service fee payments over and above the standard payment rate (made by the
Distributor to broker-dealers in connection with distribution-related or accountant maintenance services under the Distribution Plans), or in the form of other “revenue sharing” payments that may be paid to Financial Institutions, as
described in the Prospectus. These additional payments are collectively referred to as “revenue sharing payments.”
The Distributor,
SunAmerica and their affiliates make revenue sharing payments to Financial Institutions that generally range from 0.03% to 0.40% of Fund assets serviced and maintained by the Financial Institution and/or from 0.05% to 0.25% of gross or net sales of
Fund shares attributable to the Financial Institution. Payments may also take the form of flat fees payable on a one-time or periodic basis, including, but not limited to, in connection with the initial set-up of the Portfolio on a Financial
Institution’s platform, for inclusion on a Financial Institution’s preferred list of funds offered to its clients or for other marketing, sales support, educational or training programs.
The list below includes the names of the Financial Institutions that received revenue sharing payments in connection with distribution-related or other
services provided to the Portfolios in the calendar year ended December 31, 2012. This list is subject to change and the Distributor, SunAmerica, or their affiliates may, from time to time revise or terminate existing arrangements with such
entities, or may enter into new arrangements with Financial Institutions that are not presently listed below.
Ameriprise Financial
Charles Schwab & Co
D A
Davidson & Company
First Clearing Corp Wells Fargo (Wachovia)
Janney Montgomery
Linsco/Private Ledger
Merrill Lynch
Mesirow Financial
Morgan Stanley Smith Barney
National Financial Services/Fidelity Services
Oppenheimer & Co.
Prudential
Investments
Raymond James & Associates
RBC Dain Rauscher
Robert W. Baird Stifel, Nicholas & Co., Inc.
TD Ameritrade Fiserv Trust Company
UBS
Financial Services
VALIC Financial Advisors
Vanguard Group
These payments may create a conflict of interest by influencing
the Financial Institution and your salesperson to recommend a Portfolio over another investment. Ask your salesperson or visit your Financial Institution’s Website for more information.
In addition to the dealer concessions and the Distribution Plan and revenue sharing payments described above and in the Prospectus, the
Portfolios, Distributor, SunAmerica or their affiliates may also make payments to Financial Institutions in connection with administrative, sub-accounting and networking services (
i.e.
, services to support the electronic transmission of
shareholder orders through the National Securities Clearing Corporation). These fees are separate from the fees described above and from the fees paid by the Funds to SAFS, the Transfer Agent or to the Distributor pursuant to the Class I and Class W
service agreements and to SunAmerica pursuant to the Administrative Services Agreement.
The Servicing Agent.
The
Fund has entered into a service agreement (the “Service Agreement”), under the terms of which SunAmerica Fund Services, Inc. (“SAFS” or the “Servicing Agent”), an affiliate of SunAmerica, acts as a servicing agent
assisting State Street Bank and Trust Company (“State Street”) in connection with certain services offered to the shareholders of each of the Portfolios. Under the terms of the Service Agreement, SAFS may receive reimbursement of its costs
in providing such shareholder services. SAFS is located at Harborside Financial Center, 3200 Plaza 5, Jersey City, New Jersey 07311-4992.
The Service Agreement continues in effect from year to year provided that such continuance is approved annually by vote of a majority of the Directors including a majority of the Disinterested Directors.
B-51
Pursuant to the Service Agreement, as compensation for services rendered, SAFS receives
a fee from the Fund, computed and payable monthly based upon an annual rate of 0.22% of average daily net assets for Class A, Class B, Class C, Class I and Class W shares. From this fee, SAFS pays a fee to State Street, and its
affiliate, Boston Financial Data Services (“BFDS” and with State Street, the “Transfer Agent”) (other than out-of-pocket charges of the Transfer Agent which are paid by the Trust). No portion of such fee is paid or reimbursed by
or Class Z shares. Class Z shares, however, will pay all direct transfer agency fees and out-of-pocket expenses applicable to that Class. The out-of-pocket charges of the Transfer Agent include charges for services relating to anti-money laundering
procedures under the USA PATRIOT Act of 2001, as amended. For further information regarding the Transfer Agent see the section entitled “Additional Information” below.
The following table sets forth the fees paid by the Portfolios to SAFS pursuant to the Service Agreement for the fiscal years ended
October 31, 2012, 2011 and 2010.
Service Fees
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class I
|
|
|
Focused Large-Cap Growth
|
|
$
|
464,526
|
|
|
$
|
32,705
|
|
|
$
|
145,142
|
|
|
|
—
|
|
|
Focused Small-Cap Growth Portfolio
|
|
|
260,392
|
|
|
|
19,429
|
|
|
|
36,567
|
|
|
$
|
725
|
|
|
Focused Small-Cap Value Portfolio
|
|
|
182,923
|
|
|
$
|
13,443
|
|
|
|
46,390
|
|
|
|
—
|
|
|
Focused Dividend Strategy
|
|
|
2,853,582
|
|
|
|
184,203
|
|
|
|
1,037,620
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
227,669
|
|
|
|
19,147
|
|
|
|
93,047
|
|
|
|
—
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class I
|
|
|
Focused Large-Cap Growth
|
|
$
|
583,616
|
|
|
$
|
53,963
|
|
|
$
|
179,129
|
|
|
|
—
|
|
|
Focused Small-Cap Growth Portfolio
|
|
|
312,414
|
|
|
|
29,154
|
|
|
|
48,967
|
|
|
$
|
816
|
|
|
Focused Small-Cap Value Portfolio
|
|
|
249,523
|
|
|
|
20,763
|
|
|
|
67,365
|
|
|
|
—
|
|
|
Focused Dividend Strategy
|
|
|
1,051,733
|
|
|
|
88,484
|
|
|
|
403,186
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
262,619
|
|
|
|
32,173
|
|
|
|
121,210
|
|
|
|
—
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
Class I
|
|
|
Focused Large-Cap Growth
|
|
$
|
563,194
|
|
|
$
|
75,957
|
|
|
$
|
205,993
|
|
|
|
—
|
|
|
Focused Small-Cap Growth Portfolio
|
|
|
315,775
|
|
|
|
32,090
|
|
|
|
51,477
|
|
|
$
|
1,627
|
|
|
Focused Small-Cap Value Portfolio
|
|
|
251,762
|
|
|
|
22,261
|
|
|
|
57,681
|
|
|
|
—
|
|
|
Focused Dividend Strategy
|
|
|
318,925
|
|
|
|
41,834
|
|
|
|
153,646
|
|
|
|
—
|
|
|
Strategic Value Portfolio
|
|
|
288,391
|
|
|
|
54,182
|
|
|
|
151,982
|
|
|
|
—
|
|
PROXY VOTING POLICIES AND PROCEDURES
Proxy Voting Responsibility
. The Fund has adopted policies and procedures for the voting of proxies relating to Portfolio
securities (the “Policies”). The Policies were drafted according to recommendations by SunAmerica and an independent proxy voting agent. The Policies enable the Fund to vote proxies in a manner consistent with the best interests of the
Fund and the Fund’s shareholders. A committee has been established (the “Proxy Voting Committee”) to administer the voting of all Fund proxies in accordance with the Policies. The Proxy Voting Committee will consist of a member of the
Investment Management Department, at least one member of the Legal and Compliance Departments, and at least one person with respect to SunAmerica who oversees subadvisers, if any, (with respect to Portfolios, the investment discretion over which is
delegated to a subadviser) or their designees.
B-52
The Proxy Voting Committee has engaged the services of an independent voting agent to assist
in issue analyses, vote recommendations for proxy proposals, and to assist the Fund with certain responsibilities including recordkeeping of proxy votes.
The Fund is generally a passive investor in holding portfolio securities, seeking to maximize shareholder value, but not necessarily to exercise control over the issuers of portfolio securities, or
otherwise advance a particular agenda. The Fund generally will abstain on “social issue proposals” as described herein.
In addition, in accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and
ending on the day following the meeting. The Board had determined that the costs of voting proxies with respect to such shares of foreign companies generally outweigh any benefits that may be achieved by voting such proxies. The costs of voting such
proxies include the potentially serious portfolio management consequences of reduced flexibility to sell the shares at the most advantageous time for the particular Trust. As a result, such proxies generally will not be voted in the absence of an
unusual, significant vote of compelling economic importance.
Case-By-Case Voting Matters.
The Proxy Voting Committee
has established proxy voting guidelines (the “Guidelines”), which identify certain vote items to be determined on a case-by-case basis. In these circumstances, and in proposals not specifically addressed by the Policies, the Proxy Voting
Committee generally will rely on guidance or a recommendation from the independent proxy voting agent or other sources. In these instances, the Proxy Voting Committee will recommend the vote that will maximize value for, and is in the best interests
of, the Fund’s shareholders.
Examples of the Fund’s Positions on Voting Matters.
Consistent with the
approaches described above, the following are examples of the Fund’s voting positions on specific matters:
|
|
•
|
|
Vote on a case-by-case basis on proposals to increase authorized common stock;
|
|
|
•
|
|
Vote on a case-by-case basis on most mutual fund matter shareholder proposals to terminate the investment adviser;
|
|
|
•
|
|
Vote on a case-by-case basis regarding merger and acquisition matters;
|
|
|
•
|
|
Not vote proxies for index funds/portfolios and passively managed funds/portfolios;*
|
|
|
•
|
|
Not vote proxies for securities that are out on loan;**
|
|
|
•
|
|
Vote on a case by case basis on equity compensation plan
|
|
*
|
Only applicable to index and passively managed funds in the SunAmerica Fund Complex. The Boards of the applicable funds have determined that the costs of voting proxies
for index and passively managed funds will generally outweigh any benefits that may be achieved by voting such proxies because the outcome will not directly affect whether the funds retain a particular security. That is, the funds will retain or
sell a particular security based on objective, rather than subjective, criteria. For example, in the case of an index fund, the funds will make a determination to retain or sell a security based on whether the index retains or deletes the security.
|
|
**
|
The Boards of the SunAmerica funds that have approved the lending of portfolio securities have determined that the costs of voting proxies with respect to securities
that are out on loan generally outweigh any benefit that may be achieved by the voting of such proxies. The costs of voting such proxies include the opportunity cost of lost securities lending income when securities are recalled from a loan.
However, under certain circumstances, including where the investment adviser and/or subadviser to a fund determines that a proxy vote is materially important to the fund’s interest and where it is feasible to recall the security on a timely
basis, the investment adviser will use its reasonable efforts to recall the security.
|
Conflicts of Interest.
Members of the Proxy Voting Committee will resolve conflicts of interest presented by a proxy vote. In practice, application of the Guidelines will in most instances adequately address any possible conflicts of interest, as votes generally are
effected according to the policies or recommendations of the independent proxy voting agent.
However, if a situation arises
where a vote presents a conflict between the interests of the Fund’s shareholders and the interest of SunAmerica, the Fund’s principal underwriter, or one of SunAmerica’s or the underwriter’s affiliates, and the conflict is known
to the Proxy Voting Committee, the Committee will consult with one Director who is not an “interested person,” as that term is defined in the 1940 Act, time permitting, before casting the vote to ensure that the Fund vote in the best
interest of its shareholders. Any individual with a known conflict may be required by the Proxy Voting Committee to recuse himself or herself from being involved in the proxy voting decision.
Proxy Voting Records.
The Proxy Voting Committee will be responsible for documenting its basis for any determination to vote in a
non-uniform or contrary manner, as well as for ensuring the maintenance of records for each proxy vote cast on behalf of the Portfolios. The independent proxy voting agent will maintain records of voting decisions for each
B-53
vote cast on behalf of the Fund. The proxy voting record for the most recent twelve-month period ended June 30is available on the SEC’s website at http://www.sec.gov.
Board Reporting.
The Portfolios’ Chief Compliance Officer will provide a summary report at each quarterly meeting of the
Boards which describes any Proxy Voting Committee meeting(s) held during the prior quarter.
DISCLOSURE OF PORTFOLIO HOLDINGS POLICIES AND PROCEDURES
The Board has adopted policies and procedures relating to disclosure of the Portfolios’ securities. These policies and procedures
govern when and by whom portfolio holdings information will be publicly disclosed or made available to nonaffiliated third parties. Unless a Portfolio’s portfolio holdings information has been publicly disclosed, it is the Portfolios’
policy that their portfolio holdings information will not be provided to a third party unless there is a legitimate business purpose for providing this information, subject to certain other conditions described below or as set forth in the
Portfolios’ policy.
The Portfolios’ complete portfolio holdings are publicly available via SEC filings made by the
Portfolios on a fiscal quarterly basis. These shareholder reports and regulatory filings are filed with the SEC, as required by federal securities laws, and are generally available within sixty (60) days of the end of the Portfolios’
fiscal quarters.
In addition, the Portfolios’ complete holdings information will be made available
on the Portfolios’ website on a monthly basis. The Portfolios’ holdings at the end of each month will be posted on the first business day following the 15
th
day of the following month.
Portfolio holdings information shall not be publicly disclosed until the information is at least 15 days old, unless otherwise approved by SunAmerica’s Legal Department. The Portfolios and their
affiliates are not authorized to receive compensation or other consideration for the non-public disclosure of portfolio holdings information.
