Filed Pursuant to Rule 485(a)
Registration No. 2-71299
811-3153
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 168
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and
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REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 174
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RUSSELL INVESTMENT COMPANY
(Exact Name of Registrant as Specified in Charter)
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1301 Second Avenue, 18
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Floor, Seattle, Washington
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98101
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(Address of Principal Executive Office)
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(ZIP Code)
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Registrants Telephone Number, including area code: 206/505-7877
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Mary Beth Rhoden, Associate Counsel
Russell Investment Company
1301 Second Avenue, 18
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Floor
Seattle, Washington 98101
206-505-4846
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John V. OHanlon, Esq.
Dechert LLP
200 Clarendon Street, 27
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Floor
Boston, Massachusetts 02116
617-728-7100
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(Name and Address of Agent for Service)
Approximate date of commencement of proposed public offering:
As soon as practical after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant to paragraph (b)
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on , pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on , pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485.
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If appropriate, check the following box:
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this post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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PROSPECTUS
Russell Funds
Preliminary Prospectus dated March 15, 2012
PROSPECTUS DATED
, 2012
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Fund
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Ticker Symbol By Class
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A
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C
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E
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S
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Y
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Russell Multi-Strategy Alternative Fund
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[ ]
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[ ]
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[ ]
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[ ]
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[ ]
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The information in this Prospectus is
not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
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As with all mutual funds, the Securities and Exchange Commission has neither
determined that the information in this Prospectus is accurate or complete, nor
approved or disapproved of these securities. It is a criminal offense to state
otherwise.
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800-787-7354
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Table of Contents
RISK/RETURN SUMMARY
RUSSELL MULTI-STRATEGY ALTERNATIVE FUND
Investment Objective (Non-Fundamental)
The Fund seeks to achieve long-term capital growth with low correlation to, and lower volatility than, global equity markets.
Fees and Expenses of the Fund
The following tables describe the fees and expenses that you may pay if you buy and hold Shares of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in
the future, at least $50,000 in Russell Funds. More information about these and other discounts is available from your financial professional and in the Front-End Sales Charges section and the More About Deferred Sales Charges section beginning on
pages 38 and 40, respectively, of the Prospectus, and the Purchase, Exchange and Redemption of Fund Shares section, beginning on page 16 of the Funds Statement of Additional Information. Please see the Expense Notes section of the Funds
Prospectus for further information regarding expenses of the Fund.
Shareholder Fees (fees paid directly from your investment)
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Class A
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Class C, E, S, Y
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Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)
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5.75%
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None
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Maximum Deferred Sales Charge (Load)*
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1.00%
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None
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Maximum Sales Charge (Load) Imposed on Reinvested Dividends
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None
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None
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*
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The Maximum Deferred Sales Charge (Load) is charged on the lesser of the purchase price of the Shares being redeemed or the net asset value of those Shares at the time
of redemption.
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)#
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Class A
Shares
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Class C
Shares
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Class E
Shares
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Class S
Shares
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Class Y
Shares
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Advisory Fee
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1.50
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%
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1.50
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%
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1.50
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%
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1.50
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%
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1.50
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%
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Distribution (12b-1) Fees
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0.25
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%
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0.75
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%
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0.00
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%
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0.00
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%
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0.00
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%
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Other Expenses (including dividend and interest expenses on short sales of 0.35%)
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0.74
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%
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0.99
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%
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0.99
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%
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0.74
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%
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0.56
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%
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Acquired Fund Fees and Expenses
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0.01
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%
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0.01
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%
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0.01
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%
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0.01
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%
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0.01
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Total Annual Fund Operating Expenses
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2.50
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%
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3.25
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%
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2.50
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%
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2.25
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%
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2.07
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%
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Other Expenses and Acquired Fund Fees and Expenses are based on estimated amounts for the current fiscal year.
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A wholly-owned subsidiary of the Fund (the Subsidiary), organized as a company under the laws of the Cayman Islands, pays RIMCo an advisory fee and pays
RFSC an administrative fee at the annual rates of 1.50% and 0.05%, respectively, of its net assets (collectively, the Subsidiary Fees). Until [ ], RIMCo and RFSC have
contractually agreed to waive all or a portion of the advisory fees and the administrative fees paid by the Fund to RIMCo and RFSC, respectively, in the amount equal to the amount of the Subsidiary Fees received by RIMCo, if any. These waivers may
not be terminated during the relevant period except with Board approval.
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Example
This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your Shares at the end of those periods. The example also assumes your investment has a 5%
return each year and that operating expenses remain the same. The calculation of costs for the one year period takes into account the effect of any current contractual fee waivers and/or reimbursements. The calculation of costs for the
remaining periods takes such fee waivers and/or reimbursements into account only for the first year of the periods.
Although your actual costs may be higher or lower, under these assumptions your costs would be:
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Class A
Shares
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Class C
Shares
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Class E
Shares
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Class S
Shares
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Class Y
Shares
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1 Year
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$
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814
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$
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328
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$
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253
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$
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228
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$
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210
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3 Years
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$
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1,309
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$
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1,001
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$
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779
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$
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703
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$
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649
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Portfolio Turnover
The Fund pays transaction costs, such as commissions, when
it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund Shares are held in a taxable account. These costs, which are not
reflected in annual fund operating expenses or in the example, affect the Funds performance. Because the Fund is new and has no Shares outstanding, it does not have a portfolio turnover rate at this time.
Investments, Risks and Performance
Principal Investment Strategies of the Fund
The Fund seeks to achieve its investment objective by employing a multi-manager approach whereby portions of the Funds assets are
allocated to different money managers unaffiliated with Russell Investment Management Company (RIMCo) that employ a diverse range of alternative investment strategies. The money managers will utilize Relative Value, Event Driven, Equity
Hedge and Tactical Trading strategies, as described below. Pursuant to the money managers various investment strategies, the Fund may invest in a broad range of instruments, markets and asset classes economically tied to U.S., foreign and
emerging markets. Investments may include equity securities, fixed income securities and derivatives. The Fund may take both long and short positions in all of its investments. A long position is one with the expectation that the underlying asset
will rise in value. A short position is one with the expectation that the underlying asset will decline in value. The Fund may also make investments for hedging purposes in order to address perceived misalignment between the Funds investment
exposures and current or anticipated market conditions. The Fund may or may not, at any one time, invest in all of the instruments or utilize all of the investment strategies discussed below.
In selecting money managers, RIMCo seeks to identify money managers that, based on their investment strategies
and historical performance, have the potential, in the opinion of RIMCo, to perform independently of each other and achieve low correlation to, and lower volatility than, global equity markets. When determining how to allocate the Funds assets
among money managers, RIMCo considers a variety of factors. These factors include a money managers investment strategy, investment approach, investment sub-strategy and expected return potential, as well as various characteristics of the money
managers typical investment portfolio. RIMCo also considers the manner in which money managers historical and expected investment returns correlate with one another. Fund assets not allocated to money managers are managed by RIMCo.
The Funds money managers use the following
alternative investment strategies: (1) Relative Value strategy, (2) Event Driven strategy, (3) Equity Hedge strategy and (4) Tactical Trading strategy. Each of these strategies (with the exception of the Relative Value strategy)
may employ both relative value and directional trading strategies. Directional trading emphasizes market movements and movements in security prices (rather than seeking to identify price discrepancies or liquidity mismatches).
Relative Value Strategy:
An investment strategy that
seeks to identify price discrepancies or liquidity mismatches among securities that share a common financial factor such as interest rates, an index or issuer to seek
4
gains and mitigate risk. The strategy is not reliant upon market direction. A money manager may employ a variety of quantitative and qualitative techniques to identify securities it believes are
mispriced or display liquidity discrepancies based upon historical, fundamental or technical factors.
Event Driven Strategy:
An investment strategy that seeks gains from market movements in the prices of financial instruments caused
by specific events. Such events may include balance sheet restructurings, mergers and acquisitions, litigation, regulatory action or a change in perception of the riskiness of investments. Investments in an Event Driven strategy may include
corporate fixed income securities, equity-related instruments, non-agency asset-backed and mortgage-backed securities. Certain of these investments may be illiquid.
Equity Hedge Strategy:
An investment strategy that
utilizes long and short positions primarily in equity and equity-related instruments. On the long side, money managers will seek gains from securities that they believe are undervalued, provide short term trading opportunities or offer growth
opportunities. On the short side, money managers will (1) seek gains from securities that they believe are overvalued or provide short term trading opportunities, (2) seek to reduce overall market risk or (3) seek gains from an
anticipated decline in the price of a company or index by using short sales or options on common stocks or indexes to hedge risk. This strategy may also use derivatives, including options, futures and options on futures.
Tactical Trading Strategy:
An investment strategy
across global markets that seeks return based on themes or trends in equity markets, interest rates, commodity markets, government securities, currencies or futures markets. These themes or trends can be price-based (i.e., asset price momentum or an
asset price relative to another asset or set of assets) or based on economic theory (i.e., forecasts based on the analysis of interest rate trends, political changes, government policy, flow of funds, or other broad systemic factors). While Tactical
Trading strategies often utilize directional long or short positions across global markets, they may also express views on the relative value of assets. Tactical Trading may use multi-durational investments, including short-term investments, to seek
gains.
The Fund invests in equity securities of
issuers of any market capitalization which are economically tied to U.S., foreign and emerging markets. These securities may include preferred stocks, rights, warrants, convertible securities, initial public offerings and depositary receipts. The
Fund may invest in securities of companies, known as real estate investment trusts (REITs) that own and/or manage properties.
The Fund also invests in fixed income securities of any credit quality and maturity, including fixed income securities that are rated
below investment grade (commonly referred to as high yield or junk bonds). The Fund also invests in (1) U.S. and non-U.S. corporate fixed income securities, (2) Yankee Bonds (dollar-denominated obligations issued in the U.S. by
non-U.S. banks and corporations), (3) fixed income securities issued or guaranteed by the U.S. government (including Treasury Inflation Protected Securities) and by non-U.S. governments, or by their respective agencies and instrumentalities,
(4) emerging markets debt securities, (5) municipal debt obligations, (6) mortgage-backed securities and (7) asset-backed securities. The Fund may also invest in variable and floating rate securities. The Fund purchases loans and
other direct indebtedness. The Fund may at times seek to protect its investments against adverse currency exchange rate changes by purchasing currency futures and options on futures, forward currency contracts and currency options. The Fund may also
engage in currency transactions for speculative purposes. The Fund invests in derivative instruments, including swaps, futures, options and credit default swaps. The Fund may invest in credit linked notes and credit options. A portion of the
Funds net assets may become illiquid securities.
The Fund invests in certain types of derivative instruments to take either long or short positions relative to the underlying asset, including futures, options, swaps, swaptions and credit derivatives.
The Fund may invest directly, or indirectly
through the Subsidiary, in commodity-linked derivative instruments (including futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and swaptions), exchange traded funds,
exchange traded notes and commodity-linked securities that together are intended to provide exposure to the performance of the collateralized commodity futures market. The Fund may invest up to 25% of its total assets in the Subsidiary.
The Fund, like any mutual fund, maintains cash reserves
(i.e., cash awaiting investment or cash held to meet redemption requests or to pay expenses).
From time to time, RIMCo may equitize cash received from large subscriptions on a short-term basis by purchasing equity securities and/or derivatives, which typically include index futures contracts.
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RIMCo may seek to manage risk in the Funds investment portfolio by increasing cash
reserves, buying and selling portfolio securities, and through the use of various instruments, including futures, options, swaps, and short term investments. Please refer to the Investment Objective and Investment Strategies section in
the Funds Prospectus for further information.
Principal Risks of Investing in the Fund
An investment in the Fund, like any investment, has risks. The value of the Fund fluctuates and you could lose money. The principal risks
of investing in the Fund are those associated with:
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Multi-Manager Approach.
While the investment strategies employed by the money managers are intended to be complementary, they may not in fact be complementary. A
multi-manager approach could result in more exposure to certain types of securities and higher portfolio turnover.
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Active Management
. The securities selected for the portfolio may not perform as the Funds money managers expect. Additionally, securities selected may
cause a Fund to underperform relative to other funds with similar investment objectives and strategies. There is no guarantee that RIMCo will effectively assess a Funds portfolio risk and it is possible that its judgments regarding a
Funds risk profile may prove incorrect which could lead to underperformance.
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Equity Securities
. The value of equity securities will rise and fall in response to the activities of the company that issued them, general market conditions
and/or economic conditions. Securities selected using a quantitative analysis can perform differently from the market as a whole. Investments in preferred stocks are subject to the risks of common stocks, as well as the risk that interest rates will
rise and make the fixed dividend feature, if any, less appealing to investors resulting in a decline in price.
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Fixed Income Securities
. Prices of fixed income securities generally rise and fall in response to, among other things, interest rate changes. The Fund could lose
money if the issuer or guarantor of a fixed income security or other issuer of credit support is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. In addition, fixed income securities may
be downgraded in credit rating or go into default.
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Non-Investment Grade Fixed Income Securities (High Yield or Junk Bonds).
Non-investment grade fixed income securities involve higher volatility and
higher risk of default than investment grade bonds.
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U.S. and Non-U.S. Corporate Debt Securities.
Investments in U.S. and non-U.S. corporate debt securities are subject to interest rate risk and market risk, and
are affected by perceptions of the creditworthiness and business prospects of individual issuers. Non-U.S. corporate debt securities may expose the Fund to greater risk than investments in U.S. corporate debt securities.
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Government Issued or Guaranteed Securities, U.S. Government Securities
. Bonds issued or guaranteed by a government are subject to inflation risk, price
depreciation risk and default risk.
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Mortgage-Backed Securities
. Mortgage-backed securities may be affected by, among other things, changes or perceived changes in interest rates, factors concerning
the interests in and structure of the issuer or the originator of the mortgage, or the quality of the underlying assets. The underlying assets may default or decline in quality or value.
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Asset-Backed Securities.
Payment of principal and interest on asset-backed securities may be largely dependent upon the cash flows generated by the assets
backing the securities and asset-backed securities may not have the benefit of any security interest in the related assets.
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Loans and Other Direct Indebtedness
. Loans and other direct indebtedness involve the risk that payment of principal, interest and other amounts due in connection
with these investments may not be received.
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Non-U.S. and Emerging Markets Securities.
Non-U.S. securities have risks relating to political, economic and regulatory conditions in foreign countries. The
risks associated with non-U.S. securities may be amplified for emerging markets securities.
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Currency Risk
. Non-U.S. securities that trade in, and receive revenues in, non-U.S. currencies are subject to the risk that those currencies will decline in
value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged. As a result, investments in non-U.S. dollar-denominated securities and currencies may reduce
the returns of the Fund. Currency trading strategies may involve instruments that have volatile prices, are illiquid or create economic leverage.
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Derivatives
. Derivatives are subject to a number of risks such as liquidity risk, market risk, credit risk, default risk, counterparty risk (the risk that the
other party in an agreement will fail to perform its obligations) and management risk. They also involve the risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate exactly with the change
in the value of the underlying asset, rate or index.
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Counterparty Risk.
Counterparty risk is the risk that the other party or parties to an agreement or a participant to a transaction, such as a broker, might
default on a contract or fail to perform by failing to pay amounts due or failing to fulfill the obligations of the contract or transaction.
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Short Sales Risk.
A short sale will result in a loss if the price of the security sold short increases between the date of the short sale and the date on which
the borrowed security must be returned. Short sales may give rise to a form of leverage. Leverage tends to exaggerate the effect of any increase or decrease in the value of portfolio securities.
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Commodity Risk
. Exposure to the commodities markets may subject the Fund to greater volatility than investments in traditional securities, particularly if the
investments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or sectors affecting a particular industry or commodity
and international economic, political and regulatory developments. The use of leveraged commodity-linked derivatives creates an opportunity for increased return, but also creates the possibility for a greater loss.
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Tax Risk
. The tax treatment of the Funds investments may be adversely affected by future legislation, Treasury Regulations and/or guidance issued by the
Internal Revenue Service (IRS) that could affect whether income derived from such investments is qualifying income under Subchapter M of the Internal Revenue Code, or otherwise alter the character, timing and/or amount of the
Funds taxable income or any gains and distributions made by the Fund.
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Subsidiary Risk.
By investing in the Subsidiary, the Fund will be indirectly exposed to the risks associated with the Subsidiarys investments, which are
generally similar to those that are permitted to be held by the Fund. The Subsidiary is not registered under the Investment Company Act of 1940, and is generally not subject to all of the provisions of the 1940 Act.
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REITs
. REITs may be affected by changes in the value of the underlying properties owned by the REITs and by the quality of tenants credit.
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Depositary Receipts
. Depositary receipts, which are securities traded on a local stock exchange that represent securities issued by a foreign publicly-listed
company, are subject to the risks associated with the underlying international securities.
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Illiquid Securities
. An illiquid security may be difficult to sell quickly and at a fair price, which could cause the Fund to realize a loss on the security if
it was sold at a lower price than that at which it had been valued.
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Liquidity Risk
. The market for certain investments may become illiquid under adverse or volatile market or economic conditions, making those investments
difficult to sell. The market price of certain investments may fall dramatically if there is no liquid trading market.
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High Portfolio Turnover Risk
. The Fund will likely engage in active and frequent trading, which may result in higher portfolio turnover rates, higher transaction
costs and realization of short-term capital gains that will generally be taxable to shareholders as ordinary income.
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Market Volatility
. Volatile financial markets can result in greater market and liquidity risk and potential difficulty in valuing portfolio instruments.
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Economic and Market Events Risk.
Global economies and financial markets are becoming increasingly interconnected and conditions and events in one country, region
or financial market may adversely impact issuers in a different country, region or financial market.
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Government Intervention in and Regulation of Financial Markets
. Changes in government regulation may adversely affect the value of a security.
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Increased Government Debt.
A high national debt level may increase market pressures to meet government funding needs, by driving debt costs higher, causing the
U.S. treasury to sell additional debt with shorter maturity periods, and increasing refinancing risk. Unstable debt values could cause declines in currency valuation and create certain systemic risks.
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Large Redemptions
. The Fund is expected to be used as an investment by certain funds of funds and in asset allocation programs and may have a large percentage of
its Shares owned by such funds or held in such programs. Large redemption activity could result in the Fund incurring additional costs and being forced to sell portfolio securities at a loss to meet redemptions.
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New Fund Risk.
The Fund is a new fund. There can be no assurance that the Fund will grow to an economically viable size, in which case the Fund may cease
operations. Investors may be required to liquidate or transfer their investments at an inopportune time.
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Please refer to the Risks section in the Funds Prospectus for further information.
An investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Performance
Because the Fund is new, performance history and average annual returns for the Fund are not included in this Prospectus. Performance history and average annual returns for the Fund will be included in
the Prospectus after the Fund has been in operation for one calendar year.
Management
Investment Adviser
The Funds investment adviser is RIMCo. Unlike most
investment companies that have a single organization that acts as investment adviser, the Fund divides responsibility for investment advice between RIMCo and a number of unaffiliated money managers. The money managers for the Fund are:
[To be Filed by Amendment]
Portfolio Manager
Lance Babbit, a Senior Portfolio Manager, has primary
responsibility for the management of the Fund. Mr. Babbit has managed the Fund since 2012.
8
ADDITIONAL INFORMATION
How to Purchase Shares
Unless you are eligible to participate in a Russell employee
investment program, Shares are only available through a select network of Financial Intermediaries. Class E and S Shares of the Fund may only be purchased by specified categories of investors. There is currently no required minimum initial
investment for Class A, Class C, Class E or Class S Shares. For Class Y Shares, there is a $10 million minimum initial investment for each account in each Fund. However, for Class Y Shares there is no required minimum initial
investment for specified categories of investors. The Fund reserves the right to close any account whose balance falls below $1,000 and to change the categories of investors eligible to purchase its Shares.
For more information about how to purchase Shares, please
see Additional Information about How to Purchase Shares in the Funds Prospectus.
How to Redeem Shares
Shares may be redeemed through your Financial Intermediary on any business day of the Fund (a day on which the New York Stock Exchange (NYSE) is open for regular trading). Redemption requests
are processed at the next net asset value per share calculated after the Fund receives an order in proper form as determined by your Financial Intermediary. Redemption requests must be received by the Fund or an authorized Fund agent prior to 4:00
p.m. Eastern Time or the close of the NYSE, whichever is earlier, to be processed at the net asset value calculated on that day. Please contact your Financial Intermediary for instructions and processing times on how to place redemption requests.
For more information about how to redeem Shares,
please see Additional Information about How to Redeem Shares in the Funds Prospectus.
Taxes
In general, distributions from the Fund are taxable to you as either ordinary income or capital gains.
For more information about these and other tax matters relating to the Fund and its shareholders, please see Additional Information about
Taxes in the Funds Prospectus.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other Financial Intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund Shares and
related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your Financial
Intermediarys Web site for more information.
For more information about payments to broker-dealers and other Financial Intermediaries please see Distribution and Shareholder Services
Arrangements and Payments to Financial Intermediaries in the Funds Prospectus.
9
MANAGEMENT OF THE FUND
The Funds investment adviser is
RIMCo, 1301 Second Avenue, 18
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Floor, Seattle, Washington
98101. RIMCo pioneered the multi-style, multi-manager investment method in mutual funds and, as of December 31, 2011, managed over $35 billion in 50 mutual fund portfolios. RIMCo, a wholly-owned subsidiary of Frank Russell Company
(Russell), was established in 1982 to serve as the investment management arm of Russell. Russell is a subsidiary of The Northwestern Mutual Life Insurance Company (Northwestern Mutual). Founded in 1857, Northwestern Mutual is
a mutual insurance company headquartered in Milwaukee, Wisconsin.
The Funds administrator and transfer agent is Russell Fund Services Company (RFSC), a wholly-owned subsidiary of RIMCo.