Before any non-public disclosure of information about a Portfolio’s holdings is permitted, an employee of the Adviser seeking to disclose such information must submit a written form to his or her
department head requesting the release of non-public portfolio holdings information. The request must then be submitted to the Legal and/or Compliance departments of the Adviser. The Portfolio’s Chief Compliance Officer or SunAmerica’s
Legal Department may approve the request if it is determined that there is a legitimate business purpose for the disclosure of such information to the third party and it is determined that no material conflicts between the Portfolio’s
shareholders and the Portfolio’s affiliates exist. To find that there is a legitimate business purpose, it must be determined that the selective disclosure of portfolio holdings information is necessary to the Portfolios’ operation or is
in the Portfolio’s best interest. If the request is approved, the third party must execute a confidentiality agreement governing the third party’s duties with respect to the portfolio holdings information, which includes the duty to keep
such information confidential, and to not use the information for purposes of trading in the shares of the Portfolio for any reason.
Non-public holdings information may be provided to the Portfolios’ service providers on an as-needed basis in connection with the services provided to the Portfolios by such service providers.
Information may be provided to these parties without a time lag. Service providers that may be provided with information concerning the Portfolios’ holdings include the Adviser and its affiliates, legal counsel, independent registered public
accounting firms, custodian, fund accounting agent, financial printers, proxy voting service providers and broker-dealers who are involved in executing portfolio transactions on behalf of the Portfolios. Portfolio holdings information may also be
provided to the Board. The entities to which the Portfolios’ provide portfolio holdings information either by explicit arrangement or by virtue of their respective duties to the Portfolios are required to maintain the confidentiality of the
information provided.
At each quarterly meeting of the Board, the Adviser shall present the Board with a report disclosing
the addition of any organization or individual that has been approved to receive non-public portfolio holdings of the Portfolios and the purpose for such disclosure.
Each of the below listed third parties have been informed of their duty of confidentiality and have been approved to receive information concerning the Funds’ holdings:
|
1.
|
[ ]. [ ] is provided with entire portfolio holdings information during
periods in which it performs its audits or reviews of the Portfolios’ financial statements
.
[ ] does not disclose to third parties information regarding the Portfolios’ holdings.
|
|
2.
|
Ernst & Young LLP (“E&Y”).
E&Y is provided with portfolio holdings information in connection with the tax services it provides to the
Funds
.
E&Y does not disclose to third parties information regarding the Funds’ holdings.
|
B-54
|
3.
|
State Street
. State Street, as custodian to the Portfolios, has daily access to the entire holdings of each Portfolio. State Street does not disclose or release
information regarding the Funds’ holdings except as instructed by the Portfolios.
|
|
4.
|
Lipper, Inc
. (“Lipper”). Lipper is provided with the entire portfolio holdings information for each Fund on a monthly basis. This information is
disclosed approximately thirty (30) days after the month end
.
Lipper analyzes the information to produce various statistical measures and general portfolio information (including equity investment style, asset category percentages,
credit analysis, top 10 and top 25 holdings, sector weighting, etc.) and uses the information to determine each Portfolio’s asset class and category in order to place each Portfolio in the appropriate peer group. Lipper does not disclose the
entire portfolio holdings of each Portfolio, but does disclose the information listed above. This information is made available to Lipper subscribers approximately thirty (30) days after the receipt of information from the Portfolio.
|
|
5.
|
Morningstar, Inc. (“Morningstar”)
. Morningstar is a subscription-based service where certain information regarding stocks and retail mutual funds may
be accessed through its web site at no charge. Information regarding the Portfolios is available only with a subscription. State Street forwards entire portfolio holdings information to Morningstar on a monthly basis, approximately thirty
(30) days after each month end. Morningstar analyzes the information to produce various reports that contain statistical measures and other portfolio information (including equity style, asset category percentages, credit analysis, top 10 and
top 25 holdings, sector weighting, etc.). Through Morningstar’s Morningstar Direct product, entire portfolio holdings information is available to subscribers approximately one week after Morningstar’s receipt of the information. Other
Morningstar subscription-based products provide statistical measures and portfolio information generally between fifteen (15) to thirty (30) days after its receipt of such information.
|
|
6.
|
Bloomberg LLP (“Bloomberg”)
. The Performance Measurement Group discloses the entire portfolio holdings information for each Portfolio on a monthly
basis, approximately thirty (30) days after the month end. This information is made available to subscribers of Bloomberg’s various databases within one (1) to fourteen (14) days of its receipt.
|
|
7.
|
Financial Printers
. Fund Accounting provides various financial printers with portfolio holdings information within sixty (60) days after each
portfolio’s fiscal quarter. Financial printers assist the Portfolios with the filing of their annual and semi-annual shareholder reports and quarterly regulatory filings with the SEC and the printing of shareholder reports for distribution to
participants. Financial printers do not disclose the information publicly other than to file the document on the SEC’s EDGAR database.
|
|
8.
|
Investment Company Institute (“ICI”).
Fund Accounting provides the ICI with certain holdings information (top 10 holdings, sector weighting and asset
categories) regarding the Portfolios on a quarterly basis, approximately fifteen (15) days after the quarter end. The ICI uses this information for survey purposes and does not disclose a particular Portfolio’s holding information
publicly.
|
|
9.
|
Investment Technology Group (“ITG”)
. State Street provides purchase and sale information with respect to the Portfolio’s equity securities on a
quarterly basis approximately fifteen (15) days after the quarter end. ITG analyzes the information to produce reports containing brokerage execution statistics and comparisons. These reports are provided to the SunAmerica and ITG does not
disclose publicly the information it receives or the reports it prepares. SunAmerica’s contract with ITG includes a confidentiality clause.
|
|
10.
|
Manhattan Creative Partners (d/b/a “Diligent”)
. Marketing provides Diligent with entire portfolio holdings on a monthly basis approximately seven
(7) days as of the month end. Diligent services the website of the retail funds advised by SunAmerica. Diligent also hosts the Board’s online meeting materials.
|
|
11.
|
Marketing Firms
. Our Marketing Group provides portfolio holding information to various marketing firms, including PeachTree Enterprises, PrimeLook, Inc., Royal
Impressions, Wilmedia and JDP Marketing Services. with portfolio holding information. Depending on the Funds and the marketing firm, the Marketing Group provides information on a monthly, quarterly, or on an as needed basis, generally within seven
(7) days of the period end. Generally, these marketing firms are responsible for the design and/or printing of sales literature on behalf of the Funds or assist in the preparation of the MD&A section and shareholder letters to the annual
and semi-annual reports. They do not publicly disclose the Funds’ portfolio holdings information and are subject to confidentiality provisions in our agreements with them.
|
B-55
|
12.
|
Institutional Shareholder Services (“ISS”)
. ISS downloads both daily and weekly portfolio information (
i.e.
, custodian identification number,
security identification number, share position and description of the security) through State Street Insight System. This information is used for the purposes of voting proxies on behalf of the Portfolio, evaluating the Portfolio’s eligibility
for participating in, and filing proofs of claim on behalf of, the Portfolio in securities class action lawsuits. ISS does not publicly disclose the information except as may be required when filing a proof of claim in connection with a
Portfolio’s participation in a securities class action lawsuit. SunAmerica’s contract with ISS includes confidentiality disclosure.
|
|
13.
|
SunAmerica Retirement Markets, Inc. (“SARM”)
. SARM, an affiliate of SunAmerica, is provided with portfolio information, as needed, in order to
facilitate marketing-related support services with respect to the Funds.
|
Certain other information concerning a
Fund’s portfolio described below may also be disclosed prior to the public dissemination of the Fund’s portfolio holdings, provided that: (i) the information has been made available to all shareholders of the applicable Fund (e.g.,
the information has been mailed to shareholders) and/or (ii) the information has been posted on the Fund’s website, including where there is a prominent link on the website to such information (e.g., links to fund fact sheets, brochures or
other marketing pieces that may contain identifiable holdings information).
1.
Asset Class Information.
Asset class
information (e.g., equity, fixed income, currency or commodities) and the total percentage of the Fund held in each asset class;
2.
Sector or Geographic Information
. Sector information (e.g., technology, financials, industrials) or geographic information (e.g., non-U.S., U.S., or country-specific allocations) and the total
percentage of the Fund held in each sector or geographic region/country;
3.
Impact of Fund Allocation Information.
Impact of asset class, sector or geographic information, including contributors/detractors to the Fund’s performance; provided, however, that when actual portfolio holdings are named, disclosure of these holdings must be consistent with
sections 1 or 2 above; and
4.
General Portfolio Characteristics
. General portfolio characteristics of the Fund,
including, but not limited to, total number of stocks held by the Fund, average market capitalization and return on equity.
Other data regarding a Fund’s portfolio may also be distributed prior to public dissemination of the Fund’s portfolio holdings, provided that (a) such data does not identify any specific
portfolio holding and (b) the Fund’s specific portfolio holdings cannot be derived from such data. Examples of permitted data include, but are not limited to, total net assets, number of holdings, market capitalization, P/E ratio, R
2
and beta.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As discussed in the Prospectus, the Adviser is responsible for decisions to buy and sell securities for each respective Portfolio,
selection of broker-dealers and negotiation of commission rates. Purchases and sales of securities on a securities exchange are effected through broker-dealers who charge a negotiated commission for their services. Orders may be directed to any
broker-dealer including, to the extent and in the manner permitted by applicable law, an affiliated brokerage subsidiary of SunAmerica or another Adviser.
Also, subject to best price and execution and consistent with applicable securities laws and regulations, the Board may instruct an Adviser to direct brokerage to certain broker-dealers under an agreement
whereby these broker-dealers would pay designated Portfolio expenses, including, for example, custody expenses. The brokerage of one Portfolio will not be used to help pay the expenses of any other SunAmerica mutual fund. SunAmerica will continue to
waive its fees or reimburse expenses for any Portfolio for which it has agreed to do so. All expenses paid through expense offset arrangements resulting in broker commission recapture will be over and above such waivers and/or reimbursements, so
that SunAmerica will not receive any direct or indirect economic benefit from the directed brokerage arrangements. By entering into these types of expense offset arrangements, a Portfolio can reduce expenses reported to shareholders in its statement
of operations, fee table and expense ratio, and can increase its reported yield.
In the over-the-counter market, securities
are generally traded on a “net” basis with dealers acting as principal for their own accounts without a stated commission (although the price of the security usually includes a profit to the dealer). In underwritten offerings, securities
are purchased at a fixed price, which includes an amount of compensation to the
B-56
underwriter, generally referred to as the underwriter’s concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
The Adviser’s primary consideration in effecting a security transaction is to obtain
the best net price and the most favorable execution of the order. However, the Adviser may select broker-dealers that provide it with research services–analyses and reports concerning issuers, industries, securities, economic factors and
trends–and may cause a Portfolio to pay such broker-dealers commissions that exceed those that other broker-dealers may have charged, if in its view the commissions are reasonable in relation to the value of the brokerage and/or research
services provided by the broker-dealer. The research services consist of assessments and analysis of the business or prospects of a company, industry or economic sector. Certain research services furnished by brokers may be useful to the Adviser
with respect to clients other than the Fund and not all of these services may be used by the Adviser in connection with the Fund. No specific value can be determined for research services furnished without cost to the Adviser by a broker. The
Adviser is of the opinion that because the material must be analyzed and reviewed by its staff, its receipt does not tend to reduce expenses, but may be beneficial in supplementing the Adviser’s research and analysis. Therefore, it may tend to
benefit the Portfolio by improving the quality of the Adviser’s investment advice. The investment advisory fees paid by the Portfolio are not reduced because the Adviser receives such services. When making purchases of underwritten issues with
fixed underwriting fees, the Adviser may designate the use of broker-dealers who have agreed to provide the Adviser with certain statistical, research and other information.
A directed brokerage agreement includes those arrangements under which products or services (other than execution of securities transactions), expense reimbursements, or commissions are recaptured for a
client from or through a broker-dealer, in exchange for directing the client’s brokerage transactions to that broker-dealer. The Board has determined that certain directed brokerage arrangements are in the best interest of each Portfolio and
its shareholders and, therefore, has conveyed the information to the Aadviser. A Portfolio may participate in directed brokerage agreements, provided the portfolio manager can still obtain the best price and execution for trades. Thus, a Portfolio
may benefit from the products or services or recaptured commissions obtained through the directed brokerage arrangement, although there may be other transaction costs, greater spreads, or less favorable net prices on transactions. As long as the
trader executing the transaction for a Portfolio indicates that this is a directed brokerage transactions, the Portfolio will get a percentage of commissions paid on either domestic trades or international trades credited back to the Portfolio.
These credits are in hard dollars and could be used to offset the Portfolio’s custody expenses or to pay other Portfolio expenses (excluding expenses payable to affiliates). By entering into a directed brokerage arrangement, a Portfolio can
reduce expenses reported to shareholders in its statement or operations, fee table and expense ratio and can increate its reported yield. To the extent SunAmerica or any “affiliated person”, as that term is defined by the 1940 Act
(collectively, “Fund Affiliate”), has agreed to waive or reimburse any amounts otherwise payable to them by a Portfolio or reimburse the Portfolio’s expenses (collectively “Expense Waivers”), any amount of commissions used
to pay operating expenses of a Portfolio shall not reduce amounts of expenses borne by SunAmerica or its affiliate under such Expense Waivers, but shall instead be used solely to reduce expenses borne to the Portfolio to a lower level than the
Portfolio would have borne after giving full effect to the Expense Waivers.
Although the objectives of other accounts or
investment companies that the Adviser manages may differ from those of the Portfolio, it is possible that, at times, identical securities will be acceptable for purchase by one or more of the Portfolios and one or more other accounts or investment
companies that the Adviser manages. However, the position of each account or company in the securities of the same issue may vary with the length of the time that each account or company may choose to hold its investment in those securities. The
timing and amount of purchase by each account and company will also be determined by its cash position. If the purchase or sale of a security is consistent with the investment policies of one or more of the Portfolios and one or more of these other
accounts or companies is considered at or about the same time, transactions in such securities will be allocated in a manner deemed equitable by the Adviser. The Adviser may combine such transactions, in accordance with applicable laws and
regulations, where the size of the transaction would enable it to negotiate a better price or reduced commission. However, simultaneous transactions could adversely affect the ability of a Portfolio to obtain or dispose of the full amount of a
security, which it seeks to purchase or sell, or the price at which such security can be purchased or sold.