The Russell Investment Company (RIC) funds (RIC Funds) are offered through certain
banks (including bank trust departments), registered investment advisers, broker-dealers and other financial services organizations (collectively, Financial Intermediaries) that have been selected by RIMCo or Russell Financial
Services, Inc. (the Distributor). Most RIC Funds are designed to provide exposure to RIMCos multi-style, multi-manager diversification investment method utilizing RIMCos and Russells money manager
research services.
Russell was founded in 1936
and has been providing comprehensive asset management consulting services for over 30 years to institutional investors, principally large corporate employee benefit plans. Russell provides RIMCo and the RIC Funds with the money manager research
services that it provides to its other clients. The Fund does not compensate Russell for these services.
Unlike most investment companies that have a single organization that acts as investment adviser, the Fund divides responsibility for
investment advice between RIMCo and a number of unaffiliated money managers. RIMCo utilizes the money manager research and other resources of Russell in providing services to the RIC Funds. Russells money manager research services include
evaluating and recommending to RIMCo professional investment advisory and management organizations (money managers) to make specific portfolio investments for each asset class, according to designated investment objectives, styles and
strategies. The Funds assets are invested using a multi-style, multi-manager diversification technique.
The Fund conducts its business through a number of service providers who act on its behalf. RIMCo, the Funds investment
adviser, evaluates and oversees the Funds money managers as more fully described below. Each of the Funds money managers makes investment decisions for the portion of the Fund assigned to it by RIMCo. RFSC, in its capacity as the
Funds administrator, provides or oversees the provision of all administrative services for the Fund. The Funds custodian, State Street Bank, maintains custody of the Funds assets and establishes and monitors subcustodial
relationships with banks and certain other financial institutions in the foreign countries in which the Funds invest. RFSC, in its capacity as the Funds transfer agent, is responsible for maintaining the Funds shareholder records and
carrying out shareholder transactions. When the Fund acts in one of these areas, it does so through the service provider responsible for that area.
RIMCo provides or oversees the provision of all investment advisory and portfolio management services for the Fund, including developing
the investment program for the Fund. RIMCo selects, subject to the approval of the Funds Board of Trustees, money managers for the Fund, allocates Fund assets among those money managers, oversees them and evaluates their performance results.
The Funds money managers select the individual portfolio securities for the assets assigned to them.
RIMCo allocates most, currently usually at least 80%, of the Funds assets to multiple unaffiliated money managers. RIMCo manages the
portion of the Funds assets that RIMCo determines not to allocate to the money managers which generally consist of a Funds liquidity reserves and may also manage portions of a Fund during transitions between money managers. RIMCo may
also manage a Funds assets to manage risk in the Funds investment portfolio. While RIMCo recognizes that a certain level of risk is necessary to achieve a Funds investment objectives, RIMCo monitors, and may seek to manage, risk
consistent with the Funds investment objectives and strategies. RIMCo monitors risk using a variety of risk measurements such as tracking error for equity funds and duration for fixed income funds. RIMCo may, based on the facts and
circumstances of each case, including the specific characteristics of a Funds investment portfolio and general market conditions, directly manage a portion of the Funds assets, or reallocate assets among money managers for purposes of
seeking to manage the Funds risk profile.
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RIMCos employee who manages the Fund, oversees the money managers of the Fund and has
primary responsibility for the management of the Fund (the RIMCo Manager) is:
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Lance Babbit, Senior Portfolio Manager since 2011. Prior to joining Russell, Mr. Babbit was a Senior Portfolio Manager at Credit Suisse Group from 2007 to 2011.
From 2005 to 2007, Mr. Babbit was the Senior Portfolio Manager at Focus Investments.
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Please see the Funds Statement of Additional Information for additional information about the RIMCo Managers compensation,
other accounts managed by the RIMCo Manager and the RIMCo Managers ownership of securities in the Fund.
The Funds advisory fee as a percentage of average daily net assets is: 1.50%.
The Fund invests its cash reserves in an unregistered
cash management fund advised by RIMCo. RIMCo has waived its 0.05% advisory fee for the unregistered fund. RFSC charges a 0.05% administrative fee to the unregistered fund. The fees payable by the Fund with respect to the investment of the cash
reserves are included in the Acquired Fund Fees and Expenses in the Funds Annual Fund Operating Expenses table if they are at least 0.01% of the Funds average net assets.
The Fund invests all or a portion of its collateral received in securities lending transactions in an
unregistered cash management fund advised by RIMCo. The aggregate annual rate of advisory and administrative fees payable to RIMCo and RFSC on the securities lending collateral invested in the unregistered fund is 0.10%.
A discussion regarding the basis for the Boards
approval of the investment advisory contract between RIMCo and the Fund will be available in the Funds annual report to shareholders covering the period ended October 31, 2012.
THE MONEY MANAGERS
The Fund allocates most of its assets among the unaffiliated money managers listed under Money Manager
Information at the end of this Prospectus. Assets not allocated to money managers are managed by RIMCo. RIMCo, as the Funds adviser, may change the allocation of the Funds assets at any time.
Each money manager has complete discretion to select
portfolio securities for its segment of the Funds assets. At the same time, however, each money manager must operate within the Funds investment objectives, restrictions and policies. Additionally, each money manager must operate within
more specific parameters developed from time to time by RIMCo. RIMCo develops such parameters for each money manager based on RIMCos assessment of the money managers expertise and investment style. By assigning more specific parameters
to each money manager, RIMCo attempts to capitalize on the strengths of each money manager and to combine their investment activities in a complementary fashion. Although, under the Funds multi-manager structure, RIMCo is responsible for
oversight of the services provided by the Funds money managers and for providing reports to the Board regarding the money managers activities, the Board, the officers, RIMCo and Russell do not evaluate the investment merits of a money
managers individual security selections.
The Fund received an exemptive order from the Securities and Exchange Commission (SEC) that permits RIMCo to engage or
terminate a money manager at any time, subject to the approval by the Funds Board, without a shareholder vote. The Fund is required to notify its shareholders within 60 days after a money manager begins providing services. The Fund
selects money managers based upon the research and recommendations of RIMCo. RIMCo, utilizing the money manager research provided by Russell, evaluates quantitatively and qualitatively the money managers investment style and process,
performance record and portfolio characteristics in managing assets for specific asset classes, investment styles and strategies. Short-term investment performance, by itself, is not a controlling factor in the selection or termination of any money
manager.
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INVESTMENT OBJECTIVE AND INVESTMENT STRATEGIES
The Fund has a non-fundamental investment objective as
noted below. A non-fundamental investment objective may be changed by the Board without shareholder approval. If the Funds investment objective is changed, the Prospectus will be supplemented to reflect the new investment objective. To
the extent that there is a material change in the Funds investment objective, shareholders will be provided with reasonable notice.
The Board may, if it deems appropriate to do so, authorize the liquidation or merger of the Fund without shareholder approval. Unless
Fund Shares are held in a tax-deferred account, liquidation or merger may result in a taxable event for shareholders of the Fund.
The securities and investment strategies listed below are discretionary, which means that RIMCo or the money managers may or may not use
them. This Prospectus does not describe all of the various types of securities and investment strategies that may be used by the Fund. The Fund may invest in other types of securities and use other investment strategies that are not described in
this Prospectus. Such securities and investment strategies may subject the Fund to additional risks. Please see the Statement of Additional Information for additional information about the securities and investment strategies described in this
Prospectus and about additional securities and non-principal investment strategies that may be used by the Fund.
Unless otherwise stated, all percentage and credit quality limitations on Fund investments listed in this Prospectus apply at the time of
investment. There would be no violation of any of these requirements unless a Fund fails to comply with any such limitation immediately after and as a result of an investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
RUSSELL MULTI-STRATEGY ALTERNATIVE FUND
Investment Objective (Non-Fundamental)
The Fund seeks to achieve long-term capital growth with low
correlation to, and lower volatility than, global equity markets.
Principal Investment Strategies
The Fund seeks to achieve its investment objective by employing a multi-manager approach whereby portions of the Funds assets are
allocated to different money managers unaffiliated with RIMCo that employ a diverse range of alternative investment strategies. The money managers will utilize Relative Value, Event Driven, Equity Hedge and Tactical Trading strategies, as described
below. Pursuant to the money managers various investment strategies, the Fund may invest in a broad range of instruments, markets, and asset classes economically tied to U.S., foreign and emerging markets. Investments may include equity
securities, fixed income securities and derivatives. The Fund may take both long and short positions in all of its investments. A long position is one with the expectation that the underlying asset will rise in value. A short position is one with
the expectation that the underlying asset will decline in value. The Fund may also make investments for hedging purposes in order to address perceived misalignment between the Funds investment exposures and current or anticipated market
conditions. The Fund may or may not, at any one time, invest in all of the instruments or utilize all of the investment strategies discussed below.
In selecting money managers, RIMCo seeks to identify money managers that, based on their investment strategies and historical performance,
have the potential, in the opinion of RIMCo, to perform independently of each other and achieve low correlation to, and lower volatility than, global equity markets. When determining how to allocate the Funds assets among money managers, RIMCo
considers a variety of factors. These factors include a money managers investment strategy, investment approach, investment sub-strategy and expected return potential, as well as various characteristics of the money managers typical
investment portfolio. RIMCo also considers the manner in which money managers historical and expected investment returns correlate with one another. Fund assets not allocated to money managers are managed by RIMCo.
Money Manager Strategies
The Funds money managers use the following alternative
investment strategies: (1) Relative Value strategy, (2) Event Driven strategy, (3) Equity Hedge strategy and (4) Tactical Trading strategy. Each of these strategies (with the exception of the Relative Value strategy) may employ
both relative value and directional trading strategies. Directional trading emphasizes market movements and movements in security prices (rather than seeking to identify
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price discrepancies or liquidity mismatches). In addition, money managers may employ a fundamental investment approach, a quantitative investment approach or a combination of both. A quantitative
money manager selects securities using a variety of quantitative investment models (mathematical formulas based on statistical analyses) and mathematical techniques to rank the relative attractiveness of securities. A money manager using a
fundamental investment approach selects securities based upon its research and analysis of a variety of factors and may also incorporate quantitative investment models in its process.
Relative Value Strategy:
An investment strategy that seeks to identify price discrepancies or liquidity
mismatches among securities that share a common financial factor such as interest rates, an index or issuer to seek gains and mitigate risk. The strategy is not reliant upon market direction. A money manager may employ a variety of quantitative and
qualitative techniques to identify securities it believes are mispriced or display liquidity discrepancies based upon historical, fundamental or technical factors.
Investment Sub-Strategies Include:
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Fixed Income Sub-Strategy
focuses on investments in fixed income securities. Securities include sovereign and corporate fixed income securities, interest rate
swaps, futures, mortgage- and asset-backed securities and municipal debt obligations. The relative value trades share a common interest rate or credit spread component such as bonds and futures or bonds and swaps.
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Volatility Sub-Strategy
focuses on securities where volatility is a significant component of the price of the security (e.g., by seeking gains from price
discrepancies between convertible securities and their corresponding underlying equity security (convertible arbitrage)). Volatility is a measure of the frequency and level of changes in the price of a security without regard to the direction of
such changes.
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Event Driven
Strategy:
An investment strategy that seeks gains from market movements in the prices of financial instruments caused by specific events. Such events may include balance sheet restructurings, mergers and acquisitions, litigation, regulatory
action or a change in perception of the riskiness of investments. Investments in an Event Driven strategy may include corporate fixed income securities, equity-related instruments and non-agency asset-backed and mortgage-backed securities. Certain
of these investments may be illiquid.
Investment Sub-Strategies Include:
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Merger Arbitrage Sub-Strategy
is primarily focused on potential opportunities in equity and equity-related instruments of companies that are currently engaged in
a merger or acquisition. Opportunities may arise in cross-border and international transactions, which may require regulatory approval in multiple jurisdictions. Although the sub-strategy typically utilizes equity-related instruments, on occasion
corporate fixed income securities may also be used.
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Special Situations Sub-Strategy
is primarily focused on potential opportunities in equity and equity-related instruments of companies that are currently engaged
in a corporate transaction, security issuance or repurchase, asset sale, division spin-off or other catalyst-oriented event. Such opportunities may be identified through fundamental research or media reports with the expectation that they will
result in a corporate transaction or other realization of shareholder value through the occurrence of some identifiable catalyst.
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Asset-Backed Securities Sub-Strategy
seeks gains from asset-backed securities trading at a premium or discount to fair value. The value of asset-backed
securities are tied to cash flows, credit spread movements and macroeconomic conditions.
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Opportunistic Credit Sub-Strategy
seeks gains from opportunistic allocations to specific types of securities or markets, which may vary significantly over time
as market conditions vary. The degree of overall market exposure is based on money managers assessments of macroeconomic conditions.
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Distressed/High Yield Securities Sub-Strategy
focuses primarily on corporate credit instruments of companies that a money manager believes are trading at
significant discounts to their value at issuance or par value at maturity as a result of a market perception of significant financial or business difficulties. Money managers employ fundamental credit processes focused on valuation and asset
coverage of securities of stressed firms in order to identify potential opportunities.
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Equity Hedge Strategy:
An investment strategy that utilizes long and short positions
primarily in equity and equity-related instruments. On the long side, money managers will seek gains from securities that they believe are undervalued, provide short term trading opportunities or offer growth opportunities. On the short side, money
managers will (1) seek gains from securities that they believe are overvalued or provide short term trading opportunities, (2) seek to reduce overall market risk or (3) seek gains from an anticipated decline in the price of a company
or index by using short sales or options on common stocks or indexes to hedge risk. This strategy may also use derivatives, including options, futures and options on futures.
Investment Sub-Strategies Include:
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Fundamental Approach Sub-Strategy
may be used across global markets. The sub-strategy may be sector, geographic, market capitalization or short- or long-term
specific. The sub-strategy may also be exposure specific and may focus on long-bias, short-bias or short-only exposures.
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Quantitative Approach Sub-Strategy
may be sector, geographic, market capitalization or exposure specific, but uses statistical analysis and mathematical
techniques to develop models that rank the relative attractiveness of securities based on expected future returns. The models may utilize a variety of data sources, including security pricing, volume information, financial statements, sell side
research forecasts and recommendations, and news flow. The data is then processed via mathematical techniques into forecasts used to construct a portfolio with long and short positions.
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Tactical Trading Strategy:
An investment strategy
across global markets that seeks return based on themes or trends in equity markets, interest rates, commodity markets, government securities, currencies or futures markets. These themes or trends can be price-based (i.e., asset price momentum or an
asset price relative to another asset or set of assets) or based on economic theory (i.e., forecasts based on the analysis of interest rate trends, political changes, government policy, flow of funds, or other broad systemic factors). While Tactical
Trading strategies often utilize directional long or short positions across global markets, they may also express views on the relative value of assets. Tactical Trading may use multi-durational investments, including short-term investments, to seek
gains.
Investment Sub-Strategies Include:
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Discretionary Macro Sub-Strategy
is a primarily top-down sub-strategy that focuses on shifts in global government policies and money flows that may impact the
value of financial instruments. While models may be used to assist with data collection and interpretation, discretionary macro portfolios are created based upon security selection by the money managers. The sub-strategy emphasizes the
interpretation of broad global economic, demographic and financial data and seeks to gain from those interpretations through trading various financial instruments and asset classes. Discretionary macro strategies may be diversified by markets (both
developed and emerging), instruments and asset classes or they may be focused on a particular asset class, such as currencies or commodities. Trades may be directional, for example based on an expectation of an increase in the dollar price of gold,
or may express relative values between assets, such as a position between currency exchange rates in the spot or forwards market.
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Quantitative Macro Sub-Strategy
is a primarily top-down sub-strategy that uses quantitative techniques to seek gains from anticipated price movements across
multiple asset classes. These forecasted price movements may be either directional or relative to other assets. Models are largely based on valuation, economic fundamentals, changes in economic environments and changes in investor sentiment.
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Managed Futures
is a
sub-class of the Quantitative Macro Sub-Strategy that seeks gains from the implementation of quantitative models designed to anticipate upward or downward price movements in fixed income, currency, commodity or equity markets in both developed and
emerging markets. Models in the managed futures space are largely trend-following or momentum-driven strategies in nature.
Instruments
The Fund invests in equity securities of issuers of any market capitalization economically tied to U.S. and non-U.S. markets, including
emerging markets. Equity securities in which the Fund invests include common stock, preferred stock, real estate investment trusts (REITs), depositary receipts, initial public offerings and equity-related
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securities or instruments whose value is based on common stocks, such as convertible securities, rights, warrants or options to purchase common stock, futures contracts (stock or stock index) and
index swaps (equity-related instruments). The Funds positions in such securities may provide long or short exposures.
The Fund also invests in fixed income securities of any credit quality and maturity. The Fund may invest in U.S. and non-U.S. corporate
fixed income securities, Yankee Bonds (dollar-denominated obligations issued in the U.S. by non-U.S. banks and corporations) and fixed income securities issued or guaranteed by the U.S. government (including Treasury Inflation Protected Securities)
and by non-U.S. governments, or by their respective agencies and instrumentalities, as well as in emerging markets debt securities. The Fund may also purchase loans and other direct indebtedness. The Fund may invest, without limitation, in fixed
income securities that are rated below investment grade (commonly referred to as high-yield or junk bonds), in unrated securities judged by the money manager to be of comparable quality, in the lowest-rated fixed income securities,
including those in default. The Fund may invest in municipal debt obligations. The Funds investments may include variable and floating rate securities. A floating rate security is one whose terms provide for the automatic adjustment of an
interest rate whenever the specified interest rate changes. A variable rate security is one whose terms provide for the automatic establishment of a new interest rate on set dates. The Fund may invest a portion of its assets in mortgage related
securities including mortgage-backed securities, collateralized mortgage obligations, collateralized loan obligations, commercial mortgage-backed securities, mortgage pass-through securities, to be announced (TBA) securities, interest
only mortgage-backed securities, principal only mortgage-backed securities and mortgage dollar rolls, that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. A dollar roll is the
sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price, and may be considered a form of borrowing for some purposes. By investing in mortgage related securities, the Fund may also have exposure to
non-agency mortgage-backed securities, including to Alternative A (Alt-A) paper, subprime and/or non-conforming mortgages. The Fund may also invest in asset-backed securities, which may include, among others, credit card, automobile loan
and/or home equity line of credit receivables.
The Fund invests in certain types of derivative instruments to take either long or short positions relative to the underlying asset. The
Fund may purchase and sell futures contracts, including interest rate, foreign currency and Treasury futures, and enter into options, forward foreign currency contracts, swap agreements (including interest rate and currency swaps) or swaptions as a
substitute for holding securities directly, for hedging purposes, to take a net short position with respect to certain issuers, sectors or markets, or to adjust the interest rate sensitivity and duration of the Funds portfolio. The Fund may
buy or sell credit default swaps or other credit derivatives, including credit linked notes and credit options, as an alternative to buying or selling the fixed income securities themselves or otherwise to increase the Funds total return.
Credit default swaps resemble insurance contracts in that the seller of the swap provides the buyer with protection against specific risks of the issuer, such as defaults and bankruptcies, in exchange for a premium from the buyer. Credit linked
notes are obligations between two or more parties where the payment of principal and/or interest is based on the performance of some obligation, basket of obligations, index or economic indicator (a reference instrument). Credit options,
which are options whereby the purchaser has the right, but not the obligation, to enter into a transaction involving either an asset with inherent credit risk or a credit derivative, at terms specified at the initiation of the option. The Fund may
invest in STRIPS (Separate Trading of Registered Interest and Principal of Securities). STRIPS are created by separating the interest and the principal components of an outstanding U.S. Treasury or agency note or fixed income security and selling
them as individual securities.
A money manager
may seek to protect its investments for the Fund against adverse currency exchange rate changes by purchasing currency futures and options on futures, forward currency contracts and currency options. These contracts enable a money manager to
lock in the U.S. dollar price of a security that it plans to buy or sell. A money manager may purchase or sell foreign currencies, mainly through the use of forward, spot and option contracts, for speculative purposes based on the money
managers judgment regarding the direction of the market for a particular foreign currency or currencies.
The Fund will enter into short sales and certain of the Funds money managers may utilize a short-only strategy. Short sales are
transactions in which a money manager sells a security it does not own in the portion of the Fund managed by it in anticipation of a decline in the market value of that security. The Fund borrows the security and sells it to the buyer. The Fund then
is obligated to replace the security borrowed by purchasing the security at its 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 Fund. The Fund 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 Fund must return the borrowed security. The Fund will realize a
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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 Fund may also make
short sales against the box. In this type of short sale, at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire the identical security at no additional cost. Although short selling implies the use
of leverage, the Fund maintains a special custody account that mitigates the leverage effect in that the short sales are fully collateralized.
The Fund may invest directly, or indirectly through a wholly-owned subsidiary of the Fund (the Subsidiary) organized as a
company under the laws of the Cayman Islands, in commodity-linked derivative instruments (including futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and swaptions),
exchange traded funds, exchange traded notes and commodity-linked securities that together are intended to provide exposure to the performance of the collateralized commodity futures market. The Fund may invest up to 25% of its total assets in the
Subsidiary. Shares of the Subsidiary are not offered to any investors other than the Fund. Investing in the Subsidiary allows the Fund to achieve greater exposure to the commodities markets than would otherwise be possible because of U.S. tax law
requirements. The Subsidiary is advised by RIMCo and has certain of the same money managers as the Fund. Employees of RIMCo serve as directors of the Subsidiary. The Subsidiary may invest without limitation in commodity-linked securities and
derivative instruments that provide exposure to the performance of the commodities markets. The Subsidiary may also invest in fixed income instruments. Although the Subsidiary is otherwise subject to the same fundamental, non-fundamental and certain
other investment restrictions as the Fund, the investment programs of the Fund and the Subsidiary are not identical.