The following
tables set forth the brokerage commissions paid by the Portfolios and the amounts of the brokerage commissions paid to affiliated broker-dealers by the Portfolios for the fiscal years ended October 31, 2012, 2011 and 2010.
B-57
BROKERAGE COMMISSIONS
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Brokerage
Commissions
|
|
|
Amount Paid to
Affiliated Broker-
Dealers
|
|
Percentage of
Commissions Paid to
Affiliated
Broker-
Dealers
|
|
Percentage of Amount of
Transactions Involving Payment of
Commissions to Affiliated Broker-Dealers
|
|
Large-Cap Growth Portfolio
|
|
$
|
1,345,412
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Growth Portfolio
|
|
$
|
928,855
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Value Portfolio
|
|
$
|
1,425,116
|
|
|
—
|
|
—
|
|
—
|
|
Dividend Strategy Portfolio
|
|
$
|
858,032
|
|
|
—
|
|
—
|
|
—
|
|
Strategic Value Portfolio
|
|
$
|
70,136
|
|
|
—
|
|
—
|
|
—
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Brokerage
Commissions
|
|
|
Amount Paid to
Affiliated Broker-
Dealers
|
|
Percentage of
Commissions Paid
to
Affiliated
Broker-Dealers
|
|
Percentage of Amount of
Transactions Involving Payment of
Commissions toAffiliated Broker-Dealers
|
|
Large-Cap Growth Portfolio
|
|
$
|
1,484,784
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Growth Portfolio
|
|
$
|
1,071,523
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Value Portfolio
|
|
$
|
1,792,498
|
|
|
—
|
|
—
|
|
—
|
|
Dividend Strategy Portfolio
|
|
$
|
801,961
|
|
|
—
|
|
—
|
|
—
|
|
Strategic Value Portfolio
|
|
$
|
200,452
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
Brokerage
Commissions
|
|
|
Amount Paid to
Affiliated Broker-
Dealers
|
|
Percentage of
Commissions Paid
to
Affiliated
Broker-Dealers
|
|
Percentage of Amount of
Transactions Involving Payment of
Commissions to Affiliated Broker-Dealers
|
|
Large-Cap Growth Portfolio
|
|
$
|
956,120
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Growth Portfolio
|
|
$
|
2,269,866
|
|
|
—
|
|
—
|
|
—
|
|
Small-Cap Value Portfolio
|
|
$
|
2,045,706
|
|
|
—
|
|
—
|
|
—
|
|
Dividend Strategy Portfolio
|
|
$
|
401,531
|
|
|
—
|
|
—
|
|
—
|
|
Strategic Value Portfolio
|
|
$
|
141,364
|
|
|
—
|
|
—
|
|
—
|
ADDITIONAL INFORMATION REGARDING PURCHASE OF SHARES
Information regarding the purchase of shares is located in the Shareholder Account Information section of the Portfolios’ Prospectus
and is hereby incorporated by reference.
Upon making an investment in shares of a Portfolio, an open account
will be established under which shares of such Portfolio and additional shares acquired through reinvestment of dividends and distributions will be held for each shareholder’s account by the Transfer Agent. Shareholders will not be issued
certificates. Shareholders receive regular statements from the Transfer Agent that report each transaction affecting their accounts. Further information may be obtained by calling Shareholder/Dealer Services at 800-858-8850.
Shareholders who have met the Portfolio’s minimum initial investment may elect to have periodic purchases made through a dollar cost
averaging program. Dollar cost averaging does not assure a profit or protect against loss in a declining market. Since this strategy involves continuous investments, regardless of fluctuating prices, investors should consider their financial ability
to invest during periods of low price levels. At the shareholder’s election, such purchases may be made from his or her bank checking or savings account on a monthly, quarterly, semi-annual or annual basis.
Shares of each of the Portfolios are sold at the respective net asset value next determined after receipt of a purchase order, plus a
sales charge, which, at the election of the investor may be imposed: (i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B and Class C and certain Class A shares). Class II shares, now designated as Class C
shares, had elements of a sales charge that was imposed at the time of purchase and that is deferred prior to their redesignation. Class I, Class W and Class Z shares are not subject to any sales charges. Reference is made to “Shareholder
Account Information” in the Prospectus for certain information as to the purchase of Portfolio shares.
B-58
The following tables set forth the front-end sales charges with respect to Class A
shares of each Portfolio, the amount of the front-end sales concessions that was reallowed to affiliated broker-dealers, and the contingent deferred sales charges with respect to Class B and Class C shares of each Portfolio, received by the
Distributor for the fiscal years ended October 31, 2012, 2011 and 2010.
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
Front-End
Sales
Concessions
Class A
Shares
|
|
|
Amount
Reallowed
to Affiliated
Broker-Dealers
Class A Shares
|
|
|
Amount
Reallowed to
Non-Affiliated
Broker
Dealers Class
A Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class A
Shares
|
|
|
Contingent
Deferred
Sales
Charge-
Class B
Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class C
Shares
|
|
|
Large-Cap Growth Portfolio
|
|
$
|
86,688
|
|
|
$
|
35,117
|
|
|
$
|
38,652
|
|
|
$
|
185
|
|
|
$
|
21,748
|
|
|
$
|
1,780
|
|
|
Small-Cap Growth
|
|
$
|
41,623
|
|
|
$
|
15,038
|
|
|
$
|
20,531
|
|
|
|
—
|
|
|
$
|
8,737
|
|
|
$
|
625
|
|
|
Small-Cap Value Portfolio
|
|
$
|
46,921
|
|
|
$
|
19,444
|
|
|
$
|
20,578
|
|
|
$
|
8
|
|
|
$
|
12,181
|
|
|
$
|
2,669
|
|
|
Dividend Strategy Portfolio
|
|
$
|
7,361,728
|
|
|
$
|
438,735
|
|
|
$
|
5,856,167
|
|
|
$
|
14,379
|
|
|
$
|
174,906
|
|
|
$
|
120,671
|
|
|
Strategic Value Portfolio
|
|
$
|
51,790
|
|
|
$
|
22,199
|
|
|
$
|
22,116
|
|
|
|
—
|
|
|
$
|
10,549
|
|
|
$
|
2,236
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
Front-End
Sales
Concessions
Class A
Shares
|
|
|
Amount
Reallowed
to Affiliated
Broker-Dealers
Class A Shares
|
|
|
Amount
Reallowed
to
Non-Affiliated
Broker
Dealers Class
A
Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class A
Shares
|
|
|
Contingent
Deferred
Sales
Charge-
Class B
Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class C
Shares
|
|
|
Large-Cap Growth Portfolio
|
|
$
|
90,254
|
|
|
$
|
39,543
|
|
|
$
|
38,570
|
|
|
$
|
443
|
|
|
$
|
29,994
|
|
|
$
|
1,596
|
|
|
Small-Cap Growth
|
|
$
|
79,054
|
|
|
$
|
20,294
|
|
|
$
|
46,621
|
|
|
$
|
19,700
|
|
|
$
|
14,511
|
|
|
$
|
1,237
|
|
|
Small-Cap Value Portfolio
|
|
$
|
194,861
|
|
|
$
|
41,653
|
|
|
$
|
125,543
|
|
|
$
|
19,701
|
|
|
$
|
11,419
|
|
|
$
|
5,146
|
|
|
Dividend Strategy Portfolio
|
|
$
|
2,040,227
|
|
|
$
|
131,696
|
|
|
$
|
1,610,896
|
|
|
$
|
3,216
|
|
|
$
|
76,116
|
|
|
$
|
51,106
|
|
|
Strategic Value Portfolio
|
|
$
|
67,349
|
|
|
$
|
24,340
|
|
|
$
|
33,388
|
|
|
$
|
10
|
|
|
$
|
28,799
|
|
|
$
|
1,225
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
|
|
Front-End
Sales
Concessions
Class A
Shares
|
|
|
Amount
Reallowed
to
Affiliated
Broker-Dealers
Class A Shares
|
|
|
Amount
Reallowed to
Non-Affiliated
Broker
Dealers Class
A Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class A
Shares
|
|
|
Contingent
Deferred
Sales
Charge-
Class B
Shares
|
|
|
Contingent
Deferred
Sales
Charge
Class C
Shares
|
|
|
Large-Cap Growth Portfolio
|
|
$
|
110,925
|
|
|
$
|
45,765
|
|
|
$
|
45,849
|
|
|
|
—
|
|
|
$
|
42,475
|
|
|
$
|
3,260
|
|
|
Small-Cap Growth
|
|
$
|
66,157
|
|
|
$
|
21,834
|
|
|
$
|
34,922
|
|
|
|
—
|
|
|
$
|
22,992
|
|
|
$
|
1,102
|
|
|
Small-Cap Value Portfolio
|
|
$
|
49,691
|
|
|
$
|
19,608
|
|
|
$
|
22,698
|
|
|
|
—
|
|
|
$
|
11,245
|
|
|
$
|
1,227
|
|
|
Dividend Strategy Portfolio
|
|
$
|
1,019,794
|
|
|
$
|
61,348
|
|
|
$
|
816,695
|
|
|
|
—
|
|
|
$
|
27,858
|
|
|
$
|
9,327
|
|
|
Strategic Value Portfolio
|
|
$
|
110,319
|
|
|
$
|
46,955
|
|
|
$
|
47,998
|
|
|
$
|
244
|
|
|
$
|
33,174
|
|
|
$
|
2,464
|
|
CDSCs Applicable to Shareholders who Acquired Shares of a Portfolio through a Reorganization.
For Class B and
Class C shares of a Portfolio issued to shareholders in connection with the reorganization of a North American Fund into a Portfolio, the CDSC schedule applicable at the time the shareholder originally purchased the shares will continue to apply
(even if the shareholder exchanges such shares for another fund distributed by SACS). Upon a redemption of these shares, the shareholder will receive credit for the period prior to the reorganization during which the shares were held. The following
table sets forth the rates of the CDSC applicable to these shares:
CLASS B
|
|
|
|
|
|
|
Years after purchase
|
|
CDSC on shares being sold
|
|
|
Up to 2 years
|
|
|
5.00
|
%
|
|
2 years or more but less than 3 years
|
|
|
4.00
|
%
|
|
3 years or more but less than 4 years
|
|
|
3.00
|
%
|
|
4 years or more but less than 5 years
|
|
|
2.00
|
%
|
|
5 years or more but less than 6 years
|
|
|
1.00
|
%
|
|
6 or more years
|
|
|
None
|
|
B-59
CLASS C
|
|
|
|
|
|
|
Years after purchase
|
|
CDSC on shares being sold
|
|
|
Up to 1 year
|
|
|
1.00
|
%
|
|
1 year or more
|
|
|
None
|
|
Waiver of CDSCs.
As discussed under “Shareholder Account Information” in the Prospectus, CDSCs may be
waived on redemptions of Class B and Class C shares under certain circumstances. The conditions set forth below are applicable with respect to the following situations with the proper documentation:
Death
.
CDSCs may be waived on redemptions within one year following the death (i) of the sole shareholder on an
individual account or (ii) of a joint tenant where the surviving joint tenant is the deceased’s spouse. If, upon the occurrence of one of the foregoing, the account is transferred to an account registered in the name of the deceased’s
estate, the CDSC will be waived on any redemption from the estate account occurring within one year of the death. If Class B shares are not redeemed within one year of the death, they will remain Class B shares and be subject to the applicable CDSC,
when redeemed.
Disability.
CDSCs may be waived on redemptions occurring within one year after the sole shareholder on
an individual account or a joint tenant on a spousal joint tenant account becomes disabled (as defined in Section 72(m)(7) of the Code). To be eligible for such waiver: (i) the disability must arise after the purchase of shares; and
(ii) the disabled shareholder must have been under age 65 at the time of the initial determination of disability. If the account is transferred to a new registration and then a redemption is requested, the applicable CDSC will be charged.
Distributions
.
CDSCs may be waived on taxable distributions or loans to participants of
qualified retirement plans or retirement accounts (not including rollovers) for which SunAmerica Fund Services, Inc. serves as a fiduciary and in which the plan participant or account holder has attained the age of 59
1
/
2
at the time the redemption is made
Systematic Withdrawal Plan.
CDSCs may be waived when routine bill payment or periodic withdrawals are made from an investor’s account up to a maximum amount of 12% per year based on the value of the account at the time the Plan is established. All dividends and
capital gains distributions must be reinvested.
Purchases through the Distributor
An investor may purchase shares of a Fund through dealers which have entered into selected dealer agreements with the Distributor. An
investor’s dealer who has entered into a distribution arrangement with the Distributor is expected to forward purchase orders and payment promptly to the Fund. Orders received by the Distributor before the close of business will be executed at
the offering price determined at the close of regular trading on the New York Stock Exchange (“NYSE”) that day. Orders received by the Distributor after the close of business will be executed at the offering price determined at the close
of the NYSE on the next trading day. The Distributor reserves the right to cancel any purchase order for which payment has not been received by the fifth business day following the investment. A Fund will not be responsible for delays caused by
dealers.
Purchase by Check
Checks should be made payable to the specific Portfolio or payable to SunAmerica Mutual Funds. A personal check for an investor should be drawn from the investor’s bank account. In general, starter
checks, cash equivalents, stale-dated or post-dated checks will not be accepted. In the case of a new account, purchase orders by check must be submitted directly by mail to SunAmerica Fund Services, Inc., c/o BFDS, P.O. Box 219186, Kansas City,
Missouri 64121-9186, together with payment for the purchase price of such shares and a completed New Account Application. Payment for subsequent purchases should be mailed to SunAmerica Fund Services, Inc., c/o BFDS, P.O. Box 219186, Kansas City,
Missouri 64121-9186 and the shareholder’s account number should appear on the check. Certified checks are not necessary but checks are accepted subject to collection at full face value in United States funds and must be drawn on a bank located
in the United States. Upon receipt of the completed New Account Application and payment check, the Transfer Agent will purchase full and fractional shares of a Portfolio at the net asset value next computed after the check is received. There are
restrictions on the redemption of shares purchased by check for which funds are being collected. (See “Shareholder Account Information” in the Prospectus.)
Purchase by Federal Funds Wire
An investor may make purchases by
having his or her bank wire federal funds to the Fund’s Transfer Agent. Federal funds purchase orders will be accepted only on a day on which the Portfolio and the Transfer Agent are open for business.
B-60
Orders for purchase of shares received by wire transfer in the form of federal funds will be effected at the
next-determined net asset value if received at or prior to a Portfolio’s close of business, plus any applicable sales charge. In order to insure prompt receipt of a Federal funds wire, it is important that these steps be followed:
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1.
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You must have an existing SunAmerica Mutual Fund Account before wiring funds. To establish an account, complete the New Account Application and send it via facsimile to
SAFS at: 816-218-0519.
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2.
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Call SAFS’ Shareholder Services, toll free at 800-858-8850, to obtain your new account number.
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3.
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Instruct the bank to wire the specified amount to the Transfer Agent: State Street Bank and Trust Company, Boston, MA, ABA# 0 110-00028; DDA# 99029712, SunAmerica [name
of Portfolio, Class] (include shareholder name and account number).
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Waiver of Sales Charges with Respect to Certain
Purchases of Class A Shares.
To the extent that sales are made for personal investment purposes, the sales charge is waived as to Class A shares purchased by current or retired officers, directors, and other full-time employees of the
Adviser and its affiliates, as well as members of the selling group and family members of the foregoing. In addition, the sales charge is waived with respect to shares purchased by employer sponsored retirement plans, whether or not subject to the
Employee Retirement Income Security Act of 1974, as amended, that offer the Portfolios as an investment vehicle, where the trustee, fiduciary or administrator has entered into an agreement with the Distributor, a Portfolio or its agents with respect
to such purchases, and where the trustee, fiduciary or administrator performs participant recordkeeping or other administrative services. Further, the sales charge is waived with respect to shares purchased by “wrap accounts” for the
benefit of clients of broker-dealers, financial institutions, financial planners or registered investment advisers adhering to the following standards established by the Distributor: (i) the broker-dealer, financial institution or financial
planner charges its client(s) an advisory fee based on the assets under management on an annual basis, and (ii) such broker-dealer, financial institution or financial planner does not advertise that shares of the Portfolios may be purchased by
clients at net asset value. Shares purchased under this waiver may not be resold except to the Portfolio. As described under “Shareholder Account Information” in the Prospectus, Class W shares may be held solely through advisory fee-based
programs sponsored by certain financial intermediaries, such as brokerage firms, investment advisers, financial planners, third-party administrators, insurance companies, and any other institutions having a selling, administration or any similar
agreement with a Portfolio. Shares are offered at net asset value to the foregoing persons because of anticipated economies in sales effort and sales related expenses. Reductions in sales charges apply to purchases of shares by a “single
person” including an individual; members of a family unit comprising husband, wife and minor children; or a trustee or other fiduciary purchasing for a single fiduciary account. Complete details concerning how an investor may purchase shares at
reduced sales charges may be obtained by contacting the Distributor.
Reduced Sales Charges (Class A Shares only).
As discussed
under “Shareholder Account Information” in the Prospectus, investors in Class A shares of a Portfolio may be entitled to reduced sales charges pursuant to the following special purchase plans made available by the Fund.
Combined Purchase Privilege.
The following persons may qualify for the sales charge reductions or eliminations by combining purchases of
Portfolio shares into a single transaction:
(i) an individual, or a “company” as defined in
Section 2(a)(8) of the 1940 Act (which includes corporations that are corporate affiliates of each other);
(ii) an individual, his or her spouse and their minor children, purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust estate or single fiduciary account (including a pension,
profit-sharing, or other employee benefit trust created pursuant to a plan qualified under Section 401 of the Code);
(iv) tax-exempt organizations qualifying under Section 501(c)(3) of the Code (not including 403(b) plans);
(v) employee benefit plans of a single employer or of affiliated employers, other than 403(b) plans; and
(vi) group purchases as described below.
A combined purchase currently may also
include shares of other funds in the SAMF (other than money market funds) purchased at the same time through a single investment dealer, if the dealer places the order for such shares directly with the Distributor.
B-61
Rights of Accumulation
.
A purchaser of Portfolio shares may qualify for a reduced sales charge
by combining a current purchase (or combined purchases as described above) with shares previously purchased and still owned; provided the cumulative value of such shares (valued current net asset value), amounts to $50,000 or more. In determining
the shares previously purchased, the calculation will include, in addition to other Class A shares of the particular Portfolio that were previously purchased, shares of the other classes of the same Portfolio, as well as shares of any class of
any other Portfolio or of any of the other Portfolios advised by the Adviser, as long as such shares were sold with a sales charge or acquired in exchange for shares purchased with such a sales charge.
The shareholder’s dealer, if any, or the shareholder, must notify the Distributor at the time an order is placed of the
applicability of the reduced charge under the Right of Accumulation. Such notification must be in writing by the dealer or shareholder when such an order is placed by mail. The reduced sales charge will not be granted if: (a) such information
is not furnished at the time of the order; or (b) a review of the Distributor’s or the Transfer Agent’s records fails to confirm the investor’s represented holdings.
Letter of Intent
. A reduction of sales charges is also available to an investor who, pursuant to a written Letter of Intent
which is set forth in the New Account Application, establishes a total investment goal in Class A shares of one or more Portfolios or of other funds advised by the Adviser which impose a sales charge at the time of purchase to be achieved
through any number of investments over a thirteen-month period of $50,000 or more. Each investment in such Portfolios made during the period will be subject to a reduced sales charge applicable to the goal amount. The initial purchase must be at
least 5% of the stated investment goal and shares totaling 5% of the dollar amount of the Letter of Intent will be held in escrow by the Transfer Agent, in the name of the investor. Shares of any class of shares of any Fund, or of other Funds
advised by SunAmerica, that impose a sales charge at the time of purchase, which the investor intends to purchase or has previously purchased during a 30-day period prior to the date of execution of the Letter of Intent and still owns, may also be
included in determining the applicable reduction, provided, the dealer or shareholder notifies the Distributor of such prior purchase(s).
The Letter of Intent does not obligate the investor to purchase, nor the Fund to sell, the indicated amounts of the investment goal. In the event the investment goal is not achieved within the
thirteen-month period, the investor is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if
not paid, the Distributor is authorized by the Letter of Intent to liquidate a sufficient number of escrowed shares to obtain such difference. If the goal is exceeded and purchases pass the next sales charge break-point, the sales charge on the
entire amount of the purchase that results in passing that break-point, and on subsequent purchases, will be subject to a further reduced sales charge in the same manner as set forth above under “Rights of Accumulation,” but there will be
no retroactive reduction of sales charges on previous purchases. At any time while a Letter of Intent is in effect, a shareholder may, by written notice to the Distributor, increase the amount of the stated goal. In that event, shares of the
applicable Portfolios purchased after the date that the original Letter of Intent went into effect and during the previous 30-day period and still owned by the shareholder will be included in determining the applicable sales charge. The 5% escrow
and the minimum purchase requirement will be applicable to the new stated goal. Investors electing to purchase shares of one or more of the Portfolios pursuant to this purchase plan should carefully read such Letter of Intent.
Reduced Sales Charge for Group Purchases
. Members of qualified groups may purchase Class A shares of the Portfolios under the combined
purchase privilege as described above.
To receive a rate based on combined purchases, group members must purchase
Class A shares of a Portfolio through a single investment dealer designated by the group. The designated dealer must transmit each member’s initial purchase to the Distributor, together with payment and completed New Account Application.
After the initial purchase, a member may send funds for the purchase of Class A shares directly to the Transfer Agent. Purchases of a Portfolio’s shares are made at the public offering price based on the net asset value next determined
after the Distributor or the Transfer Agent receives payment for the Class A shares. The minimum investment requirements described above apply to purchases by any group member. Class B or Class C shares are not included in calculating the
purchased amount of a Fund’s shares.
Qualified groups include the employees of a corporation or a sole proprietorship,
members and employees of a partnership or association, or other organized groups of persons (the members of which may include other qualified groups) provided that: (i) the group has at least 25 members of which at least ten members participate
in the initial purchase; (ii) the group has been in existence for at least six months; (iii) the group has some purpose in addition to the purchase of investment company shares at a reduced sales charge; (iv) the group’s sole
organizational nexus or connection is not that the members are credit card customers of a bank or broker-dealer, clients of an investment adviser or security holders of a company; (v) the group agrees to provide its designated investment dealer
access to the group’s membership by means of written communication or direct presentation to the membership at a meeting on not less frequently than on an annual basis; (vi) the
B-62
group or its investment dealer will provide annual certification, in form satisfactory to the Transfer Agent, that the group then has at least 25 members and that at least ten members
participated in group purchases during the immediately preceding 12 calendar months; and (vii) the group or its investment dealer will provide periodic certification, in form satisfactory to the Transfer Agent, as to the eligibility of the
purchasing members of the group.
Members of a qualified group include: (i) any group that meets the requirements stated
above and is a constituent member of a qualified group; (ii) any individual purchasing for his or her own account who is carried on the records of the group or on the records of any constituent member of the group as being a good standing
employee, partner, member or person of like status of the group or constituent member; or (iii) any fiduciary purchasing shares for the account of a member of a qualified group or a member’s beneficiary. For example, a qualified group
could consist of a trade association that would have as its members individuals, sole proprietors, partnerships and corporations. The members of the group would then consist of the individuals, the sole proprietors and their employees, the members
of the partnership and their employees, and the corporations and their employees, as well as the trustees of employee benefit trusts acquiring a Portfolio’s shares for the benefit of any of the foregoing.
Interested groups should contact their investment dealer or the Distributor. The Fund reserves the right to revise the terms of or to
suspend or discontinue group sales with respect to shares of the Portfolio at any time.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
Reference is made to “Shareholder Account Information” in the Prospectus for certain information as to the redemption of
Portfolio shares.
If the Directors determine that it would be detrimental to the best interests of the remaining shareholders
of a Portfolio to make payment wholly or partly in cash, the Fund, having filed with the SEC a notification of election pursuant to Rule 18f-1 on behalf of each of the Portfolios (other than Dividend Strategy Portfolio), may pay the redemption price
in whole, or in part, by a distribution in kind of securities from a Portfolio in lieu of cash. In conformity with applicable rules of the SEC, the Portfolios are committed to pay in cash all requests for redemption, by any shareholder of record,
limited in amount with respect to each shareholder during any 90-day period to the lesser of: (i) $250,000; or (ii) 1% of the net asset value of the applicable Portfolio at the beginning of such period. If shares are redeemed in kind, the
redeeming shareholder would incur brokerage costs in converting the assets into cash. The method of valuing portfolio securities is described below in the section entitled “Determination of Net Asset Value,” and such valuation will be made
as of the same time the redemption price is determined.
The Distributor is authorized, as agent for the Portfolios, to offer
to repurchase shares that are presented by telephone to the Distributor by investment dealers. Orders received by dealers must be at least $500. The repurchase price is the net asset value per share of the applicable class of shares of a Portfolio
next-determined after the repurchase order is received, less any applicable CDSC. Repurchase orders received by the Distributor after the Portfolio’s close of business will be priced based on the next business day’s close. Dealers may
charge for their services in connection with the repurchase, but neither the Portfolios nor the Distributor imposes any such charge. The offer to repurchase may be suspended at any time.
EXCHANGE PRIVILEGE
Shareholders in the Portfolios may exchange their shares for the same class of shares of any other Portfolio or other funds distributed by the Distributor that offer such class at the respective net asset
value per share.
Before making an exchange, a shareholder should obtain and review the prospectus of the fund whose shares
are being acquired. All exchanges are subject to applicable minimum initial or subsequent investment requirements. Notwithstanding the foregoing, shareholders may elect to make periodic exchanges on a monthly, quarterly, semi-annual and annual basis
through the Systematic Exchange Program. The Portfolios reserve the right to reject exchange requests made through this program that are less than $50. All exchanges can be effected only if the shares to be acquired are qualified for sale in the
state in which the shareholder resides. Exchanges of shares generally will constitute a taxable transaction except for IRAs, Keogh Plans and other qualified or tax-exempt accounts. The exchange privilege may be terminated or modified upon 60
days’ written notice. Further information about the exchange privilege may be obtained by calling Shareholder/Dealer Services at 800-858-8850.
If a shareholder acquires Class A shares through an exchange from another SAMF where the original purchase of such fund’s Class A shares was not subject to an initial sales charge because
the purchase was in excess of $1 million, such shareholder will remain subject to the CDSC, if any, as described in the Prospectus, applicable to such redemptions. In such event, the period for which the original shares were held prior to the
exchange will be “tacked” with the holding period of the shares acquired in the exchange for purposes of determining whether the CDSC is applicable upon a redemption of any of such shares.
B-63
A shareholder who acquires Class B or Class C shares through an exchange from another SAMF
will retain liability for any CDSC outstanding on the date of the exchange. In such event, the period for which the original shares were held prior to the exchange will be ‘tacked’ with the holding period of the shares acquired in the
exchange for purposes of determining what, if any, CDSC is applicable upon a redemption of any of such shares and the timing of conversion of Class B shares to Class A.