A portion of the Funds net assets may become illiquid securities (i.e., securities that do not have a readily available
market or that are subject to resale restrictions, possibly making them difficult to sell in the ordinary course of business within seven days at approximately the value at which the Fund has valued them).
RIMCo Strategies
The Fund, like any mutual fund, maintains cash reserves
(i.e., cash awaiting investment or cash held to meet redemption requests or to pay expenses). Cash reserves are invested in short-term investments, including the Russell U.S. Cash Management Fund, an unregistered fund advised by RIMCo whose
investment objective is to seek to preserve principal and provide liquidity and current income. The Fund may increase its cash reserves for risk management purposes, in anticipation of a transition to a new money manager or large redemptions
resulting from rebalancing by funds of funds or asset allocation programs.
From time to time, RIMCo may equitize cash received from large subscriptions on a short-term basis pending allocation of such cash to the money managers. In such cases, RIMCo would expose such cash
inflows to the performance of appropriate markets by purchasing equity securities and/or derivatives (also known as equitization), which typically include index futures contracts. This is intended to cause such cash to perform as though
it were actually invested in those markets.
Consistent with the Funds objectives and strategies, RIMCo may seek to manage risk in the Funds investment portfolio by
increasing cash reserves, buying and selling portfolio securities, including exchange-traded funds or notes, or through the use of various instruments, including futures, options, swaps or cash instruments. In addition, RIMCo may reallocate assets
among money managers as a means of managing risk. For additional information regarding the risk management program, please see the Management of the Funds section of the Funds prospectus.
Non-Principal Investment Strategies
The Fund may enter into repurchase agreements. A repurchase
agreement is an agreement under which the Fund acquires a fixed income security from a commercial bank, broker or dealer and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally the next business
day).
The Fund may enter into when issued
transactions (also called forward commitments).
The Fund may lend its portfolio securities in an amount up to one-third of its total assets to earn income. These loans may be terminated
at any time. The Fund will receive either cash, which is invested at its own risk by the Fund, or U.S. government debt obligations as collateral to secure the obligations of the borrower.
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RISKS
An investment in the Fund, like any investment, has risks.
The value of the Fund fluctuates and you could lose money. The following table lists the types of principal and non-principal risks the Fund is subject to. Please refer to the discussion following the chart and the Funds Statement of
Additional Information for a discussion of risks associated with types of securities held by the Fund and the investment practices employed by the Fund.
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Fund
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Principal Risks
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Non-Principal
Risks
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Russell Multi-Strategy Alternative Fund
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Multi-Manager Approach
Active Management Risk
Security Selection
Risk
Management
Equity Securities Risk
Common Stocks
Quantitative
Investing
Fundamental Investing
Preferred
Stocks
Rights, Warrants and Convertible Securities
Distressed Securities Risk
Fixed Income Securities Risk
Non-Investment Grade Fixed Income Securities (High Yield or Junk Bonds)
U.S. and Non-U.S. Corporate Debt Securities Risk
Government Issued or Guaranteed Securities, U.S. Government Securities
Bank Obligations
Municipal
Obligations
Money Market Securities and Commercial Paper
Debt Securities Guaranteed Pursuant to Government Guarantees
Asset-Backed Commercial Paper
Variable and Floating Rate Securities
Mortgage-Backed Securities
Asset-Backed Securities
Demand Notes
Dollar
Rolls
Loans and Other Direct Indebtedness
Credit Linked Notes, Credit Options and Similar Investments
Non-U.S. Securities
Non-U.S.
Equity Securities
Non-U.S. Fixed Income Securities
Emerging Markets Securities
Emerging Markets Debt
Yankee
Bonds and Yankee CDs
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Currency Risk
Equity
Linked Notes
Derivatives (Future Contracts, Options, Forwards and Swaps)
Currency Trading
Forward
Currency Contracts
Leveraging Risk
Counterparty
Risk
Short Sales
Commodity
Risk
Tax Risk
Subsidiary
Risk
Securities of Other Investment Companies
Real Estate Securities
REITs
Depositary
Receipts
Illiquid Securities
Liquidity
Risk
High Portfolio Turnover Risk
Market Volatility
Economic
and Market Events Risk
Government Intervention in and Regulation of Financial Markets
Increased Government Debt
Large Redemptions and Subscriptions
Exposing Cash Inflows to Appropriate Markets
New Fund Risk
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Repurchase Agreements
Brady
Bonds
Securities Lending
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In order to determine which risks are principal or non-principal risks for the Fund, please
refer to the table above.
Multi-Manager Approach
While the investment strategies employed by
the Funds money managers are intended to be complementary, they may not in fact be complementary. The interplay of the various strategies employed by the Funds multiple money managers may result in the Fund holding a
concentration of certain types of securities. This concentration may be beneficial or detrimental to the Funds performance depending upon the performance of those securities and the overall economic environment. The money managers
selected for the Fund may underperform the market generally or other money managers that could have been selected for the Fund. The degree of correlation among money managers investment strategies and the market as a whole will vary as a
result of market conditions and other factors, and some money managers will have a greater degree of correlation with each other and with the market than others. The success of the Funds investment strategy depends on, among other things, both
RIMCos skill in selecting money managers and allocating assets to those money managers and on a money managers skill in executing the relevant investment strategy and selecting investments for the Fund.
Active Management Risk
Actively managed investment portfolios are subject to
management risk. Despite strategies designed to achieve a Funds investment objective, the values of investments will change with market conditions, and so will the value of any investment in the Fund. Investments in the Fund could be
lost or the Fund could underperform other investments.
The securities or instruments chosen by RIMCo or a money
manager to be in the Funds portfolio may not perform as the Funds money managers expect. Security or instrument selection risk may cause the Fund to underperform other funds with similar investment objectives and investment
strategies even in a rising market.
There is no guarantee that RIMCo will effectively assess
the Funds portfolio risk and it is possible that its judgments regarding the Funds risk profile may prove incorrect. In addition, actions taken for risk management purposes may be ineffective and/or cause the Fund to
underperform other funds with similar investment objectives and investment strategies. Risk models are generally backward-looking or use historical data to generate forecasts for the future which could result in an incorrect assessment of the level
of risk in the Funds portfolio.
Equity Securities
Risk
The value of equity securities
fluctuates in response to general market and economic conditions (market risk) and in response to the fortunes of individual companies (company risk). Therefore, the value of an investment in the Fund may decrease. The market as a whole can decline
for many reasons, including adverse political or economic developments here or abroad, changes in investor psychology, or heavy institutional selling. Also, certain unanticipated events, such as natural disasters, terrorist attacks, war, and other
geopolitical events, can have a dramatic adverse effect on stock markets. Changes in the financial condition of a company or other issuer, changes in specific market, economic, political, and regulatory conditions that affect a particular type of
investment or issuer, and changes in general market, economic, political, and regulatory conditions can adversely affect the price of equity securities. These developments and changes can affect a single issuer, issuers within a broad market sector,
industry or geographic region, or the market in general.
The value of common stocks will rise and fall in response
to the activities of the company that issued the stock, general market conditions and/or economic conditions. If an issuer is liquidated or declares bankruptcy, the claims of owners of bonds will take precedence over the claims of owners of common
stocks.
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Securities selected using quantitative analysis can perform differently from the market as a whole as a result
of the factors used in the analysis, the weight placed on each factor, and changes from the factors historical trends. Quantitative analysis may not work as anticipated or produce the desired results. Additionally, commonality of holdings
across quantitative money managers may amplify losses.
In fundamental analysis, securities are selected based on an evaluation of a companys future earnings
potential, security valuations, financial quality and business momentum. The process may result in an evaluation of a securitys value that may be incorrect or, if correct, may not be reflected in the securitys price.
Investments in preferred stocks are subject to the risks of
common stocks, as well as the risk that interest rates will rise and make the fixed dividend feature, if any, less appealing to investors resulting in a decline in price. Preferred stock does not usually have voting rights. The absence of voting
rights may result in approval by the holders of the common stock of a corporate action to restructure a company for the benefit of the holders of the common stock to the detriment of the holders of the preferred stocks.
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Rights, Warrants and Convertible Securities
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Rights and warrants are instruments which entitle the
holder to buy an equity security at a specific price for a specific period of time. Rights are similar to warrants but typically have shorter durations and are offered to current stockholders of the issuer. Changes in the value of a right or a
warrant do not necessarily correspond to changes in the value of its underlying security. The price of a right or a warrant may be more volatile than the price of its underlying security, and a right or a warrant may offer greater potential for
capital loss.
Convertible securities can be
bonds, notes, debentures, preferred stock or other securities which are convertible into common stock. Convertible securities are subject to both the credit and interest rate risks associated with fixed income securities and to the market risk
associated with common stock.
Fixed Income Securities Risk
Fixed income securities generally are
subject to the following risks: (i)
Interest rate risk
which is the risk that prices of fixed income securities generally rise and fall in response to interest rate changes. Generally, when interest rates rise, prices of fixed income
securities fall. Expectations of higher inflation generally cause interest rates to rise. The longer the duration of the security, the more sensitive the security is to this risk. A 1% increase in interest rates would reduce the value of a $100 note
by approximately one dollar if it had a one-year duration; (ii)
Market risk
which is the risk that the value of fixed income securities fluctuates in response to general market and economic conditions; (iii)
Company Risk
which is the risk that the value of fixed income securities fluctuates in response to the fortunes of individual companies; (iv)
Credit and default risk
which is the risk that a Fund could lose money if the issuer or guarantor of a fixed
income security or other issuer of credit support is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk which are often reflected in
credit ratings. Fixed income securities may be downgraded in credit rating or go into default. While all fixed income securities are subject to credit risk, lower-rated bonds and bonds with longer final maturities generally have higher credit risks
and higher risk of default; (v)
Inflation risk
which is the risk that the present value of a security will be less in the future if inflation decreases the value of money.
Specific types of fixed income securities are also subject to additional risks which are described below.
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Non-Investment Grade Fixed Income Securities (High-Yield or Junk Bonds)
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Although lower rated
debt securities generally offer a higher yield than higher rated debt securities, they involve higher risks, higher volatility and higher risk of default than investment grade bonds. They are especially subject to:
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Adverse changes in general economic conditions and in the industries in which their issuers are engaged,
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Changes in the financial condition of their issuers and
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Price fluctuations in response to changes in interest rates.
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As a result, issuers of lower rated debt securities are more likely than other issuers to miss principal and interest payments or to
default which could result in a loss to the Fund.
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U.S. and Non-U.S. Corporate Debt Securities Risk
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U.S. and non-U.S. corporate debt securities are subject to
the same risks as other fixed income securities, including interest rate risk and market risk. U.S. and non-U.S. corporate debt securities are also affected by perceptions of the creditworthiness and business prospects of individual issuers. The
underlying company may be unable to pay interest or repay principal upon maturity, which could adversely affect the securitys market value. In addition, due to less publicly available financial and other information, less stringent securities
regulation, war, and other adverse governmental actions, investments in non-U.S. corporate debt securities may expose the Fund to greater risk than investments in U.S. corporate debt securities.
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Government Issued or Guaranteed Securities, U.S. Government Securities
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Bonds guaranteed by a government are subject to the same
risks as other fixed income securities, including inflation risk, price depreciation risk and default risk. No assurance can be given that the U.S. government will provide financial support to certain U.S. government agencies or instrumentalities
since it is not obligated to do so by law. Accordingly, bonds issued by U.S. government agencies or instrumentalities may involve risk of loss of principal and interest.
An adverse development in the banking industry may affect
the value of the Funds investments. Banks may be particularly susceptible to certain economic factors such as interest rate changes, adverse developments in the real estate market, fiscal and monetary policy and general economic cycles.
Banks are subject to extensive but different government regulations which may limit both the amount and types of loans which may be made and interest rates which may be charged. The profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play
an important part in the operation of this industry. The banking industry may also be impacted by legal and regulatory developments, particularly the recently enacted financial reform legislation. The specific effects of such developments are not
yet fully known.
Municipal obligations are subject to interest rate, credit and illiquidity risk and are affected by economic,
business and political developments. The value of these securities, or an issuers ability to make payments, may be subject to provisions of litigation, bankruptcy and other laws affecting the rights and remedies of creditors, or may become
subject to future laws extending the time for payment of principal and/or interest, or limiting the rights of municipalities to levy taxes.
Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to
taxation, legislative changes, or the rights of municipal security holders. In addition, the perceived increased likelihood of default among issuers of municipal bonds has resulted in increased illiquidity, increased price volatility and credit
downgrades of such issuers.
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Money Market Securities and Commercial Paper
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Prices of money market securities rise and fall in response
to interest rate changes. Generally, when interest rates rise, prices of money market securities fall. Money market securities are also subject to reinvestment risk. As interest rates decline, a money market funds dividends (income) may
decline because the fund must then invest in lower-yielding instruments. There is also a risk that money market securities will be downgraded in credit rating or go into default. Lower-rated securities, and securities with longer final maturities,
generally have higher credit risks.
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Debt Securities Guaranteed Pursuant to Government Guarantees
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The TLGP guarantee presently extends through the earlier of
the maturity date of the debt or June 30, 2012. This guarantee does not extend to shares of the Fund itself. FDIC-guaranteed debt is still subject to interest rate and securities selection risk. The terms of other government guarantee programs
may differ.
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Asset-Backed Commercial Paper
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Asset-backed commercial paper is a fixed income obligation generally issued by a corporate-sponsored special
purpose entity to which the corporation has contributed cash-flowing receivables such as credit card receivables or auto and equipment leases. Investment in asset-backed commercial paper is subject to the risk that insufficient proceeds from the
projected cash flows of the contributed receivables are available to repay the commercial paper. Asset-backed commercial paper is usually unregistered and, therefore, transfer of these securities is restricted by the Securities Act of 1933.
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Variable and Floating Rate Securities
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A floating rate security is one whose terms provide for the
automatic adjustment of an interest rate whenever the specified interest rate changes. A variable rate security is one whose terms provide for the automatic establishment of a new interest rate on set dates. The interest rate on floating rate
securities is ordinarily tied to and is a specified margin above or below the prime rate of a specified bank or some similar objective standard, such as the yield on the 90-day U.S. Treasury Bill rate, and may change as often as daily. Variable and
floating rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally
increase in value if interest rates decline. Inverse floating rate securities may decrease in value if the interest rates increase. Inverse floating rate securities, which are securities whose interest rate bears an inverse relationship to the
interest rate on another security, may also exhibit greater price volatility than a fixed rate obligation with similar credit quality.
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Mortgage-Backed Securities
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The value of mortgage-backed securities (MBS) may be affected by, among other things, changes or
perceived changes in interest rates, factors concerning the interests in and structure of the issuer or the originator of the mortgage, or the quality of the mortgages underlying the securities. The mortgages underlying the securities may default or
decline in quality or value. Through its investments in MBS, the Fund has exposure to subprime loans, Alt-A loans and non-conforming loans as well as to the mortgage and credit markets generally. Underlying collateral related to subprime, Alt-A and
non-conforming mortgage loans has become increasingly susceptible to defaults and declines in quality or value, especially in a declining residential real estate market. In addition, regulatory or tax changes may adversely affect the mortgage
securities markets as a whole.
MBS often have
stated maturities of up to thirty years when they are issued, depending upon the length of the mortgages underlying the securities. In practice, however, unscheduled or early payments of principal and interest on the underlying mortgages may make
the securities effective maturity shorter than this, and the prevailing interest rates may be higher or lower than the current yield of the Funds portfolio at the time resulting in reinvestment risk.
Rising or high interest rates may result in slower than
expected principal payments which may tend to extend the duration of MBS, making them more volatile and more sensitive to changes in interest rates. This is known as extension risk.
Certain MBS may be issued or guaranteed by the U.S. government or a government sponsored entity, such as
Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation). Although these instruments may be guaranteed by the U.S. government or a government sponsored entity, many such MBS are not backed by
the full faith and credit of the United States and are still exposed to the risk of non-payment.
MBS may have less potential for capital appreciation than comparable fixed income securities due to the likelihood of prepayments of mortgages resulting from foreclosures or declining interest rates.
These foreclosed or refinanced mortgages are paid off at face value (par) or less, causing a loss, particularly for any investor who may have purchased the security at a premium or a price above par. In such an environment, this risk limits the
potential price appreciation of these securities.
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MBS held by the Fund may be issued by private issuers including commercial banks, savings
associations, mortgage companies, investment banking firms, finance companies and special purpose finance entities (called special purpose vehicles or SPVs) and other entities that acquire and package mortgage loans for resale as MBS. These
privately issued non-governmental MBS may offer higher yields than those issued by government entities, but also may be subject to greater price changes and other risks than governmental issues. Subprime loans refer to loans made to borrowers with
weakened credit histories or with a lower capacity to make timely payments on their loans. Alt-A loans refer to loans extended to borrowers who have incomplete documentation of income, assets, or other variables that are important to the credit
underwriting processes. Non-conforming mortgages are loans that do not meet the standards that allow purchase by government-sponsored enterprises. MBS with exposure to subprime loans, Alt-A loans or non-conforming loans have had in many cases higher
default rates than those loans that meet government underwriting requirements. The risk of non-payment is greater for MBS that are backed by mortgage pools that contain subprime, Alt-A and non-conforming loans, but a level of risk exists for all
loans.
Unlike MBS issued or guaranteed by the
U.S. government or a government sponsored entity, MBS issued by private issuers do not have a government or government-sponsored entity guarantee, but may have credit enhancements provided by external entities such as banks or financial institutions
or achieved through the structuring of the transaction itself. Examples of such credit support arising out of the structure of the transaction include the issue of senior and subordinated securities (e.g., the issuance of securities by an SPV in
multiple classes or tranches, with one or more classes being senior to other subordinated classes as to the payment of principal and interest, with the result that defaults on the underlying mortgage loans are borne first by the holders
of the subordinated class); creation of reserve funds (in which case cash or investments, sometimes funded from a portion of the payments on the underlying mortgage loans, are held in reserve against future losses); and
overcollateralization (in which case the scheduled payments on, or the principal amount of, the underlying mortgage loans exceeds that required to make payment on the securities and pay any servicing or other fees). However, there can be
no guarantee that credit enhancements, if any, will be sufficient to prevent losses in the event of defaults on the underlying mortgage loans. In addition, MBS that are issued by private issuers are not subject to the underwriting requirements for
the underlying mortgages that are applicable to those MBS that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying private MBS may, and frequently do, have less favorable collateral, credit risk or
other underwriting characteristics than government or government-sponsored MBS and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently include
second mortgages, high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label MBS pool may vary to a greater extent than those included in a government guaranteed
pool, and the pool may include subprime mortgage loans.
Privately issued MBS are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived weakness in the mortgage and real estate market sectors.
Without an active trading market, MBS held in the Funds portfolio may be particularly difficult to value because of the complexities involved in assessing the value of the underlying mortgage loans.
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Asset-Backed Securities
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Asset-backed securities may include MBS, loans (such as auto loans or home equity lines of credit),
receivables or other assets. The value of the Funds asset-backed securities may be affected by, among other things, actual or perceived changes in interest rates, factors concerning the interests in and structure of the issuer or the
originator of the receivables, the markets assessment of the quality of underlying assets or actual or perceived changes in the creditworthiness of the individual borrowers, the originator, the servicing agent or the financial institution
providing the credit support.
Payment of
principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities. Rising or high interest rates tend to extend the duration of asset-backed securities, making them more volatile and more sensitive to
changes in interest rates. The underlying assets are sometimes subject to prepayments which can shorten the securitys weighted average life and may lower its return. Defaults on loans underlying asset-backed securities have become an
increasing risk for asset-backed securities that are secured by home-equity loans related to subprime, Alt-A or non-conforming mortgage loans, especially in a declining residential real estate market.
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Asset-backed securities (other than MBS) present certain risks that are not presented by
MBS. Primarily, these securities may not have the benefit of any security interest in the related assets. 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. 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 on underlying assets to make payments, the
securities may contain elements of credit support which 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 results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may be provided through guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund 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. The availability of asset-backed securities
may be affected by legislative or regulatory developments. It is possible that such developments may require the Fund to dispose of any then existing holdings of such securities.
The use of repurchase agreements involves certain risks. One risk is the sellers ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the Fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under bankruptcy laws, the
disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under bankruptcy or other laws, a court may determine that the underlying
securities that are collateral for a loan by the Fund are not within its control and therefore the realization by the Fund on such collateral may be automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities and may be deemed an unsecured creditor of the other party to the agreement.
Demand notes are obligations with the right to a
put. The ability of the Fund to exercise the put may depend on the sellers ability to purchase the securities at the time the put is exercised or on certain restrictions in the buy back arrangement. Such restrictions may prohibit
the Funds from exercising the put except to maintain portfolio flexibility and liquidity. In the event the seller would be unable to honor a put for financial reasons, the Fund may be a general creditor of the seller. There may be certain
restrictions in the buy back arrangement which may not obligate the seller to repurchase the securities.
The Fund may enter into dollar rolls subject to its
limitations on borrowings. A dollar roll involves the sale of a security by the Fund and its agreement to repurchase the instrument at a specified time and price, and may be considered a form of borrowing for some purposes. The Fund will
segregate or earmark liquid assets to cover its obligations under dollar rolls. Dollar rolls may create leveraging risk for the Fund.
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Loans and Other Direct Indebtedness
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Loans and other direct indebtedness involve the risk that
the Fund will not receive payment of principal, interest and other amounts due in connection with these investments, which depend primarily on the financial condition of the borrower. Certain of the loans and the other direct indebtedness
acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay additional cash on a certain date or on demand.