Because excessive trading (including short-term ‘market timing’ trading) can hurt a Portfolio’s performance, each Portfolio may refuse any exchange sell order: (1) if it appears to be
a market timing transaction involving a significant portion of a Portfolio’s assets; or (2) from any shareholder account if previous use of the exchange privilege is considered excessive. Accounts under common ownership or control,
including, but not limited to, those with the same taxpayer identification number and those administered so as to redeem or purchase shares based upon certain predetermined market indications, will be considered one account for this purpose.
In addition, a Portfolio reserves the right to refuse any exchange purchase order if, in the judgment of the Adviser, the
Portfolio would be unable to invest effectively in accordance with its investment objective and policies, or would otherwise potentially be adversely affected. A shareholder’s purchase exchange may be restricted or refused if the Portfolio
receives or anticipates simultaneous orders affecting significant portions of the Portfolio’s assets. In particular, a pattern of excessive exchanges that coincide with a ‘market timing’ strategy may be disruptive to the Portfolio and
may therefore be refused.
Exchanging between Share Classes of the same Portfolio (other than the Dividend Strategy Portfolio)
In connection with advisory fee-based investment programs (“Programs”) sponsored by certain Financial
Institutions, and subject to the conditions set forth below, shareholders may exchange their Class C shares of a Portfolio (other than the Dividend Strategy Portfolio) into Class A shares of the same Portfolio. These transactions will be
processed as an exchange of the shares you currently hold for shares in the new class. Shareholders exchanging into the new class must meet the eligibility requirements for such class, as described in the Prospectus.
These exchanges are generally only available for shareholders who hold shares through accounts with Financial Institutions and who are
entering a Program with such Financial Institution. Please contact your Financial Institution for additional information concerning these types of exchanges, including whether they are available for your account.
Exchanging Class C shares for Class A shares -
Shareholders that are part of a Program may exchange their Class C shares of a
Portfolio (other than the Dividend Strategy Portfolio) held at the Financial Institution sponsoring the Program for Class A shares of the same Portfolio to be held in the Program. Only Class C shares that are no longer subject to a CDSC
(
i.e.,
that are held longer than twelve months) are eligible for exchange to Class A shares.
Exchanging between Share Classes
of the Dividend Strategy Portfolio
In connection with advisory fee-based programs (“Programs”) sponsored by
certain Financial Institutions, and subject to the conditions set forth below, shareholders may exchange their shares of one share class of the Dividend Strategy Portfolio for shares of another share class of the Dividend Strategy Portfolio. These
transactions will be processed as an exchange of the shares you currently hold for shares in the new class. Shareholders exchanging into a new class must meet the eligibility requirements for such class, as described in the Prospectus.
These exchanges are generally only available for shareholders who hold shares through accounts with Financial Institutions and who are
entering or leaving a Program with such Financial Institution. Please contact your Financial Institution for additional information concerning these types of exchanges, including whether they are available for your account.
Exchanging Class A shares for Class W shares
– Shareholders that are part of a Program may exchange their Class A
shares of the Dividend Strategy Portfolio held at the Financial Institution sponsoring the Program for Class W shares of the Dividend Strategy Portfolio to be held in the Program. Please note that any Class A sales charges that you paid for
these shares (including contingent deferred sales charges) will not be credited back to your account.
Exchanging Class C
shares for Class W shares -
Shareholders that are part of a Program may exchange their Class C shares of the Dividend Strategy Portfolio held at the Financial Institution sponsoring the Program for Class W shares of the Dividend Strategy
Portfolio to be held in the Program. Only Class C shares that are no longer subject to a CDSC (
i.e.,
that are held longer than twelve months) are eligible for exchange to Class W shares.
B-64
Exchanging Class W shares for Class A shares -
Shareholders may exchange
Class W shares of the Dividend Strategy Portfolio held through a Program for Class A shares of the Dividend Strategy Portfolio without paying an initial Class A sales charge if the shareholder is leaving or has left the Program and
provided that the Class A shares received in the exchange will be held at the same Financial Institution that sponsored the Program.
Shareholders should note that the Class A shares of the Dividend Strategy Portfolio are subject to a
12b-1 fee and have higher annual operating expenses than the Class W shares of the Dividend Strategy Portfolio.
An exchange of shares you currently hold in one class of a Portfolio for shares in another class of the same Portfolio will generally not
constitute a taxable transaction for federal income tax purposes. Shareholders should, however, consult with their tax adviser regarding the state and local tax consequences of this type of an exchange of shares.
Portfolios may change or cancel the exchange privilege at any time, upon 60 days’ written notice to its shareholders. The Portfolios
at all times also reserve the right to restrict, or reject any exchange transactions, for any reason, without notice.
DETERMINATION OF NET ASSET VALUE
Shares of each class of each Portfolio are valued at least daily as of the close of
regular trading on the NYSE (generally, 4:00 p.m. Eastern Time). Each Portfolio calculates the net asset value of its shares by dividing the total value of its net assets by the number of shares outstanding. The days and times of such computation
may, in the future, be changed by the Directors in the event that the portfolio securities are traded in significant amounts in markets other than the NYSE, or on days or at times other than those during which the NYSE is open for trading.
Stocks are generally valued based upon closing sales prices reported on recognized securities exchanges on which the
securities are principally traded. Stocks listed on the NASDAQ are valued using the NASDAQ Official Closing Price (“NOCP”). Generally, the NOCP will be the last sale price unless the reported trade for the stock is outside the range of the
bid/ask price. In such cases, the NOCP will be normalized to the nearer of the bid or ask price. For listed securities having no sales reported and for unlisted securities, such securities will be valued based upon the last reported bid price.
As of the close of regular trading on the NYSE, securities traded primarily on security exchanges outside the United States
are valued at the last sale price on such exchanges on the day of valuation, or if there is no sale on the day of valuation, at the last-reported bid price. If a security’s price is available from more than one exchange, a portfolio uses the
exchange that is the primary market for the security. However, depending on the foreign market, closing prices may be up to 15 hours old when they are used to price a Portfolio’s shares, and a Portfolio may determine that certain closing prices
do not reflect the fair value of the security. This determination will be based on review of a number of factors, including developments in foreign markets, the performance of U. S. securities markets, and the performance of instruments trading in
U. S. markets that represent foreign securities and baskets of foreign securities. If the Portfolio determines that closing prices do not reflect the fair value of the securities, the Portfolio will adjust the previous closing prices in accordance
with pricing procedures approved by the Board to reflect what it believes to be the fair value of the securities as of the close of regular trading on the NYSE. The Portfolio may also fair value securities in other situations, for example, when a
particular foreign market is closed but the Portfolio is open. For foreign equity securities and foreign equity futures contracts, the Portfolios use an outside pricing service to provide closing market prices and information used for adjusting
those prices.
Bonds and debentures, other long-term debt securities, and short-term debt securities with maturities in excess
of 60 days, are valued at bid prices obtained for the day of valuation from a bond pricing service, when such prices are available. The pricing services may use valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by reference to other securities that are considered comparable in such characteristics as rating, interest rate, and maturity date, option adjusted spreads models, prepayments
projections, interest rate spreads, and yield curves to determine current value. If a vendor quote is unavailable the securities may be priced at the mean of two independent quotes obtained from brokers.
Short-term securities with 60 days or less to maturity are amortized to maturity based on their cost to the Portfolio if acquired within
60 days of maturity or, if already held by the Portfolio on the 60th day, are amortized to maturity based on the value determined on the 61st day.
Investments in registered investment companies that do not trade on an exchange are valued at the end of the day net asset value per share. Investments in registered investment companies that trade on an
exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded.
B-65
Future contracts traded on national securities exchanges are valued at the quoted daily
settlement prices established by the exchange upon which they trade. Options traded on national securities exchanges are valued as of the close of the exchange upon which they trade. Forward contracts are valued at the 4:00 p.m. Eastern Time forward
rate. Other securities are valued on the basis of last sale or bid price (if a last sale price is not available) in what is, in the opinion of the Adviser, the broadest and most representative market, that may be either a securities exchange or the
over-the-counter market.
The Board is responsible for the share valuation process and has a policy and procedures (the “PRC
Procedures”) for valuing the securities and other assets held by the Funds, including procedures for the fair valuation of securities and other assets for which market quotations are not readily available or are unreliable. The PRC Procedures
provide for the establishment of a pricing review committee, which is responsible for, among other things, making certain determinations in connection with the Trust’s fair valuation procedures. There is no single standard for making fair value
determinations, which may result in prices that vary from those of other funds.
DIVIDENDS,
DISTRIBUTIONS AND TAXES
Dividends and Distributions.
Each Portfolio intends to distribute to the registered
holders of its shares substantially all of its net investment income, which includes dividends, interest and net short-term capital gains, if any, in excess of any net long-term capital losses. Each Portfolio intends to distribute any net long-term
capital gains from the sale of assets in excess of any net short-term capital losses. The current policy of each Portfolio other than the Focused Dividend Strategy Portfolio is to pay investment income dividends, if any, at least annually. Focused
Dividend Strategy Portfolio’s current policy is to pay investment income dividends, if any, on a quarterly basis. Each Portfolio intends to distribute net capital gains, if any, annually. In determining amounts of capital gains to be
distributed, any capital loss carryforwards from prior years will be offset against capital gains. The Portfolios reserve the right to declare and pay dividends less frequently than as disclosed above, provided that the net realized capital and net
investment income, if any, are paid at least annually.
As of October 31, 2012, for Federal income tax purposes, the
Portfolios indicated below have capital loss carryforwards, which expire in the year indicated, which are available to offset future capital gains, if any.
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Capital Loss Carryforward
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Unlimited
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2015
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2016
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2017
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2018
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Sort-Term
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Long-Term
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Focused Large-Cap Growth
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$
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—
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$
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19,581,110
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$
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34,259,146
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$
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—
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$
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—
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$
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—
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Focused Small-Cap Growth
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3,263,218
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|
|
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81,520,333
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|
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—
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—
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—
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—
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Focused Small-Cap Value
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5,548,880
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19,995,198
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18,529,440
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—
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2,849,557
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2,898,532
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Focused Dividend Strategy
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—
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—
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—
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—
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—
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—
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SunAmerica Strategic Value
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—
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42,506,448
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90,094,942
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—
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—
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—
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Certain capital loss carryforward amounts may be subject to limitations on their use pursuant to
applicable U.S. Federal Income Tax Law. Therefore, it is possible that not all of the capital losses will be available for use.
Distributions will be paid in additional Portfolio shares based on the net asset value at the close of business on the ex-dividend or
reinvestment date, unless the dividends total in excess of $10.00 per distribution period and the shareholder notifies the Portfolio at least five business days prior to the payment date to receive such distributions in cash.
If a shareholder has elected to receive dividends and/or capital gain distributions in cash, and the postal or other delivery service is
unable to deliver checks to the shareholder’s address of record, no interest will accrue on amounts represented by uncashed dividend or distribution checks.
Taxes.
The following is intended to be a general summary of certain U.S. Federal income tax consequences of investing in a Portfolio. It is not intended as a complete discussion of all such
consequences, nor does it purport to deal with all categories of investors. Investors are therefore advised to consult with their tax advisers before making an investment in a Portfolio. This summary is based on the laws in effect on the date of
this SAI and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.
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Each Portfolio is qualified and intends to remain qualified and elect to be taxed as a
regulated investment company under Subchapter M of the Code for each taxable year. In order to be qualified as a regulated investment company, each Portfolio generally must, among other things, (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, proceeds from loans of securities, gains from the sale or other disposition of stock or securities or foreign currencies, other income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock, securities or currencies and net income derived from interests in “qualified publicly traded partnerships” (
i
.
e
., partnerships that are traded on an
established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains, and other traditionally permitted mutual fund income); and (b) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of each Portfolio’s assets is represented by cash and cash items, U.S. government securities, securities of other regulated investment companies and
other securities limited, in respect of any one issuer, to an amount no greater than 5% of the value of each Portfolio’s assets and not greater than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than U.S. government securities or the securities of other regulated investment companies) or in any two or more issuers of which the Portfolio owns 20% or more of the voting
stock and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships. Although in general the passive loss rules of the
Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a qualified publicly traded partnership. Portfolio investments in partnerships, including
in qualified publicly traded partnerships, may result in the Portfolio’s being subject to state, local or foreign income, franchise or withholding tax liabilities.
As a regulated investment company, each Portfolio will not be subject to U.S. Federal income tax on its ordinary income and net capital gains which it distributes as dividends or capital gains
distributions to shareholders provided that it distributes to shareholders an amount at least equal to the sum of 90% of its “investment company taxable income” for the taxable year and 90% of its net tax-exempt interest income for the
taxable year. Each Portfolio intends to distribute sufficient income to meet this qualification requirement.
Under the Code,
amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To avoid the tax, each Portfolio must distribute during each calendar year the sum of (1) at
least 98% of its ordinary income for the calendar year, (2) at least 98.2% of its net capital gains,
i.e.
, net long-term capital gains in excess of its net short-term capital losses, for the one-year period ending on October 31 of
the calendar year, and (3) all ordinary income and net capital gains for the previous years that were not distributed during such years. To avoid application of the excise tax, each Portfolio intends to make distributions in accordance with the
calendar year distribution requirement. A distribution will be treated as paid during the calendar year if actually paid during such calendar year. Additionally, a distribution will be treated as paid on December 31 of a calendar year if it is
declared by the distributing Portfolio in October, November or December of such year, payable to shareholders of record on a date in such month but actually paid by such Portfolio during January of the following year. Any such distributions paid
during January of the following year will be taxable to shareholders as of such December 31 in the calendar year in which such dividend is declared, rather than on the date on which the distributions are actually received. If, in any taxable
year, a Portfolio fails to qualify as a regulated investment company under the Code or fails to meet the distribution requirement, it will be taxed in the same manner as an ordinary corporation and distributions to its shareholders will not be
deductible by the Portfolio in computing its taxable income. In addition, in the event of a failure to qualify, a Portfolio’s distributions, to the extent derived from the Portfolio’s current or accumulated earnings and profits, including
any distributions of net tax-exempt interest and, net long-term capital gains, will be taxable to shareholders as dividend income. However, such dividends will be eligible (i) to be treated as “qualified dividend income” in the case
of shareholders taxed as individuals and (ii) for the dividends received deduction in the case of corporate shareholders. Moreover, if a Portfolio fails to qualify as a regulated investment company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again as a regulated investment company. If a Portfolio fails to qualify as a regulated investment company for a period greater than two taxable years, the Portfolio may be required to recognize
any net built-in gains with respect to certain of its assets (
i.e
., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Portfolio had been
liquidated) if it qualifies as a regulated investment company in a subsequent year.
If a Portfolio is held through a
qualified retirement plan entitled to tax-exempt treatment for U.S. Federal income tax purposes, distributions will generally not be taxable currently. Special tax rules apply to such retirement plans. You should consult your tax advisor regarding
the tax treatment of distributions (which may include amounts attributable to Portfolio distributions) which may be taxable when distributed from the retirement plan.
Distributions of net investment income and short-term capital gains (“ordinary income dividends”) are taxable to the shareholder as ordinary dividend income regardless of whether the shareholder
receives such distributions in additional
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shares or in cash. The portion of such ordinary income dividends-received from each Portfolio that will be eligible for the dividends received deduction for corporations will be determined on the
basis of the amount of each Portfolio’s gross income, exclusive of capital gains from sales of stock or securities, which is derived as dividends from domestic corporations, other than certain tax-exempt corporations and certain REITs, and will
be reported as such to shareholders. Distributions of net capital gains (
i.e.
, the excess of net capital gains from the sale of assets held for more than one year over net short-term capital losses, and including such gains from certain
transactions in futures and options), if any, that a Portfolio reports as capital gains are taxable as capital gains to the shareholders, whether or not reinvested and regardless of the length of time a shareholder has owned its shares. The maximum
capital gains rate is 15% for individuals with incomes below $400,000 ($450,000 if married filing jointly) and 20% for individuals with any income above those amounts that is capital gain. The maximum capital gains rate for corporate shareholders
currently is the same as the maximum tax rate for ordinary income.
A portion of a Portfolio’s distributions may be
treated as “qualified dividend income,” taxable to individuals at long-term capita gains rates (described above). A distribution is treated as qualified dividend income to the extent that the Portfolio receives dividend income from taxable
domestic corporations and certain qualified foreign corporations, provided that holding period and other requirements are met by the Portfolio and the shareholder. Dividends subject to these special rules are not actually treated as capital gains,
however, and thus are not included in the computation of an individual’s net capital gain and generally cannot be used to offset capital losses. The long-term capital gains rates will apply to: (i) 100% of the regular dividends paid by the
Portfolio to an individual in a particular taxable year if 95% or more of the Portfolio’s gross income (ignoring gains attributable to the sale of stocks and securities except to the extent net short-term capital gain from such sales exceeds
net long-term capital loss from such sales) in that taxable year is attributable to qualified dividend income received by the Portfolio; or (ii) the portion of the regular dividends paid by the Portfolio to an individual in a particular taxable
year that is attributable to qualified dividend income received by the Portfolio in that taxable year if such qualified dividend income accounts for less than 95% of the Portfolio’s gross income (ignoring gains attributable to the sale of
stocks and securities except to the extent net short-term capital gain from such sales exceeds net long-term capital loss from such sales) for that taxable year. For this purpose, “qualified dividend income” generally means income from
dividends received by the Portfolio from U.S. corporations and certain foreign corporations (
e.g.,
foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty with the United
States or the stock of which is readily tradable on an established securities market in the United States) which are not passive foreign investment companies (“PFICs”). Dividend income will not be treated as qualified dividend income
unless the Portfolio satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain ways. Also, dividends received by the Portfolio from a REIT or another regulated
investment company generally are qualified dividend income only to the extent the dividend distributions are made out of qualified dividend income received by such REIT or other regulated investment company. In the case of securities lending
transactions, payments in lieu of dividends are not qualified dividend income. If a shareholder elects to treat Portfolio dividends as investment income for purposes of the limitation on the deductibility of investment interest, such dividends would
not be qualified dividend income. To the extent a Portfolio’s distributions are attributable to other sources, such as interest or capital gains, the distributions are not treated as qualified dividend income.
If a Portfolio retains for investment an amount equal to all or a portion of its net capital gains, it will be subject to a corporate tax
(at a maximum rate of 35%) on the amount retained. In that event, a Portfolio will report such retained amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S. Federal income
tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the 35% tax paid by the Portfolio on the undistributed amount against their U.S.
Federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. Federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed capital gains included in the shareholder’s income. Organizations or persons not subject to U.S. Federal income tax on such capital gains will be entitled to a refund of their pro rata share of such
taxes paid by the Portfolio upon filing appropriate returns or claims for refund with the Internal Revenue Service (the “IRS”).
If an individual receives a regular dividend qualifying for the long-term capital gains rates and such dividend constitutes an “extraordinary dividend,” and the individual subsequently
recognizes a loss on the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such extraordinary dividend. An “extraordinary dividend” on common
stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within an 85-day period or
(ii) in an amount greater than 20% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within a 365-day period.
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Distributions in excess of a Portfolio’s current and accumulated earnings and profits
will, as to each shareholder, be treated as a tax-free return of capital to the extent of a shareholder’s basis in its shares of the Portfolio, and as a capital gain thereafter (if the shareholder holds its shares of the Portfolio as capital
assets). Shareholders receiving dividends or distributions in the form of additional shares should be treated for U.S. Federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders receiving
cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount.
Portfolio distributions from amounts other than current or accumulated earnings and profits will be treated as returns of capital for
federal income tax purposes and will reduce your basis in your shares, with any distributed amount that exceeds your remaining basis constituting capital gain to you. Portfolio distributions in excess of a Portfolio’s minimum distribution
requirements but not in excess of the Portfolio’s remaining earnings and profits will not be returns of capital but will be taxable dividends to shareholders. A Portfolio’s capital loss carryovers, if any, from the pre-2011 taxable years
will not reduce current earnings and profits even if the Portfolio’s current year distribution requirement is offset by such carryovers.
Investors considering buying shares just prior to the record date for a dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time may reflect the
amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If a Portfolio is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends
will be included in the Portfolio’s gross income not as of the date received but as of the later of (a) the date such stock became ex-dividend with respect to such dividends (
i.e.,
the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (b) the date the Portfolio acquired such stock. Accordingly, in order to satisfy its income distribution requirements, a Portfolio may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
Upon a sale or exchange
of its shares, a shareholder will recognize a taxable gain or loss in an amount equal to the difference between the proceeds of the sale or exchange and the shareholder’s adjusted tax basis in the shares. Except as discussed below, the amount
of any contingent deferred sales charge will reduce the amount realized on the sale or exchange for purposes of determining gain or loss. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the
shareholder’s hands. In the case of an individual, any such capital gain will be treated as short-term capital gain, taxable at the same rates as ordinary income if the shares were held for not more than one year, and long-term capital gains
rates (described above, if such shares were held for more than one year. In the case of a corporation, any such capital gain will be treated as long-term capital gain, taxable at the same rates as ordinary income, if such shares were held for more
than one year. For both individuals and corporations, any such loss will be treated as long-term capital loss if such shares were held for more than one year. To the extent not disallowed, any loss recognized on the sale or exchange of shares of a
Portfolio held for six months or less, however, will be treated as long-term capital loss to the extent of any long-term capital gains distribution, and any undistributed capital gains included in income by such shareholder with respect to such
shares.
Generally, any loss realized on a sale or exchange of shares of a Portfolio will be disallowed if other shares of
such Portfolio are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Under certain circumstances the sales charge incurred in
acquiring shares of a Portfolio may not be taken into account in determining the gain or loss on the disposition of those shares. This rule applies if shares of a Portfolio are exchanged within 90 days after the date they were purchased and the new
shares are acquired without a sales charge or at a reduced sales charge. In that case, the gain or loss recognized on the exchange will generally be determined by excluding from the tax basis of the shares exchanged the sales charge that was imposed
on the acquisition of those shares to the extent of such reduction to the sales charge upon the exchange. This exclusion applies to the extent that the otherwise applicable sales charge with respect to the newly acquired shares is reduced as result
of having incurred the initial sales charge. The portion of the initial sales charge that is excluded from the basis of the exchanged shares is instead treated as an amount paid for the new shares and is added to the basis of the new shares.
A Portfolio’s administrative agent will be required to provide you with cost basis information on the sale of any of
your shares in the Portfolio, subject to certain exceptions. This cost basis reporting requirement is effective for shares purchased on or after January 1, 2012.
Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Income tax treaties between certain countries and the U.S. may
reduce or eliminate such taxes. It is impossible to determine in advance the effective rate of foreign tax to which a Portfolio will be subject, since the amount of that Portfolio’s assets to be invested in various countries is not known. If
more than 50% in value of a Portfolio’s total assets at the close of its taxable year consists of securities of foreign corporations, such Portfolio will be eligible to file an
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election with the IRS pursuant to which shareholders of the Portfolio will be required to include (in addition to taxable dividends actually received) their proportionate share of such foreign
taxes paid by the Portfolio in their U.S. income tax returns as gross income, treat such proportionate share as taxes paid by them, and deduct such proportionate share in computing their taxable incomes or, alternatively, subject to certain
limitations and the Portfolio and the shareholders satisfying certain holding period requirements, use them as foreign tax credits against their U.S. Federal income taxes. No deductions for foreign taxes, however, may be claimed by non-corporate
shareholders who do not itemize deductions. Certain retirement accounts which are not subject to tax cannot claim foreign tax credits on investments in foreign securities held in the Portfolio. A shareholder that is a nonresident alien individual or
a foreign corporation may be subject to U.S. withholding tax on the income resulting from the Portfolio’s election described in this paragraph but will not be able to claim a credit or deduction against such U.S. tax for the foreign taxes
treated as having been paid by such shareholder.
Certain Portfolios may, from time to time, invest in PFICs. A PFIC is a
foreign corporation that, in general, meets either of the following tests: (a) at least 75% of its gross income is passive or (b) an average of at least 50% of its assets produce, or are held for the production of, passive income.
Investments in PFICs are subject to special rules designed to prevent deferral of U.S. taxation of a U.S. person’s share of a PFIC’s earnings. In the absence of certain elections, if any such Portfolio acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Portfolio will be subject to U.S. Federal income tax on a portion of any “excess distribution” (generally a distribution in excess of a base amount) received on the stock or of any gain
from disposition of the stock (collectively, PFIC income), plus interest thereon, even if the Portfolio distributes the PFIC income as a taxable dividend to its shareholders. The balance of the PFIC income will be currently included in the
Portfolio’s investment company taxable income and, accordingly, will not be taxable to it to the extent that income is distributed to its shareholders. A Portfolio may make a “mark-to-market” election with respect to any marketable
stock it holds of a PFIC. If the election is in effect, at the end of the Portfolio’s taxable year, the Portfolio will recognize the amount of gains, if any, with respect to PFIC stock. Any gains resulting from such elections will be treated as
ordinary income. Losses on PFIC stock are allowed only to the extent of such previous gains. The mark-to-market election must be made separately for each PFIC owned by a Portfolio and, once made, would be effective for all subsequent taxable years,
unless revoked with the consent of the IRS. Alternatively, the Portfolio may elect to treat any PFIC in which it invests as a “qualified electing fund,” in which case, in lieu of the foregoing tax and interest obligation, the Portfolio
will be required to include in income each year its
pro rata
share of the qualified electing fund’s annual ordinary earnings and net capital gain, even if they are not distributed to the Portfolio; those amounts would be subject to the
distribution requirements applicable to the Portfolio as described above. It may be very difficult, if not impossible, to make this election because of certain requirements thereof.
Certain Portfolios may invest in REITs that hold residual interests in REMICs. Under Treasury regulations, a portion of the
Portfolio’s income from a REIT that is attributable to the REIT’s residual interest in a REMIC (referred to in the Code as an “excess inclusion”) will be subject to U.S. Federal income tax. Excess inclusion income of a regulated
investment company, such as the Portfolios, will be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC
residual interest directly. In general, excess inclusion income allocated to shareholders (i) cannot be offset by otherwise allowable deductions for tax purposes, (ii) will constitute unrelated business taxable income (“UBTI”) to
entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on unrelated business income, thereby potentially requiring such an entity that is allocated
excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income, and (iii) in the case of a foreign shareholder, will not qualify for any reduction in U.S. Federal withholding
tax. In addition, if at any time during any taxable year a “disqualified organization” (as defined in the Code) is a record holder of a share in a Portfolio , then the Portfolio will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified organization, multiplied by the highest federal income tax rate imposed on corporations. If a charitable remainder annuity trust or charitable remainder unitrust (each as
defined in Code Section 664) has UBTI for a tax year, a 100% excise tax on the UBTI is imposed on the trust.