As the Fund may be required to rely upon another lending institution to collect and pass on to the Fund
amounts payable with respect to the loan and to enforce the Funds rights under the loan and other direct
23
indebtedness, an insolvency, bankruptcy or reorganization of the lending institution may delay or prevent the Fund from receiving such amounts. The highly leveraged nature of many such loans and
other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions. Investments in such loans and other direct indebtedness may involve additional risk to
the Fund.
In purchasing loans or loan
participations, the Fund assumes the credit risk associated with the corporate borrower and may assume the credit risk associated with the interposed bank or other financial intermediary. If the corporate borrower defaults on its obligations,
the Fund may end up owning the underlying collateral.
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Credit Linked Notes, Credit Options and Similar Investments
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Credit linked notes are obligations between two or more
parties where the payment of principal and/or interest is based on the performance of some obligation, basket of obligations, index or economic indicator (a reference instrument). In addition to the credit risk associated with the
reference instrument and interest rate risk, the buyer and seller of a credit linked note or similar structured investment are subject to counterparty risk. Credit options are options whereby the purchaser has the right, but not the obligation, to
enter into a transaction involving either an asset with inherent credit risk or a credit derivative, at terms specified at the initiation of the option. These transactions involve counterparty risk.
Non-U.S. Securities
The Funds return and net asset value may be
significantly affected by political or economic conditions and regulatory requirements in a particular country. Non-U.S. markets, economies and political systems may be less stable than U.S. markets, and changes in exchange rates of foreign
currencies can affect the value of the Funds foreign assets. Non-U.S. laws and accounting standards in some cases may not be as comprehensive as they are in the U.S. and there may be less public information available about foreign
companies. Non-U.S. securities markets may be less liquid and have fewer transactions than U.S. securities markets and taxes and transaction costs may be higher. Additionally, international markets may experience delays and disruptions in securities
settlement procedures for the Funds portfolio securities. Investments in foreign countries could be affected by potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods or
restrictions affecting the prompt return of capital to the U.S.
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Non-U.S. Equity Securities
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Non-U.S. equity securities are subject to all of the risks of equity securities generally, but can involve
additional risks relating to political, economic or regulatory conditions in foreign countries. Less information may be available about foreign companies than about domestic companies, and foreign companies generally may not be subject to the same
uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic companies.
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Non-U.S. Fixed Income Securities
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The Funds non-U.S. fixed income securities are
typically obligations of sovereign governments and corporations. As with any fixed income securities, non-U.S. fixed income securities are subject to the risk of being downgraded in credit rating and to the risk of default. To the extent that
the Fund invests a significant portion of its assets in a concentrated geographic area like Eastern Europe or Asia, the Fund will generally have more exposure to regional economic risks associated with these foreign investments.
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Emerging Markets Securities
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Investing in emerging markets securities can pose some risks different from, and greater than, risks of
investing in U.S. or developed markets securities. These risks include: a risk of loss due to political instability; exposure to economic structures that are generally less diverse and mature, and to political systems which may have less stability,
than those of more developed countries; smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible repatriation of investment
income and capital. In addition, foreign investors may be required to register the proceeds of sales and future economic or
24
political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging
market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Funds. Emerging market securities may be subject to currency transfer restrictions and may
experience delays and disruptions in securities settlement procedures for the Funds portfolio securities. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.
The Funds emerging markets debt securities may include obligations of governments and corporations. As
with any fixed income securities, emerging markets debt securities are subject to the risk of being downgraded in credit rating and to the risk of default. In the event of a default on any investments in foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of such securities. With respect to debt issued by emerging market governments, such issuers may be unwilling to pay interest and repay principal when due, either due to
an inability to pay or submission to political pressure not to pay, and as a result may default, declare temporary suspensions of interest payments or require that the conditions for payment be renegotiated.
Brady Bonds involve various risk factors including residual
risk (i.e., the risk of losing the uncollateralized interest and principal amounts on the bonds) and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no
assurance that Brady Bonds will not be subject to restructuring arrangements or to requests for new credit, which may cause a loss of interest or principal on any of the holdings.
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Yankee Bonds and Yankee CDs
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Non-U.S. corporations and banks issuing dollar denominated instruments in the U.S. (Yankee Bonds or Yankee
CDs) are not necessarily subject to the same regulatory requirements that apply to U.S. corporations and banks, such as accounting, auditing and recordkeeping standards, the public availability of information and, for banks, reserve requirements,
loan limitations and examinations. This complicates efforts to analyze these securities, and may increase the possibility that a non-U.S. corporation or bank may become insolvent or otherwise unable to fulfill its obligations on these instruments.
Foreign (non-U.S.) securities that trade in, and receive
revenues in, foreign (non-U.S.) currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency
being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time due to market events, actions of governments or their central banks or political developments in the U.S. or abroad. As a result, investments in
non-U.S. dollar-denominated securities and currencies may reduce the returns of the Fund. Securities held by the Fund which are denominated in U.S. dollars are still subject to currency risk.
An equity linked note is a note, typically issued by a
company or financial institution, whose performance is tied to a single stock or a basket of stocks. Generally, upon the maturity of the note, the holder receives a return of principal based on the capital appreciation of the underlying linked
securities. The terms of an equity linked note may also provide for the periodic interest payments to holders at either a fixed or floating rate. Equity linked notes are generally subject to the risks associated with the debt securities of foreign
issuers and with securities denominated in foreign currencies and, because they are equity linked, may return a lower amount at maturity because of a decline in value of the linked security or securities. Equity linked notes are also subject to
default risk and counterparty risk.
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Derivatives (Futures Contracts, Options, Forwards and Swaps)
Derivatives are financial contracts whose value depends on,
or is derived from, the value of an underlying asset, reference rate or index. Various derivative instruments are described in more detail under Other Financial Instruments Including Derivatives in the Statement of Additional
Information. Derivatives are typically used as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as currency risk. Derivatives may also be used for leverage, to
facilitate the implementation of an investment strategy or to take a net short position with respect to certain issuers, sectors or markets. The Fund may use derivatives to seek to manage portfolio risk.
The use of derivative instruments involves risks different
from, or possibly greater than, the risks associated with investing directly in securities, physical commodities or other investments. Derivatives are subject to a number of risks such as liquidity risk, market risk, credit risk, default risk,
counterparty risk and management risk. They also involve the risk of mispricing or improper valuation and the risk that changes in the value of the derivative may not correlate exactly with the change in the value of the underlying asset, rate or
index. Investments in a derivative instrument could lose more than the principal amount invested. Also, appropriate derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in
these transactions to reduce exposure to other risks when that would be beneficial.
Participation in the options or futures markets, as well as the use of various swap instruments and forward contracts, involves investment risks and transaction costs to which the Fund would not be
subject absent the use of these strategies. If the Funds predictions of movements in the direction of the securities, currencies, interest rate or commodities markets are inaccurate, the adverse consequences to the Fund may leave the
Fund in a worse position than if such strategies were not used. Risks inherent in the use of options, futures contracts, options on futures contracts, forwards and swaps include: (i) dependence on the ability to predict correctly movements in
the direction of securities prices, currency rates, interest rates or commodities prices; (ii) imperfect correlation between the price of the derivative instrument and the underlying asset, reference rate or index; (iii) the fact that
skills needed to use these strategies are different from those needed for traditional portfolio management; (iv) the absence of a liquid secondary market for any particular instrument at any time; (v) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; (vi) for over-the-counter derivative products and structured notes, additional credit risk, the risk of counterparty default and the risk of failing to correctly evaluate the
creditworthiness of the company on which the derivative is based and (vii) the possible inability of the Fund to purchase or sell a portfolio holding at a time that otherwise would be favorable for it to do so, or the possible need to sell
the holding at a disadvantageous time, due to the requirement that the Fund maintain cover or collateral securities in connection with use of certain derivatives.
The entire amount invested in futures contracts could be
lost. There also is no assurance that a liquid secondary market will exist for futures contracts and options in which the Fund may invest. The Fund limits its investment in futures contracts so that the notional value (meaning the stated
contract value) of the futures contracts does not exceed the net assets of the Fund.
Furthermore, regulatory requirements to set aside liquid assets to meet obligations with respect to derivatives may result in the Fund being unable to purchase or sell securities or instruments when
it would otherwise be favorable to do so, or in the Fund needing to sell holdings at a disadvantageous time. The Fund may also be unable to close out its positions when desired. Investments in derivatives can cause the Fund to be more
volatile and can result in significant losses. Certain derivatives have the potential for unlimited loss. Derivatives may also be used for leverage, in which case their use would involve leveraging risk.
Because the markets for certain derivative instruments
(including markets located in foreign countries) are relatively new and still developing, appropriate derivatives transactions may not be available in all circumstances for risk management or other purposes. Upon the expiration of a particular
contract, the money manager may wish to retain the Funds position in the derivative instrument by entering into a similar contract, but may be unable to do so if the counterparty to the original contract is unwilling to enter into the new
contract and no other appropriate counterparty can be found. There is no assurance that the Fund will engage in derivatives transactions at any time or from time to time. The ability to use derivatives may also be limited by certain regulatory
and tax considerations.
The Commodity Futures
Trading Commission (the CFTC) and the various exchanges have established limits referred to as speculative position limits on the maximum net long or net short positions that any person may hold or control in a particular
futures contract. Trading limits are imposed on the number of contracts that any person may trade on a particular trading day. An exchange may order the liquidation of positions found to be in violation of these
26
limits and it may impose sanctions or restrictions. In addition, the Dodd-Frank Act requires the CFTC to establish speculative position limits on listed futures and options on physical
commodities (including certain energy, metals and agricultural products) and economically equivalent over-the-counter (OTC) derivatives. The Dodd-Frank Act also requires the CFTC to establish position limits for swap transactions that
are economically equivalent to futures or options contracts on physical commodities. Regulatory action taken by the CFTC to establish these additional position limits may adversely affect the market liquidity of the futures, options and economically
equivalent derivatives in which the Fund may invest. With respect to hedging positions, the Fund believes that these trading and positions limits will not have an adverse impact on its hedging strategies. However, it is possible that positions held
by the Fund may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could adversely affect the operations and performance of the Fund.
Currency Trading
The Fund may engage in currency trading strategies. Currency
spot, forward and option prices are highly volatile. Such prices are influenced by, among other things: changing supply and demand relationships; government trade, fiscal, monetary and exchange control programs and policies; national and
international political and economic events; and changes in interest rates. From time to time, governments intervene directly in these markets with the specific intention of influencing such prices. Currency trading may also involve economic
leverage (i.e., the Fund may have the right to a return on its investment that exceeds the return that the Fund would expect to receive based on the amount contributed to the investment), which can increase the gain or the loss associated with
changes in the value of the underlying instrument. Forward, spot and option contracts may be illiquid.
Forward Currency Contracts
Certain of the Funds money managers may engage in forward currency contracts to hedge against uncertainty in the level of future exchange rates or to effect investment transactions to generate
returns consistent with the Funds investment objectives and strategies. Forward foreign currency exchange transactions will be conducted on either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or
through entering into forward currency exchange contracts (forward contract) to purchase or sell currency at a future date. A forward contract involves an obligation to purchase or sell a specific currency. Forward currency contracts are
subject to the risk that should forward prices increase, a loss will be incurred to the extent that the price of the currency agreed to be purchased exceeds the price of the currency agreed to be sold.
Leveraging Risk
Certain transactions may give rise to a form of leverage.
Such transactions may include, among others, reverse repurchase agreements, dollar rolls, borrowing, loans of portfolio securities, and the use of when-issued, delayed delivery or forward commitment transactions and short sales. The use of
derivatives may also create leveraging risk. To mitigate leveraging risk, the Fund will segregate or earmark liquid assets or otherwise cover the transactions that may give rise to such risk. The use of leverage may cause
the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage may cause the Fund to be more volatile than if the Fund had not been leveraged.
This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Funds portfolio securities.
Counterparty Risk
Counterparty risk is the risk that the other party(s) in an agreement or a participant to a transaction, such as a broker or swap
counterparty, might default on a contract or fail to perform by failing to pay amounts due or failing to fulfill the delivery conditions of the contract or transaction. Counterparty risk is inherent in many transactions, including, but not limited
to, transactions involving over-the-counter derivatives, repurchase agreements, securities lending, short sales, credit and liquidity enhancements and equity or commodity-linked notes.
Short Sales
The Fund will enter into short sales and certain of the Funds money managers may utilize a short-only strategy. In a short sale, the
seller (
i.e.
, the Fund) sells a security that it does not own, typically a security borrowed from a broker or dealer. Because the seller remains liable to return the underlying security that it borrowed from the broker or dealer, the seller
must purchase the security prior to the date on which delivery to the broker or dealer is required. The Fund 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
27
and the date on which the Fund must return the borrowed security. The Fund will realize a gain if the security declines in price between those dates. The making of short sales exposes the Fund to
the risk of liability equal to the market value of the security that is sold (the amount of which liability increases as the market value of the underlying security increases), in addition to the costs associated with establishing, maintaining and
closing out the short position.
Although the
Funds potential for gain as a result of a short sale is limited to the price at which it sold the security short less the cost of borrowing the security, its potential for loss is theoretically unlimited because there is no limit to the cost
of replacing the borrowed security. When the Fund makes a short sale, the Fund may use all or a portion of the cash proceeds of short sales to purchase other securities or for any other permissible Fund purpose. To the extent necessary to meet
collateral requirements, the Fund is required to pledge assets in a segregated account maintained by the Funds custodian for the benefit of the broker. The Fund also may use securities it owns to meet any such collateral obligations. Until the
Fund returns a borrowed security in connection with a short sale, the Fund will: (a) maintain daily a segregated account, containing cash, cash equivalents, or liquid marketable securities, at such a level that the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will equal the current requirement under Regulation T promulgated by the Board of Governors of the Federal Reserve System under the authority of sections 7 and 8 of the
Securities Exchange Act of 1934, as amended; or (b) otherwise cover its short position in accordance with positions taken by the staff of the SEC (e.g., by taking an offsetting long position in the security sold short). If the Funds prime
broker fails to make or take delivery of a security as part of a short sale transaction, or fails to make a cash settlement payment, the settlement of the transaction may be delayed and the Fund may lose money.
Commodity Risk
Exposure to the commodities markets may subject the Fund to
greater volatility than investments in traditional securities, particularly if the investments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility,
changes in interest rates or sectors affecting a particular industry or commodity (such as drought, floods, weather, livestock disease, embargoes or tariffs) and international economic, political and regulatory developments. Use of leveraged
commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss (including the likelihood of greater volatility of the Funds net asset value), and there can be no
assurance that the Funds use of leverage will be successful. Different sectors of commodities, including precious metals, base metals, energy and agricultural commodities, may have very different risk characteristics and different levels of
volatility. Even within a given sector of a commodity (e.g., energy commodities), there can be significant differences in volatility and correlation between different commodity contracts (e.g., crude oil vs. natural gas), and similarly there can be
significant differences in volatility and correlation between contracts expiring at different dates. In addition, the purchase of derivative instruments linked to one type of commodity and the sale of another (i.e., basis spreads or
product spreads), or the purchase of contracts expiring at one date and the sale of contracts expiring at another (i.e., calendar spreads) may expose the Fund to additional risk, which could cause the Fund to underperform
other funds with similar investment objectives and investment strategies even in a rising market.
The Fund gains direct exposure to the commodity markets
through investments in commodity-linked derivative instruments (including futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and swaptions), exchange traded funds, exchange
traded notes and commodity-linked structured notes. The Fund also intends to gain exposure indirectly to commodities markets by investing in the Subsidiary, which may invest in commodity-linked securities and derivative instruments. In order for the
Fund to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the Code), the Fund must derive at least 90 percent of its gross income each taxable year from certain qualifying sources of income. The
Internal Revenue Service (IRS) has issued a revenue ruling which holds that income derived from commodity-linked swaps is not qualifying income under Subchapter M of the Code. However, the IRS has also issued private letter rulings to
other taxpayers in which the IRS specifically concluded that income from certain commodity-linked notes is qualifying income and that income derived from a wholly-owned subsidiary will also constitute qualifying income. Although those private letter
rulings can be relied on only by the taxpayers to whom they were issued, based on the reasoning in such rulings, the Fund may seek to gain exposure to the commodity markets primarily through investments in commodity-linked notes and through
investments in the Subsidiary. The IRS currently has suspended the issuance of such rulings pending further internal
28
review. There can be no assurance that the IRS will not change its position that income derived from commodity-linked notes and wholly-owned subsidiaries is qualifying income. Furthermore, the
tax treatment of commodity-linked notes, other commodity-linked derivatives and the Funds investments in the Subsidiary may otherwise be adversely affected by future legislation, Treasury Regulations and/or guidance issued by the IRS that
could affect the character, timing and/or amount of the Funds taxable income or any gains and distributions made by the Fund.
By investing in the Subsidiary, the Fund will be indirectly
exposed to the risks associated with the Subsidiarys investments, although the investment programs followed by the Fund and the Subsidiary are not identical. The derivatives and other investments that will be held by the Subsidiary are
generally similar to those that are permitted to be held by the Fund and will be subject to the same risks that apply to similar investments if held directly by the Fund. There can be no assurance that the investment objective of the Subsidiary will
be achieved. The Subsidiary is not registered under the 1940 Act, and, unless otherwise noted in this Prospectus, is not subject to all the investor protection of the 1940 Act. As noted above, the Fund relies on the reasoning of private letter
rulings from the IRS to other taxpayers with respect to the investment in the Subsidiary. Changes in the laws of the United States and/or the Cayman Islands could result in the inability of the Fund and/or the Subsidiary to operate as described in
this Prospectus and the Statement of Additional Information and could adversely affect the Fund.
Securities of Other Investment Companies
If the Fund invests in other investment companies, shareholders will bear not only their proportionate share of the Funds expenses (including operating expenses and the fees of the adviser),
but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the Fund but also to the portfolio investments of the underlying
investment companies.
Real Estate Securities
Just as real estate values go up and down, the value of the
securities of companies involved in the industry, and in which the Fund invests, also fluctuates. By investing in real estate securities, the Fund is also indirectly subject to the risks associated with direct ownership of real estate.
Additional risks include declines in the value of real estate, changes in general and local economic and real estate market conditions, changes in debt financing availability and terms, increases in property taxes or other operating expenses and
changes in tax laws and interest rates. The value of securities of companies that service the real estate industry may also be affected by such risks.
REITs may be affected by changes in the value of the
underlying properties owned by the REITs and by the quality of tenants credit. Moreover, the underlying portfolios of REITs may not be diversified, and therefore subject to the risk of investing in a limited number of properties. REITs are
also dependent upon management skills and are subject to heavy cash flow dependency, defaults by tenants, self-liquidation and the possibility of failing either to qualify for tax-free pass-through of income under federal tax laws or to maintain
their exemption from certain federal securities laws. By investing in REITs indirectly through the Fund, a shareholder will bear expenses of the REITs in addition to expenses of the Fund.
Depositary Receipts
Depositary receipts are securities traded on a local stock exchange that represent interests in securities issued by a foreign
publicly-listed company. Depositary receipts have the same currency and economic risks as the underlying shares they represent. They are affected by the risks associated with the underlying non-U.S. securities, such as changes in political or
economic conditions of other countries and changes in the exchange rates of foreign currencies. The value of depositary receipts will rise and fall in response to the activities of the company that issued the securities represented by the depositary
receipts, general market conditions and/or economic conditions. Also, if there is a rise in demand for the underlying security and it becomes less available to the market, the price of the depositary receipt may rise, causing the Fund to pay a
premium in order to obtain the desired depositary receipt. Conversely, changes in foreign market conditions or access to the underlying securities could result in a decline in the value of the depositary receipt. The Funds may invest in both
sponsored and unsponsored depositary receipts, which are purchased through
29
sponsored and unsponsored facilities, respectively. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a
depositary may establish an unsponsored facility without the participation of the issuer of the underlying security. Unsponsored depositary receipts may not provide as much information about the underlying issuer and may not carry the same voting
privileges as sponsored depositary receipts.
Illiquid
Securities
An illiquid security is one that
does not have a readily available market or that is subject to resale restrictions, possibly making it difficult to sell in the ordinary course of business within seven days at approximately the value at which the Fund has valued it. The Fund
with an investment in an illiquid security may not be able to sell the security quickly and at a fair price, which could cause the Fund to realize losses on the security if the security is sold at a price lower than that at which it had been valued.
An illiquid security may also have large price volatility.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become
illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions of a particular issuer or a securitys underlying collateral. In such cases, due to limitations on investments in illiquid
securities and the difficulty in purchasing and selling such securities or instruments, the Fund may be unable to achieve its desired level of exposure to a certain sector. Also, the market price of certain investments may fall dramatically if
there is no liquid trading market. To the extent that the Funds principal investment strategies involve foreign (non-U.S.) securities, derivatives or securities with substantial market and/or credit risk, the Fund will tend to have
the greatest exposure to liquidity risk. Additionally, fixed income securities can become difficult to sell, or less liquid, for a variety of reasons, such as lack of a liquid trading market.
High Portfolio Turnover Risk
The Fund will likely engage in active and frequent trading, which may result in higher portfolio turnover rates, higher transaction costs
and realization of short-term capital gains that will generally be taxable to shareholders as ordinary income. The Funds multi-manager approach may also increase the Funds portfolio turnover rates. As a result, the Funds portfolio
turnover rates may be far higher than that of a typical mutual fund.
Market Volatility
Financial markets have recently exhibited substantial instability and volatility. Volatile financial markets can expose the Fund to greater market and liquidity risk and potential difficulty in
valuing portfolio instruments held by the Fund. RIC has established procedures to value instruments for which market prices may not be readily available. RIMCo will monitor developments in financial markets and seek to manage the Fund in a
manner consistent with achieving the Funds investment objective, but there can be no assurance that it will be successful in doing so.