Under the
Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Portfolio accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time such
Portfolio actually collects such receivables or pays such liabilities are treated as ordinary income or ordinary loss. Similarly, gains or losses on sales of currencies or dispositions of debt securities or certain forward contracts, futures
contracts, options or similar financial instruments denominated in a foreign currency or determined by reference to the value of one or several foreign currencies also are treated as ordinary income or ordinary loss. These gains, referred to under
the Code as “Section 988” gains or losses, increase or decrease the amount of each Portfolio’s investment company taxable income available to be distributed to its shareholders as ordinary income. In certain cases, a Portfolio may be
entitled to elect to treat foreign currency gains on forward or futures contracts, or options thereon, as capital gains.
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The Code includes special rules applicable to the listed non-equity options, regulated
futures contracts, and listed options on futures contracts which a Portfolio may write, purchase or sell. Such options and contracts are classified as “Section 1256 contracts” under the Code. The character of gain or loss resulting
from the sale, disposition, closing out, expiration or other termination of Section 1256 contracts, except forward foreign currency exchange contracts, is generally treated as long-term capital gain or loss to the extent of 60% thereof and
short-term capital gain or loss to the extent of 40% thereof (“60/40 gain or loss”). Such contracts, when held by a Portfolio at the end of a taxable year, generally are required to be treated as sold at market value on the last business
day of such taxable year for U.S. Federal income tax purposes (“marked-to-market”). Over-the-counter options are not classified as Section 1256 contracts and are not subject to the marked-to-market rule or to 60/40 gain or loss
treatment. Any gains or losses recognized by a Portfolio from transactions in over-the-counter options written by the Portfolio generally constitute short-term capital gains or losses. Any gain or loss recognized by a Portfolio from transactions in
over-the-counter options purchased by such Portfolio generally has the same character as the property to which the option relates has in the hands of such Portfolio (or would have if acquired by the Portfolio). When call options written, or put
options purchased, by a Portfolio are exercised, the gain or loss realized on the sale of the underlying securities may be either short-term or long-term capital gain or loss, depending on the holding period of the securities. In determining the
amount of such gain or loss, the sales proceeds are reduced by the premium paid for the puts or increased by the premium received for calls.
A substantial portion of each Portfolio’s transactions in options, futures contracts and options on futures contracts, particularly its hedging transactions, may constitute “straddles”
which are defined in the Code as offsetting positions with respect to personal property. A straddle, at least one (but not all) of the positions in which is a Section 1256 contract, would constitute a “mixed straddle” under the Code.
The Code generally provides special rules with respect to straddles, such as: (i) “loss deferral” rules which may postpone recognition for tax purposes of losses from certain closing purchase transactions or other dispositions of a
position in the straddle to the extent of unrecognized gains in the offsetting position; (ii) “wash sale” rules which may postpone recognition for tax purposes of losses where a position is sold and a new offsetting position is
acquired within a prescribed period; (iii) “short sale” rules which may suspend the holding period of securities owned by a Portfolio when offsetting positions are established and which may convert certain capital losses from
short-term to long-term; and (iv) “conversion transaction” rules which recharacterize all or a portion of capital gains as ordinary income. The Code provides that certain elections may be made for mixed straddles that can alter the
character of the capital gain or loss recognized upon disposition of positions which form part of a straddle. Certain other elections are also provided in the Code; no determination has been reached to make any of these elections.
Code Section 1259 requires the recognition of gain if a Portfolio makes a “constructive sale” of an appreciated financial
position. A Portfolio generally will be considered to make a constructive sale of an appreciated financial position if it sells the same or substantially identical property short, enters into a futures or forward contract to deliver the same or
substantially identical property, or enters into certain other similar transactions.
Under the “wash sale” rule,
losses incurred by a Portfolio on the sale of (or on a contract or option to sell) stock or securities are not deductible if, within a 61-day period beginning 30 days before and ending 30 days after the date of the sale, the Portfolio acquires or
has entered into a contract or option to acquire stock or securities that are substantially identical. In such a case, the basis of the stock or securities acquired by the Portfolio will be adjusted to reflect the disallowed loss.
In general, gain or loss on a short sale, to the extent permitted, is recognized when a Portfolio closes the sale by
delivering the borrowed property to the lender, not when the borrowed property is sold. Gain or loss from a short sale is generally considered as capital gain or loss to the extent that the property used to close the short sale constitutes a capital
asset in the Portfolio’s hands. Except with respect to certain situations where the property used by a Portfolio to close a short sale has a long-term holding period on the date of the short sale, special rules would generally treat the gains
on short sales as short-term capital gains. These rules may also terminate the running of the holding period of “substantially identical property” held by a Portfolio. Moreover, a loss on a short sale will be treated as a long-term capital
loss if, on the date of the short sale, “substantially identical property” has been held by a Portfolio for more than one year. In general, a Portfolio will not be permitted to deduct payments made to reimburse the lender of securities for
dividends paid on borrowed stock if the short sale is closed on or before the 45
th
day after the short sale is entered into.
As a result of entering into swap
contracts, a Portfolio may make or receive periodic net payments. A Portfolio may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will
generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if a Portfolio has been a party to the swap for more than one year). With
respect to certain types of swaps, a Portfolio may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as
ordinary income or loss.
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Each Portfolio may purchase debt securities (such as zero-coupon, or deferred interest or
pay-in-kind securities) that contain original issue discount. Original issue discount that accrues in a taxable year is treated as earned by a Portfolio and therefore is subject to the distribution requirements of the Code. Because the original
issue discount earned by the Portfolio in a taxable year may not be represented by cash income, the Portfolio may have to dispose of other securities and use the proceeds to make distributions to shareholders. If a Portfolio holds (directly or
indirectly) one or more “tax credit bonds” (defined below) on one or more specified dates during the Portfolio’s taxable year, and the Portfolio satisfies the minimum distribution requirement, the Portfolio may elect for U.S. Federal
income tax purposes to pass through to shareholders tax credits otherwise allowable to the Portfolio for that year with respect to such bonds. A tax credit bond is defined in the Code as a “qualified tax credit bond” (which includes a
qualified forestry conservation bond, a new clean renewable energy bond, a qualified energy conservation bond, or a qualified zone academy bond, each of which must meet certain requirements specified in the Code), a “build America bond” or
certain other specified bonds. If the Portfolio were to make an election, a shareholder of the Portfolio would be required to include in income and would be entitled to claim as a tax credit an amount equal to a proportionate share of such credits.
Certain limitations may apply on the extent to which the credit may be claimed.
A Portfolio may be required to withhold U.S.
Federal income tax at the rate of 28% on all taxable distributions payable to shareholders who fail to provide their correct taxpayer identification number or fail to make required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against a shareholder’s U.S. Federal income tax liability.
Any distributions of net investment income or short-term capital gains made to a foreign shareholder generally will be subject to U.S.
withholding tax of 30% (or a lower treaty rate if applicable to such shareholder) if any, provided that the required information is timely furnished to the IRS.
In general, U. S. Federal withholding tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of net long-term capital gains over net short-term capital
losses, exempt-interest dividends, or upon the sale or other disposition of shares of a Portfolio. For foreign shareholders of a Portfolio, a distribution attributable to the Portfolio’s sale or exchange of U.S. real property or of a REIT or
other U.S. real property holding corporation will be treated as real property gain subject to 35% withholding tax if 50% or more of the value of the Portfolio’s assets is invested in REITs and other U.S. real property holding corporations and
if the foreign shareholder has held more than 5% of a class of stock at any time during the one-year period ending on the date of the distribution. In addition, foreign shareholders may be subject to certain tax filing requirements if 50% or more of
the Portfolio’s assets are invested in REITs and other U.S. real property holding corporations.
The rules laid out in
the previous paragraph, other than the withholding rules, will apply notwithstanding the Portfolio’s participation in a wash sale transaction or its payment of a substitute dividend.
For taxable years beginning before January 1, 2014, properly-reported dividends are generally exempt from U.S. federal withholding
tax where they (i) are paid in respect of the Portfolio’s “qualified net interest income” (generally, the Portfolio’s U.S. source interest income, other than certain contingent interest and interest from obligations of a
corporation or partnership in which the Portfolio is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the Portfolio’s “qualified short-term capital gains”
(generally, the excess of the Portfolio’s net short-term capital gain over the Portfolio’s long-term capital loss for such taxable year). However, depending on its circumstances, the Portfolio may report all, some or none of its
potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption
from withholding, a non-U.S. shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares held through an
intermediary, the intermediary may withhold even if the Portfolio reports the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries with respect to the application of
these rules to their accounts.
For taxable years beginning before January 1, 2014, distributions that a Portfolio
reports as “short-term capital gains dividends” or “long-term capital gains dividends” may not be treated as such to a recipient foreign shareholder if the distribution is attributable to gain received from the sale or exchange
of U.S. real property or an interest in a U.S. real property holding corporation and the foreign shareholder has not owned more than 5% of the outstanding shares of the Portfolio at any time during the one-year period ending on the date of
distribution. Such distributions will be subject to 30% withholding by the Portfolio and will be treated as ordinary dividends to the foreign shareholder.
B-72
The tax consequences to a foreign shareholder entitled to claim the benefits of an
applicable tax treaty may be different from those described here. Foreign shareholders should consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Portfolio, including the applicability of
foreign taxes.
Shares of a Portfolio held by a non-U.S. shareholder at death will be considered situated in with the United
States and subject to the U.S. estate tax, if applicable.
A 30% withholding tax will be imposed on dividends paid after
December 31, 2013 and redemption proceeds paid after December 31, 2014, to (i) foreign financial institutions including non-U.S. investment funds unless they agree to collect and disclose to the IRS information regarding their direct
and indirect U.S. account holders and (ii) certain other foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. To avoid withholding, foreign financial institutions will need to (i) enter
into agreements with the IRS that state that they will provide the IRS information including the names, addresses and taxpayer identification numbers of direct and indirect U.S. account holders, comply with due diligence procedures with respect to
the identification of U.S. accounts, report to the IRS certain information with respect to U.S. accounts maintained, agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders who fail to
provide the required information, and determine certain other information as to their account holders, or (ii) in the event that an applicable intergovernmental agreement and implementing legislation are adopted, provide local revenue
authorities with similar account holder information. Other foreign entities will need to provide the name, address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain
exceptions apply.
If a shareholder recognizes a loss with respect to a Portfolio’s shares of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement on Form 8886. Direct shareholders of Portfolio securities are in many cases exempted from this reporting
requirement, but under current guidance, shareholders of a regulated investment company are not exempted. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of
the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances. Dividends, distributions and redemption proceeds may also be subject to additional
state, local and foreign taxes depending on each shareholder’s particular situation.
Beginning in 2013, a 3.8% Medicare
contribution tax will be imposed on net investment income, including, among other things, interest, dividends, and net capital gain from investments, of U.S. individuals with income exceeding $200,000 (or $250,000 if married filing jointly), and of
estates and trusts.
In the event that a Portfolio were to experience an ownership change as defined under the Code, the
Portfolio’s loss carryforwards, if any, may be subject to limitation.
The foregoing is a general and abbreviated summary
of the applicable provisions of the Code and Treasury regulations currently in effect. Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, state, local and foreign taxes. In addition, foreign investors
should consult with their own tax advisers regarding the particular tax consequences to them of an investment in each Portfolio. Qualification as a regulated investment company under the Code for tax purposes does not entail government supervision
of management and investment policies.
RETIREMENT PLANS
Shares of a Portfolio may be purchased by various types of qualified retirement plans. The summary below is only a brief description of
these plans and does not purport to be complete. Further information or an application to invest in shares of a Portfolio through purchase by any of the retirement plans described below may be obtained by calling Retirement Plans at 800-858-8850.
However, it is recommended that anyone considering an acquisition of Shares by a retirement plan consult a tax adviser before the acquisition is made.
Pension and Profit-Sharing Plans.
Sections 401(a) and 401(k) of the Code permit employers and certain employee associations to establish qualified pension and profit sharing plans for employees,
including those who are self-employed individuals or partners. Each qualified pension or profit sharing plan provides tax advantages for employers and participants. Contributions made by the employers are tax-deductible, and participants do not pay
taxes on contributions or earnings until withdrawn.
Tax-Sheltered Custodial Accounts.
Section 403(b)(7) of the
Code permits public school employees, and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code, to establish accounts through which shares of a Portfolio may be purchased.
Subject to certain limitations, contributions by or on behalf
B-73
of these employees to such accounts, and the earnings thereon, are excluded from their gross income for tax purposes until withdrawn.
Traditional Individual Retirement Accounts.
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement account or annuity (a Traditional IRA), including an account under a Simplified Employee Pension Plan, commonly referred to as a SEP-IRA. Traditional IRAs are subject to limitations with respect to the amount that may be
contributed, the eligibility of individuals to make contributions, the amount (if any) entitled to be contributed on a deductible basis, and the time by which distributions must commence. In addition, certain distributions from some other types of
retirement plans may be deposited on a tax-deferred basis in a Traditional IRA. Earnings on the funds in a Traditional IRA are not taxable until withdrawn.
Salary Reduction Simplified Employee Pension (“SARSEP”).
A SARSEP offers a unique way for small employers to provide the benefit of retirement planning for their employees. Contributions
are deducted from the employee’s paycheck on a before-tax basis, and are deposited into an IRA by the employer. These contributions are not included in the employee’s income and therefore are not reported or deducted on his or her tax
return. Contributions and the earnings thereon are taxable when withdrawn. A SARSEP may not be established after 1996. A SARSEP established before 1997 may continue.
Savings Incentive Match Plan for Employees (“SIMPLE IRA”).
This plan was introduced by a provision of the Small Business Job Protection Act of 1996 to provide small employers with a
simplified tax-favored retirement plan. Contributions are deducted from the employee’s paycheck before taxes and are deposited into a SIMPLE IRA by the employer, who must make either matching contributions or non-elective contributions for the
employee. Contributions are tax-deductible for the employer and participants do not pay taxes on contributions, or the earnings thereon, until they are withdrawn.
Roth IRA.
Roth IRAs were introduced by the Taxpayer Relief Act of 1997. Generally under Section 408A of the Code in 2012, unmarried individuals with adjusted gross income of up to $112,000,
and married couples who file a joint return and have joint adjusted gross income of up to $178,000, may contribute to a Roth IRA. The maximum allowed contribution phases out above such amounts. Contributions are not tax-deductible, but distribution
of assets (contributions and earnings) held in the account for at least five years may be distributed tax-free under certain qualifying conditions.
Coverdell Education Savings Accounts.
Coverdell Education Savings Accounts were introduced by the Taxpayer Relief Act of 1997. Generally, under Section 530 of the Code, unmarried individuals
with adjusted gross income of up to $95,000, and married couples who file a joint return and have joint adjusted gross income of up to $190,000 may contribute up to $2,000 each year to a Coverdell Education Savings Account on behalf of a child under
the age of 18. The $2,000 annual limit is phased out for unmarried individuals with adjusted gross income between $95,001 and $110,000, and for married individuals who file a joint return and have joint adjusted gross income between $190,001 and
$220,000. Contributions are not tax-deductible but distributions are tax-free if used for qualified educational expenses.
Individual 401(k).
The individual 401(k) plan is intended for owner-only businesses and businesses with employees that can be excluded under federal laws governing plan coverage requirements. The
Individual 401(k) is a type of 401(k) plan made newly relevant to owner-only businesses because of changes made to the section 415 and 404 limits provided by the Economic Growth and Tax Relief Act of 2001 (EGTRRA). The Individual 401(k) generally
allows for an employer contribution of 25% of compensation and an employee salary deferral up to the limit defined in IRC Section 402(g). In addition, because of its smaller size, the Individual 401(k) is also less complex and less costly than
the typical multiple-employee 401(k) plan.
DESCRIPTION OF SHARES
Ownership of the Fund is represented by shares of common stock. The total number of shares that the Fund has authority to issue is three
billion (3,000,000,000) shares of common stock (par value $0.0001 per share), amounting in aggregate par value to three hundred thousand dollars ($300,000).
Currently, seven investment funds of the Fund have been authorized pursuant to the Fund’s Articles of Incorporation (“Articles”): the Large-Cap Growth Portfolio, the Small-Cap Growth
Portfolio, the Small-Cap Value Portfolio, the Dividend Strategy Portfolio, the Strategic Value Portfolio, SunAmerica Focused Balanced Strategy Portfolio and SunAmerica Focused Multi-Asset Strategy Portfolio. The Small-Cap Growth Portfolio is divided
into four classes of shares, designated as Class A, Class B, Class C and Class I. The Dividend Strategy Portfolio is divided into four classes of shares, designated as Class A, Class B, Class C and Class W. The Small-Cap Value Portfolio
and Strategic Value Portfolio are divided into three classes of
B-74
shares, designated as Class A, Class B and Class C. The Large-Cap Growth Portfolio is divided into four classes of shares, designated as Class A, Class B, Class C and Class Z. The
Directors may authorize the creation of additional series of shares so as to be able to offer to investors additional investment portfolios within the Fund that would operate independently from the Fund’s present Portfolios, or to distinguish
among shareholders, as may be necessary, to comply with future regulations or other unforeseen circumstances. Each series of the Fund’s shares represents the interests of the shareholders of that series in a particular portfolio of assets. In
the future, the Directors may authorize the creation of additional classes of shares in the future, which may have fee structures different from those of existing classes and/or may be offered only to certain qualified investors.
Shareholders are entitled to a full vote for each full share held. The Directors have terms of unlimited duration (subject to certain
removal procedures) and have the power to alter the number of Directors, and appoint their own successors, provided that at all times at least a majority of the Directors have been elected by shareholders. The voting rights of shareholders are not
cumulative, so that holders of more than 50% of the shares voting can, if they choose, elect all Directors being elected, while the holders of the remaining shares would be unable to elect any Directors. Although the Fund need not hold annual
meetings of shareholders, the Directors may call special meetings of shareholders for action by shareholder vote as may be required by the 1940 Act. Also, a shareholders meeting must be called, if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Fund. In addition, the Directors may be removed by the action of the shareholders of record of two-thirds or more of the outstanding shares. All Portfolios of shares will vote with respect to certain
matters, such as election of Directors. When all Portfolios are not affected by a matter to be voted upon, such as approval of investment advisory agreements or changes in a Portfolio’s policies, only shareholders of the Portfolios affected by
the matter may be entitled to vote.
The classes of shares of a given Portfolio are identical in all respects, except that
(i) each class may bear differing amounts of certain class-specific expenses, (ii) Class A shares are subject to an initial sales charge and a distribution fee, (iii) Class B shares are subject to a CDSC and a distribution fee,
(iv) Class B shares convert automatically to Class A shares on the first business day of the month eight years after the purchase of such Class B Shares, (v) Class C shares are subject to a distribution fee and a CDSC, (vi) Class
I shares are not subject to any sales charges or distribution fees, (vii) Class W shares have a $50,000 minimum investment requirement, (viii) each class has voting rights on matters that pertain to the Rule 12b-1 plan adopted with respect
to such class, except that under certain circumstances, the holders of Class B shares may be entitled to vote on material changes to the Class A Rule 12b-1 plan and (ix) Class Z shares are not subject to any sales charge or any
distribution, account maintenance or service fee. All shares of the Fund issued and outstanding and all shares offered by the Prospectus when issued are fully paid and non-assessable. Shares have no preemptive or other subscription rights and are
freely transferable on the books of the Fund. In addition, shares have no conversion rights, except as described above.
The Articles provide, to the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted (as limited by
the 1940 Act) that no Director or officer of the Fund shall be personally liable to the Fund or to stockholders for money damages. The Articles provide that the Fund shall indemnify (i) the Directors and officers, whether serving the Fund or
its request any other entity, to the full extent required or permitted by the General Laws of the State of Maryland now or hereafter in force (as limited by the 1940 Act), including the advance of expenses under the procedures and to the full extent
permitted by law, and (ii) other employees and agents to such extent as shall be authorized by the Board or the Fund’s By-laws and be permitted by law. The duration of the Fund shall be perpetual.
ADDITIONAL INFORMATION
Computation of Offering Price Per Share.
The following is the offering
price calculation for each Class of shares of the Portfolios, based on the value of each Portfolio’s net assets and number of shares outstanding on October 31, 2012. There are no sales charges for Class I or Class W shares and therefore
the offering price for these shares will be computed by dividing its net assets by the number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large-Cap Growth Portfolio
|
|
|
|
|
Class A
|
|
|
Class B**
|
|
|
Class C†
|
|
|
Class Z
|
|
|
Net Assets
|
|
$
|
208,921,258
|
|
|
$
|
12,455,087
|
|
|
$
|
60,839,684
|
|
|
$
|
148,923
|
|
|
Number of Shares Outstanding
|
|
|
11,239,955
|
|
|
|
738,983
|
|
|
|
3,597,586
|
|
|
|
7,469
|
|
|
Net Asset Value Per Share
(net assets divided by number of shares)
|
|
$
|
18.59
|
|
|
$
|
16.85
|
|
|
$
|
16.91
|
|
|
$
|
19.94
|
|
|
Sales charge for Class A Shares: 5.75% of offering price
(6.10% of net asset value per share)
*
|
|
$
|
1.13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Offering Price
|
|
$
|
19.72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
B-75
|
*
|
Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B shares are not subject to an initial charge but may be subject to a CDSC on redemption of shares within six years of purchase.
|
|
†
|
Class C shares may be subject to a CDSC on redemption of shares within twelve months of purchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small-Cap Growth Portfolio
|
|
|
|
|
Class A
|
|
|
Class B**
|
|
|
Class C†
|
|
|
Class I
|
|
|
Net Assets
|
|
$
|
113,933,219
|
|
|
$
|
7,078,885
|
|
|
$
|
14,211,113
|
|
|
$
|
311,083
|
|
|
Number of Shares Outstanding
|
|
|
9,273,535
|
|
|
|
676,331
|
|
|
|
1,360,101
|
|
|
|
24,549
|
|
|
Net Asset Value Per Share
(net assets divided by number of shares)
|
|
$
|
12.29
|
|
|
$
|
10.47
|
|
|
$
|
10.45
|
|
|
$
|
12.67
|
|
|
Sales charge for Class A Shares: 5.75% of offering price
(6.10% of net asset value per share)*
|
|
|
0.75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Offering Price
|
|
$
|
13.04
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
*
|
Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B shares are not subject to an initial charge but may be subject to a CDSC on redemption of shares within six years of purchase.
|
|
†
|
Class C shares may be subject to a CDSC on redemption of shares within twelve months of purchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Small-Cap Value Portfolio
|
|
|
|
|
Class A
|
|
|
Class B**
|
|
|
Class C†
|
|
|
Net Assets
|
|
$
|
75,701,876
|
|
|
$
|
4,751,205
|
|
|
$
|
16,755,642
|
|
|
Number of Shares Outstanding
|
|
|
5,308,569
|
|
|
|
378,711
|
|
|
|
1,327,914
|
|
|
Net Asset Value Per Share
(net assets divided by number of shares)
|
|
$
|
14.26
|
|
|
$
|
12.55
|
|
|
$
|
12.62
|
|
|
Sales charge for Class A Shares: 5.75% of offering price
(6.10% of net asset value per share)*
|
|
$
|
0.87
|
|
|
|
—
|
|
|
|
—
|
|
|
Offering Price
|
|
$
|
15.13
|
|
|
|
—
|
|
|
|
—
|
|
|
*
|
Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B shares are not subject to an initial charge but may be subject to a CDSC on redemption of shares within six years of purchase.
|
|
†
|
Class C shares may be subject to a CDSC on redemption of shares within twelve months of purchase.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Strategy Portfolio
|
|
|
|
|
Class A
|
|
|
Class B**
|
|
|
Class C†
|
|
|
Net Assets
|
|
$
|
1,916,050,906
|
|
|
$
|
114,793,932
|
|
|
$
|
715,532,617
|
|
|
Number of Shares Outstanding
|
|
|
145,328,807
|
|
|
|
8,746,489
|
|
|
|
54,516,741
|
|
|
Net Asset Value Per Share
(net assets divided by number of shares)
|
|
$
|
13.18
|
|
|
$
|
13.12
|
|
|
$
|
13.13
|
|
|
Sales charge for Class A Shares: 5.75% of offering price
(6.10% of net asset value per share)*
|
|
$
|
0.80
|
|
|
|
—
|
|
|
|
—
|
|
|
Offering Price
|
|
$
|
13.98
|
|
|
|
—
|
|
|
|
—
|
|
|
*
|
Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B shares are not subject to an initial charge but may be subject to a CDSC on redemption of shares within six years of purchase.
|
|
†
|
Class C shares may be subject to a CDSC on redemption of shares within twelve months of purchase.
|
B-76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic Value Portfolio
|
|
|
|
|
Class A
|
|
|
Class B**
|
|
|
Class C†
|
|
|
Net Assets
|
|
$
|
114,964,558
|
|
|
$
|
7,307,977
|
|
|
$
|
39,881,955
|
|
|
Number of Shares Outstanding
|
|
|
6,430,936
|
|
|
|
441,060
|
|
|
|
2,401,385
|
|
|
Net Asset Value Per Share (net assets divided by number of shares)
|
|
$
|
17.88
|
|
|
$
|
16.57
|
|
|
|
16.61
|
|
|
Sales charge for Class A Shares: 5.75% of offering price
(6.10% of net asset value per share)*
|
|
|
1.09
|
|
|
|
—
|
|
|
|
—
|
|
|
Offering Price
|
|
$
|
18.97
|
|
|
|
—
|
|
|
|
—
|
|
|
*
|
Rounded to nearest one-hundredth percent; assumes maximum sales charge is applicable.
|
|
**
|
Class B shares are not subject to an initial charge but may be subject to a CDSC on redemption of shares within six years of purchase.
|
|
†
|
Class C shares may be subject to a CDSC on redemption of shares within twelve months of purchase.
|
Reports to Shareholders.
The Fund sends audited Annual and unaudited Semi-Annual reports to shareholders of each of the Portfolios. In addition,
the Transfer Agent sends a statement to each shareholder having an account directly with the Fund to confirm transactions in the account.
Custodian and Transfer Agent.
State Street Bank and Trust Co., 1776 Heritage Drive, North Quincy, MA 02171, serves as Custodian and Transfer Agent
for the Portfolios and in those capacities maintains certain financial and accounting books and records pursuant to agreements with the Portfolios. Transfer Agent functions are performed for State Street by Boston Financial Data Services, P.O. Box
419572, Kansas City, MO 64141-6572, an affiliate of State Street. SAFS, Harborside Financial Center, 3200 Plaza 5, Jersey City, New Jersey 07311-4992, acts as a servicing agent assisting State Street in connection with certain services offered to
the shareholders of each of the Portfolios.
Independent Registered Public Accounting Firm.
[ ], has been selected to serve as the Fund’s independent registered public accounting firm and, in that capacity,
examines the annual financial statements of the Fund.
Legal Counsel.
The firm of Willkie Farr & Gallagher LLP, 787
Seventh Avenue, New York, NY 10019, serves as legal counsel to the Portfolios.
FINANCIAL
STATEMENTS
[The Fund’s audited financial statements are incorporated in this SAI by reference to its
[ ] annual report to shareholders. You may request a copy by calling (800) 858-8850. ]
B-77