Economic and Market Events Risk
Global economies and financial markets are becoming increasingly interconnected and conditions and events in one country, region or
financial market may adversely impact issuers in a different country, region or financial market. For example, regional economic or political instability or natural disasters may impact issuers across various countries, regions and markets. The
severity or duration of such conditions may be affected by policy changes made by governments or quasi-governmental organizations. Economic and market events may not have the same impact on all types of securities and the Funds investments
could underperform other types of investments.
Government
Intervention in and Regulation of Financial Markets
Recent instability in the financial markets has led the governments across the globe to take a number of unprecedented actions designed to support certain financial institutions and segments of the
financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. The effects of such action are not yet fully known. Federal, state, and other governments, their regulatory agencies, or self regulatory organizations
may take additional actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Future legislation or regulation may also change the way in which the Fund is
regulated. Such legislation or regulation could limit or preclude the Funds ability to achieve its investment objective.
30
Governments or their agencies may also acquire distressed assets from financial institutions
and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such a program may have positive or negative effects on the liquidity, valuation and performance of the
Funds portfolio holdings.
The value of the
Funds holdings is also generally subject to the risk of future local, national, or global economic disturbances. In the event of such a disturbance, issuers of securities held by the Fund may experience significant declines in the value of
their assets and even cease operations, or may receive government assistance accompanied by increased restrictions on their business operations or other government intervention. It is not certain whether governments would intervene in response to
future market disturbances and the effect of any such future intervention cannot be predicted.
Increased Government Debt
Total U.S. public debt as a percentage of gross domestic product has grown rapidly since the beginning of the recent financial downturn. U.S. government agencies project that the U.S. will continue to
maintain high debt levels in the near future. Although high debt levels do not necessarily indicate or cause economic problems, they may create certain systemic risks if sound debt management practices are not implemented.
A high national debt level may increase market pressures to
meet government funding needs, by driving debt cost higher, causing the U.S. Treasury to sell additional debt with shorter maturity periods, and increasing refinancing risk. A high national debt also raises concerns that the U.S. government will be
unable to pay investors at maturity. Unsustainable debt levels could cause declines in currency valuations and prevent the U.S. government from implementing effective fiscal policy.
On August 5, 2011 Standard & Poors Ratings Services (S&P) lowered its
long-term sovereign credit rating on the U.S. In explaining the downgrade, the S&P cited, among other reasons, controversy over raising the statutory debt ceiling and growth in public spending. The ultimate impact of the downgrade is uncertain,
but it may lead to increased interest rates and market volatility. Because the Fund may invest in securities supported by the full faith and credit of the U.S. government, the market prices and yields of such securities may be adversely affected by
the S&Ps downgrade.
Large Redemptions and
Subscriptions
Large redemption activity
could result in the Fund being forced to sell portfolio securities at a loss or before its money managers would otherwise decide to do so. Large redemptions in the Fund may also result in increased expense ratios, higher levels of realized capital
gains or losses with respect to the Funds portfolio securities, higher brokerage commissions and other transaction costs. The Fund is expected to be used as an investment for funds of funds which have the same investment adviser as the Fund.
The Fund may also be used as an investment in asset allocation programs sponsored by certain Financial Intermediaries. The Fund may have a large percentage of its Shares owned by such funds of funds or through such asset allocation programs. Should
RIMCo or such Financial Intermediary change investment strategies or investment allocations such that fewer assets are invested in the Fund or the Fund is no longer used as an investment, the Fund could experience large redemptions of its Shares.
Exposing Cash Inflows to Appropriate Markets
From time to time, RIMCo may equitize cash received from
large subscriptions on a short-term basis pending allocation of such cash to the money managers. In such cases, RIMCo would expose such cash inflows to the performance of appropriate markets by purchasing equity securities and/or derivatives, which
typically include index futures contracts. This is intended to cause such cash to perform as though it were actually invested in those markets. However, the market performance of these instruments may not correlate precisely to the performance of
the corresponding market. This approach increases the Funds performance if the particular market rises and reduces the Funds performance if the particular market declines. In addition, the Funds equitization exposure may or may not
constitute exposure that matches its benchmark.
Securities
Lending
If a borrower of the Funds
securities fails financially, the Funds recovery of the loaned securities may be delayed or the Fund may lose its rights to the collateral, which could result in a loss to the Fund. While securities are on loan, the Fund is subject to: the
risk that the borrower may default on the loan and that the collateral could be
31
inadequate in the event the borrower defaults, the risk that the earnings on the collateral invested may not be sufficient to pay fees incurred in connection with the loan, the risk that the
principal value of the collateral invested may decline and may not be sufficient to pay back the borrower for the amount of the collateral posted, the risk that the borrower may use the loaned securities to cover a short sale which may place
downward pressure on the market prices of the loaned securities, the risk that the return of loaned securities could be delayed and could interfere with portfolio management decisions and the risk that any efforts to recall the securities for
purposes of voting may not be effective.
Distressed Securities
Distressed securities are securities of
issuers that are experiencing significant financial or business difficulties. Investments in distressed securities may be considered speculative and may involve substantial risks not normally associated with investments in healthier companies,
including the increased possibility that adverse business, financial or economic conditions will cause the issuer to default or initiate insolvency proceedings. Investments in distressed securities inherently have more credit risk than investments
in non-distressed issuers, and the degree of risk associated with particular distressed securities may be difficult or impossible to determine. Distressed securities may also be illiquid, difficult to value and experience extreme price volatility.
In the event that an issuer of distressed securities defaults or initiates insolvency proceedings, the Fund may lose all of its investments, or it may be required to accept cash or securities with a value less than the Funds original
investment.
New Fund Risk
The Fund is a new fund which may result in additional risk.
There can be no assurance that the Fund will grow to an economically viable size, in which case the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time. You should
consider your own investment goals, time horizon and risk tolerance before investing in the Fund.
32
PORTFOLIO TURNOVER
Portfolio turnover measures how frequently securities held
by the Fund are bought and sold. The portfolio turnover rates for multi-manager funds are likely to be somewhat higher than the rates for comparable mutual funds with a single money manager. The Funds money managers make decisions to buy or
sell securities independently from other money managers. Thus, one money manager for the Fund may be selling a security when another money manager for that Fund (or for another Fund) is purchasing the same security. Also, when the Fund replaces a
money manager, the new money manager may significantly restructure the investment portfolio. These practices may increase the Funds portfolio turnover rates which may result in higher levels of realized gains or losses with respect to the
Funds portfolio securities, higher brokerage commissions and other transaction costs. Brokerage commissions and transaction costs will reduce Fund performance. The annual portfolio turnover rates for the Fund will be shown in the Financial
Highlights tables in this Prospectus when they are available.
PORTFOLIO HOLDINGS
A description of the Funds policies and procedures with respect to the disclosure of the Funds portfolio securities is available in the Funds Statement of Additional Information.
DIVIDENDS AND
DISTRIBUTIONS
The Fund distributes
substantially all of its net investment income and net capital gains to shareholders each year.
Income Dividends
The amount and frequency of distributions are not guaranteed; all distributions are at the Boards discretion. Currently, the Board intends to declare dividends from net investment income, if any,
according to the following schedule:
|
|
|
|
|
Declared
|
|
Payable
|
|
Fund
|
Annually
|
|
Mid-December
|
|
Russell Multi-Strategy Alternative Fund
|
An additional distribution
of net investment income may be declared and paid by the Fund if required to avoid the imposition of a federal tax on the Fund.
Capital Gains Distributions
The Board will declare capital gains distributions (both short-term and long-term) once a year in mid-December to reflect any net
short-term and net long-term capital gains, if any, realized by the Fund in the prior fiscal year. An additional distribution may be declared and paid by the Fund if required to avoid the imposition of a federal tax on the Fund. Distributions that
are declared in October, November or December to shareholders of record in such months, and paid in January of the following year, will be treated for tax purposes as if received on December 31 of the year in which they were declared.
Buying a Dividend
If you purchase Shares just before a distribution, you will
pay the full price for the Shares and receive a portion of the purchase price back as a taxable distribution. This is called buying a dividend. Unless your account is a tax-deferred account, dividends paid to you would be included in
your gross income for tax purposes even though you may not have participated in the increase of the net asset value of the Fund, regardless of whether you reinvested the dividends. To avoid buying a dividend, check the Funds
distribution dates before you invest.
Automatic Reinvestment
Your dividends and other distributions will
be automatically reinvested at the closing net asset value on the record date, in additional Fund Shares, unless you elect to have the dividends or distributions paid in cash or invested in another Fund. You may change your election by delivering
written notice no later than ten days prior to the record date to your Financial Intermediary.
33
ADDITIONAL INFORMATION ABOUT TAXES
In general, distributions from the Fund are taxable to you
as either ordinary income or capital gains. This is true whether you reinvest your distributions in additional Shares or receive them in cash. Any long-term capital gains distributed by the Fund are taxable to you as long-term capital gains no
matter how long you have owned your Shares. Early each year, you will receive a statement that shows the tax status of distributions you received for the previous year.
If you are an individual investor, a portion of the
dividends you receive from the Fund may be treated as qualified dividend income which is taxable to individuals at the same rates that are applicable to long-term capital gains. A Fund distribution is treated as qualified dividend income
to the extent that the Fund receives dividend income from taxable domestic corporations and certain qualified foreign corporations, provided that certain holding period and other requirements are met. Fund distributions generally will not qualify as
qualified dividend income to the extent attributable to interest, capital gains, REIT distributions and, in many cases, distributions from non-U.S. corporations. For taxable years beginning after December 31, 2012, the special rates for
qualified dividend income will no longer apply, and such income will be taxed at ordinary income rates.
It is not expected that any portion of Fund distributions will be eligible to be treated as qualified dividend income or as eligible for
the corporate dividends received deduction. For taxable years beginning after December 31, 2010, the special rates for qualified dividend income will no longer apply, and such income will be taxed at ordinary income rates.
When you sell or exchange Shares, you may have capital gains
or losses. Any losses you incur if you sell or exchange Shares that you have held for six months or less will be treated as long-term capital losses, but only to the extent that the Fund has paid you long-term capital gains dividends with respect to
those Shares during that period. The tax rate on any gains from the sale or exchange of your Shares depends on how long you have held your Shares.
The Fund does not make any representation as to the amount or variability of its capital gains distributions which may vary as a
function of several factors including, but not limited to, gains and losses related to the sale of securities, prevailing dividend yield levels, general market conditions, shareholders redemption patterns and Fund cash equitization activity.
Fund distributions and gains from the sale or
exchange of your Shares will generally be subject to state and local income tax. Non-U.S. investors may be subject to U.S. withholding and estate taxes. For Fund taxable years beginning after 2004 and before 2012 (or a later date if extended by
Congress), a portion of Fund distributions received by a non-U.S. investor may be exempt from U.S. withholding tax to the extent attributable to U.S. source interest income and short-term capital gains earned by the Fund if properly reported by the
Fund. Also, for that same period, U.S. estate taxes may not apply to that portion of Shares held by a non-U.S. investor that is attributable to Fund assets consisting of certain debt obligations or other property treated as not within the United
States for U.S. estate tax purposes. You should consult your tax professional about federal, state, local or foreign tax consequences of holding Shares.
When a Fund invests in securities of certain foreign countries, the Fund may have taxes withheld on the income received from these
securities.
If you are a corporate investor, a
portion of the dividends from net investment income paid by Russell Multi-Strategy Alternative Fund will generally qualify, in part, for the corporate dividends-received deduction. However, the portion of the dividends so
qualified depends on the aggregate qualifying dividend income received by the Fund from domestic (U.S.) sources. Certain holding period and debt financing restrictions may apply to corporate investors seeking to claim the deduction. You should
consult your tax professional with respect to the applicability of these rules.
The Fund makes no representation as to the amount, if any, or variability of the Funds capital gains.
Fund distributions and gains from the sale or exchange of Shares will generally be subject to state and local income tax. Non-U.S.
investors will generally be subject to U.S. withholding tax and may be subject to U.S. estate taxes. You should consult your tax professional about federal, state, local or foreign tax consequences of holding Shares.
34
By law, the Fund must withhold the legally required amount of your distributions and
proceeds if you do not provide your correct taxpayer identification number, or certify that such number is correct, or if the IRS instructs the Fund to do so.
One of the requirements for favorable tax treatment as a regulated investment company under the Code is that the Fund derive at least 90%
of its gross income from certain qualifying sources of income. The IRS has issued a revenue ruling which holds that income derived from commodity-linked swaps is not qualifying income under Subchapter M of the Code. As such, the Funds ability
to utilize commodity-linked swaps as part of its investment strategy is limited to a maximum of 10 percent of its gross income. However, the IRS has also issued private letter rulings to other taxpayers in which the IRS specifically concluded that
income from certain commodity index-linked structured notes is qualifying income and that income derived from an investment in a wholly-owned subsidiary will also constitute qualifying income, even if the subsidiary itself owns commodity-linked
swaps. Although those private letter rulings can be relied on only by the taxpayers to whom they were issued, based on the reasoning in such rulings, the Fund intends to seek to gain exposure to the commodity markets primarily through investments in
commodity index-linked structured notes and through investments in the Subsidiary. The IRS currently has suspended the issuance of such rulings pending further internal review. There can be no assurance that the IRS will not change its position that
income derived from commodity-linked notes and wholly-owned subsidiaries is qualifying income. Furthermore, the tax treatment of commodity-linked notes, other commodity-linked derivatives and the Funds investments in the Subsidiary may
otherwise be adversely affected by future legislation, Treasury Regulations and/or guidance issued by the IRS that could affect the character, timing and/or amount of the Funds taxable income or any gains and distributions made by the Fund.
The tax discussion set forth above is
included for general information only. You should consult your own tax adviser concerning the federal, state, local or foreign tax consequences of an investment in the Fund.
Additional information on these and other tax matters
relating to the Fund and its shareholders is included in the section entitled Taxes in the Funds Statement of Additional Information.
Cost Basis Reporting
Effective January 1, 2012, Department of the Treasury regulations mandate cost basis reporting to shareholders and the Internal
Revenue Service (IRS) for redemptions of Fund shares acquired on or after January 1, 2012 (post-effective date shares). If you acquire and hold shares directly with the Fund and not through a Financial Intermediary, RFSC
will use a default average cost basis methodology for tracking and reporting your cost basis on post-effective date shares, unless you request, in writing, another cost basis reporting methodology.
Additionally, for redemptions of shares held directly with
the Fund on or after January 1, 2012, unless you select specific share lots in writing at the time of redemption, RFSC will first relieve (i.e., identify the shares to be redeemed for purposes of determining cost basis) all shares acquired
prior to January 1, 2012 (pre-effective date shares), before relieving any post-effective date shares. You continue to be responsible for tracking cost basis, and appropriately reporting sales of pre-effective date shares to
the IRS. If RFSC has historically provided cost basis reporting on these pre-effective date shares, RFSC will continue to provide those reports. However, no cost basis reporting will be provided to the IRS on the sale of pre-effective date
shares.
If you acquire and hold shares through a
Financial Intermediary, please contact your Financial Intermediary for information related to cost basis defaults, cost basis selection, and cost basis reporting.
You should consult your own tax advisor(s) when selecting
your cost basis tracking and relief methodology.
HOW NET ASSET VALUE IS DETERMINED
Net Asset Value Per Share
The net asset value per share is calculated for Shares of
each Class of the Fund on each business day on which Shares are offered or redemption orders are tendered. For the Fund, a business day is one on which the New York Stock Exchange (NYSE) is open for regular trading. The Fund determines net
asset value at 4:00 p.m. Eastern Time or as of the close of the NYSE, whichever is earlier.
The price of Fund Shares is computed by dividing the current value of the Funds assets (less liabilities) by the number of Shares of the Fund outstanding and rounding to the nearest cent. Share
value for purchase, redemption or
35
exchange will be based on the net asset value next calculated after your order is received in good form (i.e., when all required documents and your check or wired funds are received) by the Fund
or an authorized Fund agent. See Additional Information About How to Purchase Shares, Additional Information About How to Redeem Shares and Exchange Privilege for more information.
Valuation of Portfolio Securities
The Fund values portfolio securities according to
Board-approved securities valuation procedures and pricing services, which include market value procedures, fair value procedures and a description of the pricing services used by the Fund. Under the Board-approved securities valuation procedures,
the Board has delegated the day-to-day valuation functions to RFSC. However, the Board retains oversight over the valuation process.
Debt obligation securities maturing within 60 days of the date of purchase are priced using the amortized cost method of valuation, unless
the Board determines that amortized cost does not represent market value of short-term debt obligations. Under this method, a portfolio instrument is initially valued at cost and thereafter a constant accretion/amortization to maturity of any
discount or premium is assumed. While amortized cost provides certainty in valuation, it may result in periods when the value of an instrument is higher or lower than the price the Fund would receive if it sold the instrument. Investments in other
investment companies are valued at their net asset value per share, calculated at 4:00 p.m. Eastern Time or as of the close of the NYSE, whichever is earlier. The circumstances under which these companies will use fair value pricing and the effects
of using fair value pricing can be found in the other investment companies prospectuses.
Ordinarily, the Fund values each portfolio security based on market quotations provided by pricing services or brokers (when permitted by the market value procedures).
If market quotations are not readily available for a
security or if subsequent events suggest that a market quotation is not reliable, the Fund will use the securitys fair value, as determined in accordance with the fair value procedures. This generally means that equity securities and fixed
income securities listed and traded principally on any national securities exchange are valued on the basis of the last sale price or, lacking any sales, at the closing bid price, on the primary exchange on which the security is traded. The fair
value procedures may involve subjective judgments as to the fair value of securities. The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market in which they are traded, but rather may
be priced by another method that the Board believes reflects fair value. The use of fair value pricing by the Fund may cause the net asset value of its Shares to differ significantly from the net asset value that would be calculated using current
market values. Fair value pricing could also cause discrepancies between the daily movement of the value of Fund Shares and the daily movement of the benchmark index if the index is valued using another pricing method.
This policy is intended to assure that the Funds net
asset values fairly reflect security values as of the time of pricing. Events or circumstances affecting the values of Fund securities that occur between the closing of the principal markets on which they trade and the time the net asset value of
Fund Shares is determined may be reflected in the calculation of the net asset values for each applicable Fund when the Fund deems that the particular event or circumstance would materially affect such Funds net asset value. Funds that invest
primarily in frequently traded exchange listed securities will use fair value pricing in limited circumstances since reliable market quotations will often be readily available. Funds that invest in foreign securities are likely to use fair value
pricing more often since significant events may occur between the close of foreign markets and the time of pricing which would trigger fair value pricing of the foreign securities. Funds that invest in low rated debt securities are also likely to
use fair value pricing more often since the markets in which such securities are traded are generally thinner, more limited and less active than those for higher rated securities. Examples of events that could trigger fair value pricing of one or
more securities are: a material market movement of the U.S. Securities Market (defined in the fair value procedures as the movement of a single major U.S. Index greater than a certain percentage) or other significant event; foreign market holidays
if on a daily basis fund exposure exceeds 20% in aggregate (all closed markets combined); a company development such as a material business development; a natural disaster or emergency situation; or an armed conflict.
Because foreign securities can trade on non-business days,
the net asset value of the Funds portfolio that includes foreign securities may change on days when shareholders will not be able to purchase or redeem Fund Shares.
36
CHOOSING A CLASS OF SHARES TO BUY
The Fund offers more than one Class of Shares. Each Class of
Shares has different sales charges and expenses, allowing you to choose the Class that best meets your needs. Which Class is more beneficial to you depends on the amount and intended length of the investment.
Comparing the Funds Classes
Your Financial Intermediary can help you decide which Class
of Shares meets your goals. Your Financial Intermediary may receive different compensation depending upon which Class of Shares you choose.
Each Class of Shares has its own sales charge and expense structure, which enables you to choose the Class of Shares (and pricing) that
best meets your specific needs and circumstances. In making your decision regarding which Class of Shares may be best for you to invest in, please keep in mind that your Financial Intermediary may receive different compensation depending on the
Class of Shares that you invest in and you may receive different services in connection with investments in different Classes of Shares. You should consult with your Financial Intermediary about the comparative pricing and features of each Class,
the services available for shareholders in each Class, the compensation that will be received by the Financial Intermediary in connection with each Class and other factors that may be relevant to your decision as to which Class of Shares to buy.
|
|
|
Class A Shares
|
|
|
|
|
Initial Sales Charge
|
|
Up to 5.75%; reduced, waived or deferred for large purchases and certain investors
|
|
|
Deferred Sales Charge
|
|
1.00% on redemptions of Class A Shares made within 12 months of a purchase on which no front-end sales charge was paid and your Financial Intermediary was paid a commission by
the Funds Distributor
|
|
|
Annual 12b-1 Fees
|
|
0.25% of average daily assets
|
|
|
Annual Shareholder Service Fees
|
|
None
|
|
|
Class C Shares
|
|
|
|
|
Initial Sales Charge
|
|
None
|
|
|
Deferred Sales Charge
|
|
None
|
|
|
Annual 12b-1 Fees
|
|
0.75% of average daily assets
|
|
|
Annual Shareholder Service Fees
|
|
0.25% of average daily assets
|
|
|
Class E Shares
|
|
|
|
|
Initial Sales Charge
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|
None
|
|
|
Deferred Sales Charge
|
|
None
|
|
|
Annual 12b-1 Fees
|
|
None
|
|
|
Annual Shareholder Service Fees
|
|
0.25% of average daily assets
|
|
|
Class S Shares
|
|
|
|
|
Initial Sales Charge
|
|
None
|
|
|
Deferred Sales Charge
|
|
None
|
|
|
Annual 12b-1 Fees
|
|
None
|
|
|
Annual Shareholder Service Fees
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|
None
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|
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Class Y Shares
|
|
|
|
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Initial Sales Charge
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None
|
|
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Deferred Sales Charge
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|
None
|
|
|
Annual 12b-1 Fees
|
|
None
|
|
|
Annual Shareholder Service Fees
|
|
None
|
37
FRONT-END SALES CHARGES
Class C, E, S and Y Shares
Class C, E, S and Y Shares of the Fund offered in this
Prospectus are sold without an initial sales charge.
Class A Shares
Class A Shares are sold at the offering price, which is the net asset value plus a front-end sales charge. You pay a lower front-end
sales charge as the size of your investment increases to certain levels. You do not pay a front-end sales charge on the Funds distributions of dividends or capital gains you reinvest in additional Class A Shares.
The table below shows the rate of front-end sales charge
that you pay, depending on the amount that you purchase. The table below also shows the amount of compensation that is paid to your Financial Intermediary out of the front-end sales charge. This compensation includes commissions to Financial
Intermediaries that sell Class A Shares. Financial Intermediaries may also receive the distribution fee payable on Class A Shares at an annual rate of up to 0.25% of the average daily net assets represented by the Class A Shares
serviced by them.
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|
|
|
|
|
|
|
|
Front-end sales charge
as % of
|
|
Financial Intermediary
commission as
% of offering price
|
Amount of Purchase
|
|
Offering Price
|
|
Net amount
Invested
|
|
Less than $50,000
|
|
5.75
|
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6.10
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5.00
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$50,000 but less than $100,000
|
|
4.50
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4.71
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3.75
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$100,000 but less than $250,000
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3.50
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3.63
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2.75
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$250,000 but less than $500,000
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2.50
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2.56
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2.00
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$500,000 but less than $1,000,000
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|
2.00
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|
2.04
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1.60
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$1,000,000 or more
|
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-0-
|
|
-0-
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up to 1.00
|
Investments of $1,000,000
or more.
You do not pay a front-end sales charge when you buy $1,000,000 or more of Shares of RIC Funds (other than the Russell Money Market Fund). However, if your Financial Intermediary was paid a commission by the Funds Distributor on
those Class A Shares and you redeem those Class A Shares within one year of purchase, you will pay a deferred sales charge of 1.00%. Additional information on commissions paid to your Financial Intermediary on purchases of $1,000,000 or
more is available in the Funds SAI.
Reducing Your Front-End Sales Charge.
To receive a reduced front-end sales charge on purchases of Class A Shares as described
below, you must notify your Financial Intermediary of your ability to qualify for a reduced front-end sales charge at the time your order for Class A Shares is placed.
Front-end Sales Charge Waivers.
Purchases of
Class A Shares may be made at net asset value without a front-end or deferred sales charge in the following circumstances. There is no commission paid to the Financial Intermediaries for Shares purchased under the following circumstances:
|
1.
|
Sales to RIC trustees and employees of Russell (including retired trustees and employees), to the immediate families (as defined below) of such persons, or to a
pension, profit-sharing or other benefit plan for such persons
|
|
2.
|
Offers of Class A Shares to any other investment company to effect the combination of such company with the Fund by merger, acquisition of assets or otherwise
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3.
|
Sales to multi-participant employer sponsored Defined Contribution plans held in plan level accounts, excluding SEPs and SIMPLE-IRAs
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4.
|
Sales to endowments or foundations with $50 million or more in assets
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5.
|
Sales to current/retired registered representatives of broker-dealers having sales agreements with the Funds Distributor to sell Class A Shares of the Fund
and sales to a current spouse or the equivalent thereof, child, step-child (with respect to current union only), parent, step-parent or parent-in-law of such registered representative or to a family trust in the name of such registered
representative
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|
6.
|
Accounts managed by a member of Russell Investments
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7.
|
Shares purchased through accounts that are part of certain qualified fee-based programs
|
38
Moving Between Accounts.
Under certain circumstances, you may transfer Class A
Shares of the Fund from an account with one registration to an account with another registration within 90 days without incurring a front-end sales charge. For example, you may transfer Shares without paying a front-end sales load in the following
cases:
|
|
From a non-retirement account to an IRA or other individual retirement account
|
|
|
From an IRA or other individual retirement account, such as a required minimum distribution, to a non-retirement account
|
In some cases, due to operational limitations or reporting
requirements, you must redeem Shares from one account and purchase Shares in another account to achieve this type of transfer.
If you want to learn more about front-end sales charge waivers, contact your Financial Intermediary.
Aggregated Investments.
The following types of
accounts may be combined to qualify for reduced front-end sales charge including purchases made pursuant to rights of accumulation or letter of intent as described below:
The following accounts owned by you and/or a member of your
immediate family (as defined below):
|
a.
|
Accounts held individually or jointly
|
|
b.
|
Those established under the Uniform Gift to Minors Act or Uniform Transfer to Minors Act
|
|
c.
|
IRA accounts and certain single participant retirement plan accounts
|
|
d.
|
Solely controlled business accounts
|
|
e.
|
Trust accounts benefiting you or a member of your immediate family
|
For purposes of aggregated investments, your immediate
family includes your spouse, or the equivalent thereof, and your children and step-children under the age of 21.
Purchases made in nominee or street name accounts may NOT be aggregated with those made for other accounts and may NOT be aggregated with
other nominee or street name accounts unless otherwise qualified as described above.
Rights of Accumulation (ROA)
. Subject to the limitations described in the aggregation policy, you may combine current purchases of any RIC Fund (other than the Russell Money Market
Fund) with your existing holdings of all RIC Funds (other than direct purchases into the Russell Money Market Fund) to determine your current front-end sales charge. Subject to your Financial Intermediarys capabilities, your accumulated
holdings will be calculated as the higher of (a) the current value of your existing holdings or (b) the amount you invested (including reinvested dividends and capital gains, but excluding capital appreciation) less any withdrawals (the
cost value). You must notify your Financial Intermediary at the time an order is placed for a purchase or purchases which would qualify for the reduced front-end sales charge due to existing investments or other purchases. The reduced
front-end sales charge may not be applied if such notification is not furnished at the time of the order.
The value of all of your holdings in accounts established in calendar year 2007 or earlier will be assigned an initial cost value equal to
the market value of those holdings as of the last business day of 2007. Thereafter, the cost value of such accounts will increase or decrease according to actual investments or withdrawals.
For purchases to be aggregated for the purpose of qualifying for the ROA, they must be made on the same day
through one Financial Intermediary. Your Financial Intermediary may require certain information to verify that the purchase qualifies for the reduced front-end sales charge. The right of accumulation is subject to modification or discontinuance at
any time with respect to all Shares purchased thereafter. Additional information is available from your Financial Intermediary.
Letter of Intent (LOI).
A non-binding LOI allows you to combine purchases of Shares of any RIC Funds (other than the
Russell Money Market Fund) you intend to make over a 13-month period with the market value of your current RIC Fund holdings (other than the Russell Money Market Fund) to determine the applicable front-end sales charge. Any appreciation of your
current RIC Fund holdings and any Shares issued from reinvestment of dividends or capital gains will not be considered purchases made during the 13-month period. A portion of your account (up to 5%) will be held in escrow to cover additional
Class A front-end sales charges that may be due. If you purchase less than the amount specified in the LOI and the LOI period expires or a full-balance redemption is requested during the LOI period, Shares in your account will be automatically
redeemed to pay additional front-end sales charges that may be
39
due. Class A Shares of the Fund held in plan or omnibus accounts are not eligible for an LOI unless the plan or omnibus account can maintain the LOI on their record keeping system. If the
shareholder dies within the 13-month period, no additional front-end sales charges are required to be paid.
Exchange Privilege.
Generally, exchanges between Class A Shares of the RIC Funds are not subject to a front-end sales charge.
Class A Shares of the Russell Money Market Fund initially purchased without payment of a front-end sales charge will be subject to the applicable front-end sales charge when exchanged into Class A Shares of another RIC Fund. Exchanges may
have the same tax consequences as ordinary sales and purchases. Please contact your Financial Intermediary and/or tax adviser for more detailed information.
Reinstatement Privilege.
You may reinvest proceeds from a redemption or distribution of Class A Shares (other than money
market funds) into Class A Shares of any RIC Fund without paying a front-end sales charge if such reinvestment is made within 90 days after the redemption or distribution date and the proceeds are invested in any related account eligible to be
aggregated for Rights of Accumulation purposes. Proceeds will be reinvested at the net asset value next determined after receipt of your purchase order in proper form. For purposes of this Reinstatement Privilege, automatic transactions (including,
for example, automatic purchases, withdrawals and payroll deductions) and ongoing individual retirement plan contributions are not eligible for reinstatement without a sales charge. The privilege may not be exercised if proceeds are subject to a
purchase restriction as described in the section entitled Frequent Trading Policies and Limitations on Trading Activity and certain other restrictions may apply. Contingent deferred sales charges will be credited to your account at
current net asset value following notification to the Fund by your Financial Intermediary.
Information about sales charges and sale charge waivers is available free of charge, on the Funds website at www.russell.com.
MORE ABOUT DEFERRED SALES CHARGES
You do not pay a front-end sales charge when
you buy $1,000,000 or more of Shares of RIC Funds. However, if your Financial Intermediary was paid a commission by the Funds Distributor on Class A Shares and you redeem those Class A Shares within one year of purchase, you will pay
a deferred sales charge of 1.00%. The 1.00% is charged on the lesser of the purchase price of the Shares being redeemed or the net asset value of those Shares at the time of redemption. Class A Shares not subject to a deferred sales charge
(those issued upon reinvestment of dividends or capital gains) are redeemed first followed by the Class A Shares you have held the longest. Exchanges between Class A Shares of the RIC Funds are not subject to a deferred sales charge.
The deferred sales charge may be waived on:
|
|
Shares sold within 12 months following the death or disability of a shareholder
|
|
|
redemptions made in connection with the minimum required distribution from retirement plans or IRAs upon the attainment of age 70
1
/
2
|
|
|
a systematic withdrawal plan equaling no more than 1% of the account value per any monthly redemption
|
|
|
involuntary redemptions
|
|
|
redemptions of Class A Shares to effect a combination of the Fund with any investment company by merger, acquisition of assets or otherwise
|
All waivers of deferred sales
charges are subject to confirmation of your status or holdings.
If you want to learn more about deferred sales charges, contact your Financial Intermediary.
DISTRIBUTION AND SHAREHOLDER SERVICES ARRANGEMENTS AND PAYMENTS TO FINANCIAL INTERMEDIARIES
The Fund offers multiple Classes of Shares in this
Prospectus: Class A, Class C, Class E, Class S and Class Y. Class A Shares are discussed in the sections entitled Choosing a Class of Shares to Buy, Front-End Sales Charges, and More About Deferred Sales
Charges.
40
Class A Shares participate in the Funds Rule 12b-1 distribution plan. Under
the distribution plan, Class A Shares pay distribution fees of 0.25% annually for the sale and distribution of Class A Shares. The distribution fees are paid out of the Funds Class A Shares assets on an ongoing basis,
and over time these fees will increase the cost of your investment in the Fund, and the distribution fee may cost an investor more than paying other types of sales charges.
Class C Shares participate in the Funds Rule 12b-1
distribution plan and in the Funds shareholder services plan. Under the distribution plan, the Funds Class C Shares pay distribution fees of 0.75% annually for the sale and distribution of Class C Shares. Under the shareholder services
plan, the Funds Class C Shares pay shareholder services fees of 0.25% on an annualized basis for services provided to Class C shareholders. Because both of these fees are paid out of the Funds Class C Share assets on an ongoing basis,
over time these fees will increase the cost of your investment in Class C Shares of the Fund, and the distribution fee may cost an investor more than paying other types of sales charges.
Class E Shares participate in the Funds shareholder services plan. Under the shareholder services plan,
the Funds Class E Shares pay shareholder services fees of 0.25% on an annualized basis for services provided to Class E shareholders. The shareholder services fees are paid out of the Funds Class E Share assets on an ongoing basis, and
over time these fees will increase the cost of your investment in the Fund.
Class S and Class Y Shares do not participate in either the Funds distribution plan or the Funds shareholder services plan.
Financial Intermediaries may receive distribution compensation from the Funds Distributor with
respect to Class A Shares of the Fund pursuant to the Funds Rule 12b-1 distribution plan. Financial Intermediaries may receive distribution compensation and shareholder services compensation from the Funds Distributor with
respect to Class C Shares of the Fund pursuant to the Funds Rule 12b-1 distribution plan and the Funds shareholder services plan. Financial Intermediaries may receive shareholder services compensation from the Funds
Distributor with respect to Class E Shares of the Fund pursuant to the Funds shareholder services plan. These payments are reflected in the fees and expenses listed in the annual fund operating expenses table earlier in the Prospectus.
In addition to the foregoing payments, RIMCo or
the Funds Distributor may make cash payments, from its own resources, to key Financial Intermediaries (including those who may offer Fund Shares through specialized programs such as tax deferred retirement programs) in connection with
distribution, which may include providing services intended to result in the sale of Fund Shares, or to pay a portion of costs related to, marketing support, account consolidation, education, transaction processing and/or administrative services
support. These compensation arrangements may vary by Financial Intermediary and may increase as the dollar value of Fund Shares held through a particular Financial Intermediary increases. Because these payments are not made by the Fund, these
payments are not reflected in the fees and expenses listed in the annual fund operating expenses table. Some of these payments are commonly referred to as revenue sharing. At times, such payments may create an incentive for a Financial
Intermediary to recommend or make Shares of the Fund available to its customers and may allow the Fund greater access to the customers of the Financial Intermediary.
RFSC may also make cash payments, from its own resources, to
key Financial Intermediaries (including those who may offer Fund Shares through specialized programs such as tax deferred retirement programs) to pay a portion of costs related to account consolidation, transaction processing and/or administrative
services support. These compensation arrangements may vary by Financial Intermediary and may fluctuate based on the dollar value of Fund Shares held through a particular Financial Intermediary. Because these payments are not made by the Fund, these
payments are not reflected in the fees and expenses listed in the annual fund operating expenses table. At times, such payments may create an incentive for a Financial Intermediary to recommend or make Shares of the Fund available to its customers
and may allow the Fund greater access to the customers of the Financial Intermediary.
The Funds Distributor may pay or allow other promotional incentive payments to Financial Intermediaries to the extent permitted by the rules adopted by the SEC and the Financial Industry Regulatory
Authority relating to the sale of mutual fund shares.
To enable Financial Intermediaries to provide a higher level of service and information to prospective and current Fund shareholders, the Funds Distributor also offers them a range of complimentary
software tools and educational services. The Funds Distributor provides such tools and services from its own resources.
Ask your Financial Intermediary for additional information as to what compensation, if any, it receives from the Fund, the Funds
Distributor or RIMCo.
41
ADDITIONAL INFORMATION ABOUT HOW TO PURCHASE SHARES
Unless you are eligible to participate in a
Russell employee investment program, Shares are only available through a select network of Financial Intermediaries. If you are not currently working with one of these Financial Intermediaries, please call 800-787-7354 for assistance in contacting
an investment professional near you.
Class E and
Class S Shares may only be purchased by:
|
(1)
|
clients of Financial Intermediaries who charge an advisory fee, management fee, consulting fee, fee in lieu of brokerage commissions or other similar fee for their
services for the shareholder account in which the Class E and S Shares are held or clients of Financial Intermediaries where the Financial Intermediary would typically charge such a fee but has determined to waive its fee in a particular instance as
the result of a potential conflict of interest;
|
|
(2)
|
employee benefit and other plans, such as 401(k) plans, 457 plans, employer sponsored 403(b) plans, HSAs (Health Savings Accounts), profit sharing plans, money purchase
plans, defined benefit plans and non-qualified deferred compensation plans, that consolidate and hold all Fund Shares in plan level or omnibus accounts on behalf of participants. SEPs, SIMPLE-IRA and individual 403(b) Plans are not considered plans
for purposes of this paragraph;
|
|
(3)
|
clients of Financial Intermediaries who are members of Russell Investments;
|
|
(4)
|
individuals pursuant to employee investment programs of Russell or its affiliates; or
|
|
(5)
|
current/retired registered representatives of broker-dealers having sales agreements with the Funds Distributor to sell Class E and Class S Shares of the Fund and
current spouses or the equivalent thereof, children, step-children (with respect to current union only), parents, step-parents or parents-in-law of such registered representative or to a family trust in the name of such registered representative.
|
The Fund generally does not have
the ability to enforce these limitations on access to Class E and Class S Shares. It is the sole responsibility of each Financial Intermediary to ensure that it only makes Class E and S Shares available to those categories of investors listed above
that qualify for access to Class E and Class S Shares. However, the Fund will not knowingly sell Class E and Class S Shares to any investor not meeting one of the foregoing criteria.
There is currently no required minimum initial investment for Class A, Class C, Class E or Class S Shares
of the Fund. However, the Fund reserves the right to close any account whose balance falls below $1,000 and to change the categories of investors eligible to purchase its Shares.
For Class Y Shares, there is a $10 million required minimum
initial investment for each account in the Fund. However, there is no required minimum initial investment for (i) any Russell Investment Company or Russell Investment Funds fund of funds, (ii) for investment companies that have entered
into a contractual arrangement with the Fund or its service providers to acquire Class Y Shares or (iii) shares acquired by any collective vehicle or other discretionary account actively managed by Russell Investments.
If the Fund detects a pattern of trading that appears to be
designed to evade the minimum initial investment requirement for Class Y Shares, the Fund reserves the right to close the account(s). The Fund reserves the right to close any account whose balance falls below $1,000 and to change the categories of
investors eligible to purchase its Shares or the required minimum investment amounts. You may be eligible to purchase Shares if you do not meet the required initial minimum investment. You should consult your Financial Intermediary for details,
which are summarized in the Funds Statement of Additional Information.
If you purchase, redeem, exchange or hold Shares through a Financial Intermediary, your Financial Intermediary may charge you transaction-based fees, activity based fees and other fees for its services
based upon its own policies and procedures. Those fees are retained entirely by your Financial Intermediary and no part of those fees are paid to RIMCo, the Funds Distributor or the Fund. Please contact your Financial Intermediary for more
information about these fees as they may apply to your investments and your accounts.
You may purchase Shares through a Financial Intermediary on any business day of the Fund (a day on which the NYSE is open for regular trading). Purchase orders are processed at the next net asset value
per share calculated after the Fund receives your order in proper form (as determined by your Financial Intermediary). The Fund will close early if the NYSE closes early. Any purchase order received after the close of the NYSE will be processed on
the following
42
business day at the next calculated net asset value per share. Because Financial Intermediaries may have cut off times for processing orders to buy Fund Shares prior to market close, please ask
your Financial Intermediary what their cut off time is.
For Class A Shares:
You must place purchase orders for Class A Shares through a Financial Intermediary in U.S. dollars. Specific payment arrangements should be made with your Financial
Intermediary. However, exceptions may be made by prior special arrangement.
For Class C, Class E, Class S and Class Y Shares:
All purchases must be made in U.S. dollars. Checks and other negotiable bank drafts must be drawn on U.S. banks and made payable to
Russell Investment Company or as otherwise instructed by your Financial Intermediary. Purchases will be rejected if a payment does not clear the bank. Financial Intermediaries settling through National Securities Clearing Corporation, or
in limited circumstances with prior arrangement with the Fund, may settle trades on the third business day following receipt by the Fund of your order. If you fail to properly settle a purchase, you will be responsible for any resulting loss to the
Fund (i.e., any difference in net asset value between the trade date and the settlement date). In the case of an insufficient funds check, an overdraft charge may also be applied. Third party checks are generally not accepted, however exceptions may
be made by prior special arrangements with certain Financial Intermediaries. Cash, checks drawn on credit card accounts, cashiers checks, money orders, traveler checks, and other cash equivalents will not be accepted.
Customer Identification Program:
To help the
government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who opens an account and to determine whether such
persons name appears on government lists of known or suspected terrorists and terrorist organizations. When you open a new account to buy Shares of the Fund, the Fund or your Financial Intermediary will ask your name, address, date of birth,
taxpayer identification or other government identification number and other information that will allow the Fund to identify you. If the Fund or your Financial Intermediary are unable to adequately identify you within the time frames set forth in
the law, your Shares may be automatically redeemed. If the net asset value per share has decreased since your purchase, you will lose money as a result of this redemption.
Foreign Investors:
A Financial Intermediary may offer
and sell the Fund to non-resident aliens and non-U.S. entities, if (1) the Financial Intermediary can fulfill the due diligence and other requirements of the USA PATRIOT ACT and applicable Treasury or SEC rules, regulation and guidance
applicable to foreign investors, and (2) the offer and sale occur in a jurisdiction where the Fund is authorized to be offered and sold, currently the 50 states of the United States and certain U.S. territories. Without the prior approval of
the Funds Chief Compliance Officer, non-resident aliens and entities not formed under U.S. law may not purchase Shares of the Fund where the Fund is responsible for the due diligence and other requirements of the USA PATRIOT ACT and applicable
Treasury or SEC rules, regulation and guidance applicable to foreign investors.
Offering Dates and Times
Purchase orders must be received by the Fund or an authorized Fund agent prior to 4:00 p.m. Eastern Time or the close of the NYSE, whichever is earlier, to be processed at the net asset value calculated
on that day. Purchases can be made on any day when Shares are offered. Certain authorized Fund agents have entered into agreements with the Funds Distributor or its affiliates to receive and accept orders for the purchase and redemption of
Shares of the Fund. Some, but not all, Financial Intermediaries are authorized Fund agents, and some, but not all, authorized Fund agents are Financial Intermediaries. Fund agents and Financial Intermediaries may have earlier purchase order cut off
times to allow them to deliver purchase orders to the Fund prior to the Funds order transmission cut off time. Please verify your purchase order cut off time with your Financial Intermediary.
Order and Payment Procedures
Generally, you must place purchase orders for Shares through
your Financial Intermediary. You may pay for your purchase by mail or funds transfer. Please contact your Financial Intermediary for instructions on how to place orders and make payment to the Fund.
If your account is held directly with the Fund, in order for
your instructions by mail to be considered in proper form, the instructions must be received at one of the following addresses:
Regular Mail: Russell Funds, P.O. Box 8420, Boston, MA 02266-8420
Overnight Mail: Russell Funds, 30 Dan Road, Canton, MA 02021
43
Automated Investment Program
For Class A Shares:
Your Financial Intermediary
may offer an automated investment program whereby you may choose to make regular investments in an established account. Contact your Financial Intermediary for further information.
For Class C, Class E and Class S Shares:
If you invest through certain Financial Intermediaries,
you may choose to make regular investments in an established account on a monthly, quarterly, semiannual, or annual basis by automatic electronic funds transfer from an account held within U.S. financial institutions that are members of the Federal
Reserve System. Depending on the capabilities of your Financial Intermediary, a separate transfer may be made for each Fund in which you purchase Shares. You may change the amount or stop the automatic purchase at any time. Contact your Financial
Intermediary for further information on this program. If you invest directly through the Funds, you may choose to make such regular investments subject to a minimum of $25 per fund.
EXCHANGE PRIVILEGE
How to Exchange Shares
Exchanges Between Funds.
Through your Financial Intermediary you may exchange Shares you own in one Fund for Shares of any other
Fund offered by RIC on the basis of the current net asset value per share at the time of the exchange if you meet any applicable initial minimum investment or investor eligibility requirements stated in the Prospectus for that Fund. For additional
information, including Prospectuses for other RIC Funds, contact your Financial Intermediary.
An exchange between Funds involves the redemption of Shares, which is treated as a sale for income tax purposes. Thus, capital gains or losses may be realized. Please consult your tax adviser for more
information.
Exchanges Between Classes.
Through your Financial Intermediary, you may exchange or convert Shares you own of the Fund for Shares of any other Class of Shares of that Fund on the basis of the current net asset value (except that exchanges into Class A Shares will
normally be made at the Public Offering Price) per share at the time of the exchange if you meet any applicable initial minimum investment or investor eligibility requirements stated in the Prospectus for that Class of Shares.
RFSC believes that an exchange between Classes of the same
Fund is not a taxable event; however, you must check with your Financial Intermediary to determine if they will process the exchange as non-taxable. Please consult with your Financial Intermediary and your tax adviser for more information.
Contact your Financial Intermediary for
assistance in exchanging Shares and, because Financial Intermediaries processing times may vary, to find out when your account will be credited or debited. To request an exchange in writing, please contact your Financial Intermediary.
For Class A Shares, exchanges must be made
through your Financial Intermediary.
Systematic Exchange
Program
If you invest in Class A
Shares, your Financial Intermediary may offer a systematic exchange program. If you would like to establish a systematic exchange program, please contact your Financial Intermediary.
If you invest in Class C, Class E or Class S Shares, and if you invest through certain Financial
Intermediaries, a systematic exchange program which allows you to redeem Shares from one or more Funds and purchase Shares of certain other RIC Funds may be offered. Systematic exchanges may be established to occur on a monthly, quarterly,
semiannual or annual basis. If you would like to establish a systematic exchange program, please contact your Financial Intermediary.
A systematic exchange involves the redemption of Shares, which is treated as a sale for income tax purposes. Thus, capital gains or losses
may be realized. Please consult your tax adviser for more information.
44
RIGHT TO REJECT OR RESTRICT PURCHASE AND EXCHANGE ORDERS
The Board has adopted frequent trading
policies and procedures which are described below. The Fund will apply these policies uniformly. The Fund discourages frequent purchases and redemptions of Fund Shares by Fund shareholders. The Fund does not accommodate frequent purchases and
redemptions of Fund Shares by Fund shareholders.
The Fund reserves the right to restrict or reject, without prior notice, any purchase or exchange order for any reason. The Fund may,
in its discretion, restrict or reject a purchase or exchange order even if the transaction is not subject to the specific limitations on frequent trading described below if the Fund or its agents determine that accepting the order could interfere
with the efficient management of the Funds portfolio or otherwise not be in the Funds best interests.
In the event that the Fund rejects an exchange request, the Fund will seek additional instructions from the Financial Intermediary
regarding whether or not to proceed with the redemption side of the exchange.
Frequent Trading Policies and Limitations on Trading Activity
Frequent trading of Fund Shares, often in response to short-term fluctuations in the market, also known as market timing, is
not knowingly permitted by the Fund. Frequent traders and market-timers should not invest in the Fund. The Fund is intended for long-term investors. The Fund, subject to the limitations described below, takes steps reasonably designed to curtail
frequent trading practices by investors or Financial Intermediaries.
The Fund monitors for substantive round trip trades over a certain dollar threshold that the Fund determines, in its discretion, could adversely affect the management of the Fund. A
single substantive round trip is a purchase and redemption or redemption and purchase of Shares of a Fund within a rolling 60 day period. The Fund permits two substantive round trip trades within a 60 day period.
While the Fund monitors for substantive trades over a
certain dollar threshold, the Fund may deem any round trip trade to be substantive depending on the potential impact to the applicable Fund or Funds.
If after two substantive round trips, an additional purchase or redemption transaction is executed within that rolling 60 day
period, future purchase transactions will be rejected or restricted for 60 days. If after expiration of such 60 day period, there are two substantive round trips followed by an additional purchase or redemption transaction within that
rolling 60 day period, that shareholders right to purchase Shares of any Fund advised by RIMCo will be permanently revoked.
If the Fund does not have direct access to the shareholders account to implement the purchase revocation, the Fund will require the
shareholders Financial Intermediary to impose similar revocation of purchase privileges on the shareholder. In the event that the shareholders Financial Intermediary cannot, due to regulatory or legal obligations, impose a revocation of
purchase privileges, the Fund may accept an alternate trading restriction reasonably designed to protect the Fund from improper trading practices.
Any exception to the permanent revocation of a shareholders purchase privileges, or an alternative trading restriction designed to
protect the Fund from improper trading practices, must be approved by the Funds Chief Compliance Officer.
The Fund, through its agents, will use its best efforts to exercise the Funds right to restrict or reject purchase and exchange
orders as described above.
In certain
circumstances, with prior agreement between a Financial Intermediary and the Fund, the Fund may rely on a Financial Intermediarys frequent trading policies if it is determined that the Financial Intermediarys policies are sufficient to
detect and deter improper frequent trading. Any reliance by the Fund on a Financial Intermediarys frequent trading polices must be approved by the Funds Chief Compliance Officer after a determination that such policies are sufficient to
detect and deter improper frequent trading. Therefore, with respect to frequent trading, shareholders who invest through a Financial Intermediary should be aware that they may be subject to the policies and procedures of their Financial Intermediary
which may be more or less restrictive than the Funds policies and procedures.
45
This policy will
not
apply to:
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Transactions in the Fund by certain other funds (i.e., funds of funds), including any Russell Investment Company and Russell Investment Funds funds of funds, and any
other approved unaffiliated fund of funds. RIMCo and the Board of Trustees believe these transactions do not offer the opportunity for price arbitrage.
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Institutional accounts, including but not limited to, foundations, endowments or defined benefit plans, where the transactions are a result of the characteristics
of the account (e.g., donor directed activity or funding or disbursements of defined benefit plan payments) rather than a result of implementation of an investment strategy, so long as such transactions do not interfere with the efficient
management of a Funds portfolio or are otherwise not in the Funds best interests.
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Trading associated with asset allocated programs where the asset allocation has been developed by RIMCo or an affiliate of RIMCo and RIMCo has transparency into the
amount of trading and the ability to monitor and assess the impact to the Funds or scheduled rebalancing of asset allocated programs based on set trading schedules within specified limits.
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Systematic purchase or redemption programs, if available.
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In applying the policy on limitations on trading activity, the Fund considers the information available at the time and reserves the right
to consider trading history in any Fund including trading history in other accounts under common ownership or control in determining whether to suspend or terminate trading privileges.
This policy will not affect any shareholders redemption rights.
Risks of Frequent Trading
Short-term or excessive trading into and out of the Fund may
harm the Funds performance by disrupting portfolio management strategies and by increasing expenses. These expenses are borne by all Fund shareholders, including long-term investors who do not generate such costs. Frequent trading may
interfere with the efficient management of the Funds portfolio, and may result in the Fund engaging in certain activities to a greater extent than it otherwise would, such as maintaining higher cash balances, using interfund lending and
engaging in portfolio transactions. Increased portfolio transactions and use of interfund lending would correspondingly increase the Funds operating expenses and decrease the Funds performance.
Additionally, to the extent that the Fund invests
significantly in foreign securities traded on markets which may close prior to when the Fund determines its net asset value (referred to as the valuation time), frequent trading by certain shareholders may cause dilution in the value of Fund Shares
held by other shareholders. Because events may occur after the close of these foreign markets and before the valuation time of the Fund that influence the value of these foreign securities, investors may seek to trade Fund Shares in an effort to
benefit from their understanding of the value of these foreign securities as of the Funds valuation time (referred to as price arbitrage). This Fund has procedures designed to adjust closing market prices of foreign securities under certain
circumstances to better reflect what are believed to be the fair values of the foreign securities as of the valuation time. To the extent that the Fund does not accurately value foreign securities as of its valuation time, investors engaging in
price arbitrage may cause dilution in the value of Fund Shares held by other shareholders.
Because certain small cap equity securities may be traded infrequently, to the extent that the Fund invests significantly in small cap equity securities investors may seek to trade Fund Shares in an
effort to benefit from their understanding of the value of these securities (referred to as price arbitrage). Any such frequent trading strategies may interfere with efficient management of the Funds portfolio to a greater degree than Funds
which invest in highly liquid securities, in part because the Fund may have difficulty selling these small cap portfolio securities at advantageous times or prices to satisfy large and/or frequent redemption requests. Any successful price arbitrage
may also cause dilution in the value of Fund Shares held by other shareholders.
Limitations on the Ability to Detect and Curtail Frequent Trading
The Fund will use reasonable efforts to detect frequent trading activity but may not be able to detect such activity in certain
circumstances. While the Fund has the authority to request and analyze data on shareholders in omnibus accounts and will use its best efforts to enforce the policy described above, there may be limitations on the ability of the Fund to detect and
curtail frequent trading practices and the Fund may still not be able to completely eliminate the possibility of improper trading under all circumstances. Shareholders seeking to engage in frequent trading activities
46
may use a variety of strategies to avoid detection and, despite the efforts of the Fund to prevent frequent trading, there is no guarantee that the Fund or its agents will be able to identify
each such shareholder in an omnibus account or curtail their trading practices.
The Fund may make exceptions to this policy, if in its judgment, the transaction does not constitute improper trading or other trading activity that may be harmful to it.
ADDITIONAL INFORMATION ABOUT HOW
TO REDEEM SHARES
Shares may be redeemed
through your Financial Intermediary on any business day of the Fund (a day on which the NYSE is open for regular trading). Redemption requests are processed at the next net asset value per share calculated after the Fund receives an order in proper
form as determined by your Financial Intermediary. The Fund will close early if the NYSE closes early. Any redemption requests received following an early closure will be processed on the following business day at the next calculated net asset value
per share. Shares recently purchased by check may not be available for redemption for 15 days following the purchase or until the check clears, whichever occurs first, to assure that the Fund has received payment for your purchase.
Redemption Dates and Times
Redemption requests must be received by the Fund or an
authorized Fund agent prior to 4:00 p.m. Eastern Time or the close of the NYSE, whichever is earlier, to be processed at the net asset value calculated on that day. Please contact your Financial Intermediary for instructions on how to place
redemption requests. Because Financial Intermediaries may have cut off times for processing orders to sell Fund shares prior to market close, please ask your Financial Intermediary what their cut off time is.
Systematic Withdrawal Program
For Class A Shares:
Your Financial Intermediary
may offer a systematic withdrawal program whereby you may choose to redeem your Shares and receive regular payments from your account. If you would like to establish a systematic withdrawal program, please contact your Financial Intermediary. When
you redeem your Shares under a systematic withdrawal program, it may be a taxable transaction.
For Class C, Class E, Class S or Class Y Shares:
If you invest through certain Financial Intermediaries, a systematic withdrawal program which allows you to redeem your Shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual basis may be offered. If you would like to establish a systematic withdrawal program, please contact your Financial Intermediary. You will generally receive your
payment by the end of the month in which a payment is scheduled. When you redeem your Shares under a systematic withdrawal program, it may be a taxable transaction.
You may discontinue the systematic withdrawal program, or
change the amount and timing of withdrawal payments by contacting your Financial Intermediary.
PAYMENT OF REDEMPTION PROCEEDS
Payment will ordinarily be made within seven days of receipt of your request in proper form. The Fund reserves the right to suspend
redemptions or postpone the date of payment for more than seven days if an emergency condition (as determined by the SEC) exists.
For Class A Shares:
When you redeem your Shares, the Fund will pay your redemption proceeds to your Financial
Intermediary for your benefit within seven days after the Fund receives the redemption request in proper form. Your Financial Intermediary is then responsible for settling the redemption with you as agreed between you and your Financial
Intermediary.
For Class C, Class E,
Class S or Class Y Shares:
Your redemption proceeds will be paid in one of the following manners: (1) if you invest through certain Financial Intermediaries, your redemption proceeds will be sent directly to your Financial
Intermediary who is then responsible for settling the redemption with you as agreed between you and your Financial Intermediary; (2) a check for the redemption proceeds may be sent to the shareholder(s) of record at the address of record within
seven days after the Fund receives a redemption request in proper form; or (3) if you have
47
established the electronic redemption option, your redemption proceeds can be (a) wired to your predesignated bank account on the next bank business day after the Fund receives your
redemption request in proper form or (b) sent by Electronic Funds Transfer (EFT) to your predesignated bank account on the second business day after the Fund receives your redemption request in proper form. On Federal Reserve holidays, funds
will settle on the next day the Federal Reserve is open. The Fund may charge a fee to cover the cost of sending a wire transfer for redemptions, and your bank may charge an additional fee to receive the wire. The Fund will always charge a fee
when sending an international wire transfer. The Fund reserves the right to charge a fee when sending a domestic wire transfer for redemptions. The Fund does not charge for EFT though your bank may charge a fee to receive the EFT. Wire transfers and
EFTs can be sent to U.S. financial institutions that are members of the Federal Reserve System.
OTHER INFORMATION ABOUT SHARE TRANSACTIONS
Written Instructions
For Class A Shares:
Written instructions must be in proper form as determined by your Financial Intermediary.
For Class C, Class E, Class S or Class Y
Shares:
The Fund requires that written instructions be in proper form and reserves the right to reject any written instructions that are not in proper form. Your Financial Intermediary will assist you in preparing and submitting transaction
instructions to the Fund to insure proper form. Generally, your instructions must include:
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The Fund name and account number
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Details related to the transaction including type and amount
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Signatures of all owners exactly as registered on the account
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Any supporting legal documentation that may be required
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Responsibility for Fraud
Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account
confirmations or statements that the Fund or your Financial Intermediary send you. Contact your Financial Intermediary immediately about any transactions that you believe to be unauthorized.
Signature Guarantee
For Class C, Class E, Class S or Class Y Shares:
The Fund reserves the right to require a signature guarantee for
any request related to your account including, but not limited to, requests for transactions or account changes. A signature guarantee verifies the authenticity of your signature. You should be able to obtain a signature guarantee from a bank,
broker, credit union, savings association, clearing agency, or securities exchange or association, but not a notary public. Contact your Financial Intermediary for assistance in obtaining a signature guarantee.
In-Kind Exchange of Securities
A Fund may, at its discretion, permit you to acquire Shares
in exchange for securities you currently own. Any securities exchanged must meet the investment objective, policies, and limitations of the appropriate Fund; have a readily ascertainable market value; be liquid; and not be subject to restrictions on
resale.
Shares purchased in exchange for
securities generally may not be redeemed or exchanged for 15 days following the purchase by exchange or until the transfer has settled, whichever comes first. If you are a taxable investor, you will generally realize gains or losses on the exchange
for federal income tax purposes. If you are contemplating an in-kind exchange you should consult your tax adviser.
The price at which the exchange will take place will depend upon the relative net asset value of the Shares purchased and securities
exchanged. Securities accepted by the Fund will be valued in the same way the Fund values its assets. Any interest earned on the securities following their delivery to the Fund and prior to the exchange will be considered in valuing the securities.
All interest, dividends, subscription or other rights attached to the securities becomes the property of the Fund, along with the securities. Please contact your Financial Intermediary for further information.
48
Redemption In-Kind
If operationally possible (typically only when the Fund is
notified in advance of a large redemption), the Fund may, at its discretion, pay for any portion of a redemption amount by a distribution of in-kind securities from the Funds portfolio, instead of in cash. There are also operational
limitations on the ability of the Fund to make an in-kind distribution of most non-U.S. securities. An in-kind distribution of portfolio securities could include illiquid securities. Illiquid securities may not be able to be sold quickly or at a
price that reflects full value, which could cause you to realize losses on the security if the security is sold at a price lower than that at which it had been valued. If you receive an in-kind distribution of portfolio securities, and choose to
sell them, you will incur brokerage charges and continue to be subject to tax consequences and market risk pending any sale.
Uncashed Checks
For Class C, Class E, Class S or Class Y Shares:
Please make sure you promptly cash checks issued to you by the Fund. If
you do not cash a dividend, distribution, or redemption check, the Fund will act to protect itself and you. This may include restricting certain activities in your account until the Fund is sure that it has a valid address for you. After 180 days,
the Fund will no longer honor the issued check and, after attempts to locate you, the Fund will follow governing escheatment regulations in disposition of check proceeds. No interest will accrue on amounts represented by uncashed checks.
Registration of Fund Accounts
Many brokers, employee benefit plans and bank trusts combine
their clients holdings in a single omnibus account with the Fund held in the brokers, plans, or bank trusts own name or street name. Therefore, if you hold Shares through a brokerage account, employee benefit plan
or bank trust fund, the Fund may have records only of that Financial Intermediarys omnibus account. In this case, your broker, employee benefit plan or bank is responsible for keeping track of your account information. This means that you may
not be able to request transactions in your Shares directly through the Fund, but can do so only through your broker, plan administrator or bank. Ask your Financial Intermediary for information on whether your Shares are held in an omnibus account.
49
[THIS PAGE INTENTIONALLY LEFT BLANK.]
FINANCIAL HIGHLIGHTS
No Class A, Class C, Class E, Class S or Class Y Shares
of the Fund were outstanding as of the date of this Prospectus.
51
MONEY MANAGER INFORMATION
The money managers are not affiliates of the Fund, RIMCo,
RFSC or RFS other than as a result of their management of Fund assets. Each money manager is principally engaged in managing institutional investment accounts. These managers may also serve as managers or advisers to other investment companies
unaffiliated with RIC, other RIC Funds, or to other clients of RIMCo or of Frank Russell Company, including Frank Russell Companys wholly-owned subsidiary, Russell Trust Company. Investments in the Fund are not deposits with or other
liabilities of any of the money managers and are subject to investment risk, including loss of income and principal invested and possible delays in payment of redemption proceeds. The money managers do not guarantee the performance of the Fund or
any particular rate of return.
The Fund may
engage or terminate a money manager at any time, subject to the approval of the Funds Board, without a shareholder vote. A complete list of current money managers for the Fund can also be found at www.russell.com. Assets not allocated to money
managers are managed by RIMCo.
Russell
Multi-Strategy Alternative Fund
[ ]
[To Be Updated By Amendment]
When considering an investment in the Fund, do not rely
on any information unless it is contained in this Prospectus or in the Funds Statement of Additional Information. The Fund has not authorized anyone to add any information or to make any additional statements about the Fund. The Fund may not
be available in some jurisdictions or to some persons. The fact that you have received this Prospectus should not, in itself, be treated as an offer to sell Shares to you. Changes in the affairs of the Fund or in the Funds money managers may
occur after the date on the cover page of this Prospectus. This Prospectus will be amended or supplemented to reflect any material changes to the information it contains.
52
EXPENSE NOTES
The following notes supplement the Annual Fund Operating
Expenses table in the Risk/Return Summary and provide additional information necessary to understand the expenses provided in that table:
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If you purchase Shares through a Financial Intermediary, such as a bank or an investment adviser, you may also pay additional fees to the intermediary for services
provided by the intermediary. You should contact your Financial Intermediary for information concerning what additional fees, if any, will be charged.
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Pursuant to the rules of the Financial Industry Regulatory Authority (FINRA), the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on Class A and Class C Shares of the Fund may not exceed 7.25% and 6.25%, respectively, of total gross sales, subject to certain exclusions. These limitations are imposed at the class level on each Class of Shares of the Fund
rather than on a per shareholder basis. Therefore, long-term shareholders of the Class A and Class C Shares may pay more than the economic equivalent of the maximum sales charges permitted by FINRA.
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Other Expenses includes a shareholder services fee of 0.25% of average daily net assets for Class C Shares, and an administrative fee of up to 0.05% of
average daily net assets for all Classes of Shares.
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In addition to the advisory and administrative fees payable by the Fund to RIMCo and Russell Fund Services Company (RFSC), to the extent that the Fund
invests its cash reserves in the Russell U.S. Cash Management Fund, an unregistered fund advised by RIMCo, it will bear indirectly a proportionate share of the Funds operating expenses, which include the administrative fee that the Russell
U.S. Cash Management Fund pays to RFSC. The cash reserves for the Fund are invested in the Russell U.S. Cash Management Fund. The aggregate annual rate of administrative fees payable to RFSC on the cash reserves invested in the Russell U.S. Cash
Management Fund is 0.05%.
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Dividend expense on securities sold short is the cost of paying the value of dividends on those securities to the lender of the security. This expense is offset by
gains on the decrease in the market value of the securities sold short as a result of the dividend declaration. Interest expense on securities sold short is the amount paid to the lender of the security for making the loan. This may be partially
offset by the interest earned from investment of cash collateral posted for the borrowed securities. While the Fund is obligated to record the dividend expense and interest as an expense from an accounting perspective, these expenses are not charged
directly to the Fund but are similar to transaction charges for buying and selling securities.
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A portion of Other Expenses is attributable to interest expense and dividend expense on short sales as follows:
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Class A
Shares
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Class C
Shares
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Class E
Shares
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Class S
Shares
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Class Y
Shares
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Interest Expense on Short Sales
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0.08
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%
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0.08
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%
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0.08
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%
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0.08
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%
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0.08
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%
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Dividend Expense on Short Sales
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0.27
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%
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0.27
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%
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0.27
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%
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0.27
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%
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0.27
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%
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Total Dividend and Interest Expenses on Short Sales
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0.35
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%
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0.35
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%
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0.35
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%
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0.35
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%
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0.35
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%
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For more information about the Fund, the following documents are available without charge:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed information
about the Fund.
The SAI is incorporated into this Prospectus by reference.
You may obtain free copies of the Funds SAI, and may request other information or make other inquiries, by contacting your Financial Intermediary or the Fund at:
Russell Investment Company
1301 Second Avenue
18
th
Floor
Seattle, WA 98101
Telephone:
1-800-787-7354
The Funds SAI and annual and semiannual reports to
shareholders are available, free of charge, on the Funds Web site at www.russell.com.
Each year you are automatically sent an updated Prospectus and annual and semiannual reports for the Fund. You may also occasionally receive notifications of Prospectus changes and proxy statements for the Fund. In
order to reduce the volume of mail you receive, when possible, only one copy or one mailing of these documents will be sent to shareholders who are part of the same family, sharing the same name and the same household address. If you would like to
opt out of the household-based mailings, please call your Financial Intermediary.
Some Financial Intermediaries may offer electronic delivery of the Funds Prospectus and annual and semiannual reports. Please contact your Financial Intermediary for further details.
You can review and copy information about the Fund (including the SAI) at the
Securities and Exchange Commissions Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room by calling the Commission at 1-202-942-8090. Reports and other information about the Fund is
available on the EDGAR Database on the Commissions Internet website at http://www.sec.gov. Copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or
by writing the Commissions Public Reference Section, Washington, D.C. 20549.
Distributor: Russell Financial
Services, Inc.
Russell Investment Companys SEC File No. 811-03153
36-08-423
The information in this Statement of Additional Information is not complete and may be changed. A
registration statement relating to these securities has been filed with the Securities and Exchange Commission. We may not sell these securities until the registration statement is effective. This Statement of Additional Information is not a
prospectus.
Subject to completion, dated March 15, 2012
RUSSELL INVESTMENT COMPANY
1301 Second Avenue, 18th Floor
Seattle, Washington 98101
Telephone 1-800-787-7354
STATEMENT OF ADDITIONAL INFORMATION
RUSSELL MULTI-STRATEGY ALTERNATIVE
FUND
Non-Fund of Funds
[
]
, 2012
Russell Investment Company (RIC) is a single legal entity organized as a Massachusetts business trust. RIC operates
investment portfolios, including the Russell Multi-Strategy Alternative Fund, which is referred to as the Fund. RIC offers Shares of beneficial interest in the Fund in a separate Prospectus.
This Statement of Additional Information (SAI) is not a prospectus; this SAI should be read in conjunction with the
Funds Prospectus dated [
], 2012 and any supplements thereto. The Prospectus may be obtained without charge by
telephoning or writing RIC at the number or address shown above.
Capitalized terms not otherwise defined in this SAI shall
have the meanings assigned to them in the Prospectus.
As of the date of this SAI, RIC is comprised of [40] Funds. This SAI
relates to 1 of these Funds. The Fund presently offers interests in different classes of Shares as described in the table below. Unless otherwise indicated, this SAI relates to all classes of Shares of the Fund.
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Fund
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Class A
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Class C
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Class E
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Class S
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Class Y
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Russell Multi-Strategy Alternative Fund
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[
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[
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[
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[
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[
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TABLE OF CONTENTS
STRUCTURE AND GOVERNANCE
ORGANIZATION AND BUSINESS HISTORY.
RIC commenced business operations as a Maryland corporation on
October 15, 1981. On January 2, 1985, RIC reorganized by changing its domicile and legal status to a Massachusetts business trust.
RIC is currently organized and operating under a Second Amended and Restated Master Trust Agreement dated October 1, 2008, as amended, (the
Master Trust Agreement) and the provisions of Massachusetts law governing the operation of a Massachusetts business trust. The Board of Trustees (Board or the Trustees) may amend the Master Trust Agreement from
time to time; provided, however, that any amendment which would materially and adversely affect shareholders of RIC as a whole, or shareholders of a particular Fund, must be approved by the holders of a majority of the Shares of RIC or the Fund,
respectively. However, the Trustees may, without the affirmative vote of a majority of the outstanding voting shares (as defined in the Investment Company Act of 1940, as amended (the 1940 Act)) of the Trust or Sub-Trust by a vote of a
majority of the Trustees or written instrument executed by a majority of their number then in office, terminate, liquidate or reorganize any Sub-Trust or any Class of any such Sub-Trust at any time by written notice to affected Shareholders. RIC is
a registered open-end management investment company. The Fund is diversified. Under the 1940 Act, a diversified company is defined as a management company which meets the following requirements: at least 75% of the value of its total assets is
represented by cash and cash items (including receivables), Government securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in
value than five percent of the value of the total assets of such management company and to not more than 10% of the outstanding voting securities of such issuer.
RIC is authorized to issue Shares of beneficial interest, and may divide the Shares into two or more series, each of which evidences a pro rata ownership interest in a different investment portfolio
a Fund. Each Fund is deemed to be a separate trust under Massachusetts law. The Trustees may, without seeking shareholder approval, create additional Funds at any time. The Master Trust Agreement provides that shareholders may be
required to redeem their Shares at any time (1) if the Trustees determine in their sole discretion that failure to so redeem may have material adverse consequences to the shareholders of RIC or of any Fund or (2) upon such other conditions
as may from time to time be determined by the Trustees and set forth in the prospectuses with respect to the maintenance of shareholder accounts of a minimum amount. However, shareholders can only be required to redeem their Shares only to the
extent consistent with the 1940 Act, the rules thereunder and Securities and Exchange Commission interpretations thereof.
RICs Funds
are authorized to issue Shares of beneficial interest in one or more classes. Shares of each class of a Fund have a par value of $.01 per share, are fully paid and nonassessable, and have no preemptive or conversion rights. Shares of each class of a
Fund represent proportionate interests in the assets of that Fund and have the same voting and other rights and preferences as the Shares of other classes of the Fund. Shares of each class of a Fund are entitled to the dividends and distributions
earned on the assets belonging to the Fund that the Board declares. Each class of Shares is designed to meet different investor needs. Class A Shares are subject to (1) an initial sales charge and (2) a Rule 12b-1 fee of up to 0.75%
(presently limited to 0.25%). Class C Shares are subject to a Rule 12b-1 fee of 0.75% and a shareholder services fee of 0.25%. Class E Shares are subject to a shareholder services fee of 0.25%. Class S and Class Y Shares are not subject to either a
Rule 12b-1 fee or a shareholder services fee. Unless otherwise indicated, Shares in this SAI refers to all classes of Shares of the Fund.
Under certain unlikely circumstances, as is the case with any Massachusetts business trust, a shareholder of the Fund may be held personally liable for the obligations of the Fund. The Master Trust
Agreement provides that shareholders shall not be subject to any personal liability for the acts or obligations of the Fund and that every written agreement, obligation or other undertaking of the Fund shall contain a provision to the effect that
the shareholders are not personally liable thereunder. The Master Trust Agreement also provides that RIC shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of any shareholder incurring financial loss beyond his investment on account of shareholder liability is limited to circumstances in which the Fund itself would be unable to meet its obligations.
Currently, pursuant to claims for exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act
(CEA), the Fund and RIMCo are not subject to registration or regulation as commodity pool operators under the CEA. However, the Commodity Futures Trading Commission (CFTC) has adopted certain rule amendments that
significantly affect the availability of these exclusions, and may subject the Fund and certain other Funds, as well as RIMCo, to regulation by the CFTC. These amendments are not yet effective and their scope of application is still
uncertain. When these amendments become effective, the Fund may consider steps, such as investment strategy changes, in order to continue to qualify for exemption from CFTC regulation, or may determine to operate subject to CFTC
regulation. If the Fund operates subject to CFTC regulation, it may incur additional expenses.
-1-
Frank Russell Company (FRC) has the right to grant (and withdraw) the nonexclusive use of the
name Frank Russell, Russell or any variation.
SHAREHOLDER MEETINGS.
RIC will
not hold annual meetings of shareholders, but special meetings may be held. Special meetings may be convened (i) by the Board, (ii) upon written request to the Board by shareholders holding at least 10% of RICs outstanding Shares, or
(iii) upon the Boards failure to honor the shareholders request described above, by shareholders holding at least 10% of the outstanding Shares by giving notice of the special meeting to shareholders. The Trustees will provide the
assistance required by the 1940 Act in connection with any special meeting called by shareholders following a failure of the Board to honor a shareholder request for a special meeting. Each share of a class of the Fund has one vote in Trustee
elections and other matters submitted for shareholder vote. On any matter which affects only a particular class, only Shares of that class are entitled to vote. There are no cumulative voting rights.
CONTROLLING SHAREHOLDERS.
The Trustees have the authority and responsibility under applicable state law to
direct the management of the business of RIC, and hold office unless they retire (or upon reaching the mandatory retirement age of 72), resign or are removed by, in substance, a vote of two-thirds of RIC Shares outstanding. Under these
circumstances, no one person, entity or shareholder controls RIC.
Because the Fund is new, there were no shares outstanding as of
the date of this SAI.
TRUSTEES AND OFFICERS.
The Board of Trustees is responsible under applicable
state law for generally overseeing management of the business and affairs of RIC and does not manage operations on a day-to-day basis. The officers of RIC, all of whom are employed by and are officers of Russell Investment Management Company
(RIMCo), the Funds adviser, or its affiliates, are responsible for the day-to-day management and administration of the Funds operations. The Board of Trustees carries out its general oversight responsibilities in respect of
the Funds operations by, among other things, meeting with RIC management at the Boards regularly scheduled meetings and as otherwise needed and, with the assistance of RIC management, monitoring or evaluating the performance of the
Funds service providers, including RIMCo, the Funds custodian and the Funds transfer agent. As part of this oversight process, the Board of Trustees consults not only with management and RIMCo, but with RICs independent
auditors, Fund counsel and separate counsel to the Independent Trustees. The Board of Trustees monitors Fund performance as well as the quality of services provided to the Fund. As part of its monitoring efforts, the Board of Trustees reviews Fund
fees and expenses in light of the nature, scope and overall quality of services provided to the Fund while also seeking to provide for the Funds continued access to high quality services in the future. The Board of Trustees is required under
the 1940 Act to review and approve the Funds contracts with RIMCo and the money managers. Generally, a Trustee may be removed at any time by a vote of two-thirds of RIC Shares. A vacancy in the Board shall be filled by a vote of a majority of
the remaining Trustees so long as after filling such vacancy, two-thirds of the Trustees have been elected by shareholders. There is one Trustee Emeritus. Trustees Emeritus do not have the power to vote on matters coming before the Board, or to
direct the vote of any Trustee, and generally are not responsible or accountable in any way for the performance of the Boards responsibilities.
The Trustees and officers of the Fund also serve in similar positions for funds of funds (the Funds of Funds) which invest in different combinations of some of the Funds. Thus, if the
interests of the Fund and a Fund of Funds were to diverge, it is possible that a conflict of interest could arise. If such a conflict arises, the trustees and officers of the affected Funds, respectively, will take all steps they believe reasonable
to manage, and where possible, minimize the potential conflict, including possibly by disclosing the conflict to shareholders.
The Board of
Trustees is currently comprised of eight trustees, two of whom are interested trustees. There are six independent trustees on the Board, including Kristianne Blake who serves as the Chair of the Board and has since 2005. The Board of Trustees has
established a standing Audit Committee, a standing Nominating and Governance Committee and a standing Investment Committee which assist in performing aspects of its role in oversight of the Funds operations and are described in more detail in
the following paragraphs. The Boards role in risk oversight of the Fund reflects its responsibility under applicable state law to oversee generally, rather than to manage, the operations of the Fund. In line with this oversight responsibility,
the Board receives reports and makes inquiry at its regular meetings and as needed regarding the nature and extent of significant Fund risks (including investment, operational, compliance and valuation risks) that potentially could have a material
adverse impact on the business operations, investment performance or reputation of the Fund, but relies upon the Funds management (including the Funds portfolio managers), the Funds Chief Compliance Officer (CCO), who
reports directly to the Board, and the Adviser (including the Advisers Chief Risk Officer (CRO)) to assist it in identifying and understanding the nature and extent of such risks and determining whether, and to what extent, such
risks may be eliminated or mitigated. Under the Funds multi-manager structure, the Adviser is responsible for oversight, including risk management oversight, of the services provided by the Funds money managers, and providing reports to
the Board with respect to the money managers. In addition to reports and other information received from Fund management and the Adviser regarding the Funds investment program and activities, the Board as part of its risk oversight efforts
meets at its regular meetings and as needed with representatives of the Funds senior management, including its CCO, to discuss, among other things, risk issues and issues regarding the policies, procedures and controls of the Fund. The Board
receives quarterly reports from the CCO and other representatives of the Funds senior
-2-
management which include information regarding risk issues and receives an annual report from the CRO. The Board may be assisted in performing aspects of its role in risk oversight by the Audit
Committee, the Investment Committee and such other standing or special committees as may be established from time to time by the Board. For example, the Audit Committee of the Board regularly meets with the Funds independent public accounting
firm to review, among other things, reports on the Funds internal controls for financial reporting. The Board believes it is not possible to identify all risks that may affect the Fund; it is not practical or cost-effective to eliminate or
mitigate all risks; and it is necessary for the Fund to bear certain risks (such as investment-related risks) to achieve their investment objectives. The processes or controls developed to address risks may be limited in their effectiveness and some
risks may be beyond the reasonable control of the Board, the Fund, the Adviser, the Advisers affiliates or other service providers. Because the Chairman of the Board and the Chair of each of the Boards Audit, Investment and Nominating
and Governance Committees are Independent Trustees, the manner in which the Board administers its risk oversight efforts is not expected to have any significant impact on the Boards leadership structure. The Board has determined that its
leadership structure, including its role in risk oversight, is appropriate given the characteristics and circumstances of the Fund, including such factors as the number of Fund, the Funds share classes and the Funds distribution
arrangements and the Funds manager of manager structure. In addition, the Board believes that its leadership structure facilitates the independent and orderly exercise of its oversight responsibilities.
RICs Board of Trustees has adopted and approved a formal written charter for the Audit Committee, which sets forth the Audit Committees
current responsibilities. The Audit Committees primary functions are: (1) to assist Board oversight of (a) the integrity of the Funds financial statements, (b) RICs compliance with legal and regulatory requirements
that relate to financial reporting, as appropriate, (c) the Independent Registered Public Accounting Firms qualifications and independence, and (d) the performance of RICs Independent Registered Public Accounting Firm;
(2) to oversee the preparation of an Audit Committee report as required by the Securities and Exchange Commission to be included in RICs Form N-CSR or any proxy statement, as applicable; (3) to oversee RICs accounting and
financial reporting policies and practices and its internal controls; and (4) to act as a liaison between RICs Independent Registered Public Accounting Firm and the full Board. The Audit Committee reviews both the audit and non-audit work
of RICs Independent Registered Public Accounting Firm, submits a recommendation to the Board as to the selection of the Independent Registered Public Accounting Firm, and pre-approves (i) all audit and non-audit services to be rendered by
the Independent Registered Public Accounting Firm for RIC, (ii) all audit services provided to RIMCo, or any affiliate thereof that provides ongoing services to RIC, relating to the operations and financial reporting of RIC, and (iii) all
non-audit services relating to the operations and financial reporting of RIC, provided to RIMCo, or any affiliate thereof that provides ongoing services to RIC, by any auditors with an ongoing relationship with RIC. It is managements
responsibility to maintain appropriate systems for accounting and internal control and the auditors responsibility to plan and carry out a proper audit. Currently, the Audit Committee members are Messrs. Jack R. Thompson and Jonathan Fine, and
Ms. Kristianne Blake, each of whom is an Independent Trustee. For the fiscal year ended October 31, 2011, the Audit Committee held four meetings.
RICs Board of Trustees has adopted and approved a formal written charter for the Investment Committee, which sets forth the Investment Committees current responsibilities. The Investment
Committee: (1) shall regularly review and monitor the investment strategies and investment performance of the Fund; (2) shall review the kind, scope, and format of, and the time periods covered by, the investment performance data and
related reports provided to the Board; (3) may review the investment performance benchmarks and peer groups used in reports delivered to the Board; (4) may review such matters that are related to the investments, investment strategies and
investment performance of the Fund as would be considered by the Board as the Committee may deem to be necessary or appropriate; and (5) may meet with any officer of the Trust, or officer or other representative of RIMCo, any subadviser to a
fund or other service provider to the Trust. Currently, the Investment Committee members are Messrs. Thaddas L. Alston, Daniel P. Connealy and Raymond P. Tennison, Jr. and Mses. Julie W. Weston and Sandra Cavanaugh. For the fiscal year ended
October 31, 2011, the Investment Committee held four meetings.
RICs Board of Trustees has adopted and approved a formal written
charter for the Nominating and Governance Committee, which sets forth the Nominating and Governance Committees current responsibilities. The primary functions of the Nominating and Governance Committee are to: (1) nominate and evaluate
individuals for Trustee membership on the Board, including individuals who are not interested persons of RIC for independent Trustee membership; (2) supervise an annual assessment by the Trustees taking into account such factors as the
Committee may deem appropriate; (3) review the composition of the Board; (4) review Independent Trustee compensation; and (5) make nominations for membership on all Board committees and review the responsibilities of each committee.
In identifying and evaluating nominees, the Nominating and Governance Committee considers factors it deems relevant which include: whether or not the person is an interested person as defined in the 1940 Act and whether the person is
otherwise qualified under applicable laws and regulations to serve on the Board of Trustees of the Trust; whether or not the person has any relationship that might impair his or her independence, such as any business, financial or family
relationships with Fund management, the investment adviser of the Fund, Fund service providers or their affiliates; whether or not the person serves on boards of, or is otherwise affiliated with, competing organizations or Funds; and the character
and integrity of the person and the contribution which the person can make to the Board. The Nominating and Governance Committee does not have a formal diversity policy but it may consider diversity of professional experience, education and skills
when evaluating
-3-
potential nominees. The Committee will not consider nominees recommended by Shareholders of the Fund. Currently, the Nominating and Governance Committee members are Mr. Raymond P.
Tennison and Mses. Julie W. Weston and Kristianne Blake, each of whom is an independent Trustee. For the fiscal year ended October 31, 2011, the Nominating and Governance Committee held one meeting.
RIC paid $934,926 in the aggregate for the fiscal year ended October 31, 2011 to the Trustees who are not officers or employees of RIMCo or its
affiliates. Trustees are paid an annual retainer plus meeting attendance and chairperson fees, both at the Board and Committee levels, in addition to any travel and other expenses incurred in attending Board and Committee meetings. RICs
officers and employees are paid by RIMCo or its affiliates.
Each Trustee was selected to join the Board based upon a variety of factors,
including, but not limited to, the Trustees background, business and professional experience, qualifications and skills. No factor, by itself, has been controlling in the selection evaluations.
The following tables provide information for each officer and trustee of the Russell Fund Complex. The Russell Fund Complex consists of Russell
Investment Company (RIC), which has [40] funds, and Russell Investment Funds (RIF), which has 10 funds. Each of the trustees is a trustee of both RIC and RIF. The first table provides information for the interested trustees.
The second table provides information for the independent trustees. The third table provides information for the trustees emeritus. The fourth table provides information for the officers. Furthermore, each Trustee possesses the following specific
attributes: Mr. Alston has business, financial and investment experience as a senior executive of an international real estate firm and is trained as a lawyer; Ms. Blake has had experience as a certified public accountant and has had
experience as a member of boards of directors/trustees of other investment companies; Mr. Connealy has had experience with other investment companies and their investment advisers first as a partner in the investment management practice of
PricewaterhouseCoopers LLP and, subsequently, as the senior financial executive of two other investment organizations sponsoring and managing investment companies; Mr. Fine has had financial, business and investment experience as a senior
executive of a non-profit organization and previously, as a senior executive of a large regional financial services organization with management responsibility for such activities as investments, asset management and securities brokerage;
Mr. Tennison has had business, financial and investment experience as a senior executive of a corporation with international activities and was trained as an accountant; Mr. Thompson has had experience in business, governance, investment
and financial reporting matters as a senior executive of an organization sponsoring and managing other investment companies, and, subsequently, has served as a board member of other investment companies, and has been determined by the Board to be an
audit committee financial expert; and Ms. Weston has had experience as a tax and corporate lawyer, has served as general counsel of several corporations and has served as a director of another investment company. Ms. Cavanaugh
has had experience with other financial services companies, including companies engaged in the sponsorship, management and distribution of investment companies. As a senior officer of the Funds, the Adviser and various affiliates of the Adviser
providing services to the Funds, Ms. Cavanaugh is in a position to provide the Board with such parties perspectives on the management, operations and distribution of the Funds.
-4-
|
|
|
|
|
|
|
|
|
|
|
Name, Age, Address
|
|
Position(s) Held
With
Fund and Length of Time
Served
|
|
Term of
Office*
|
|
Principal Occupation(s)
During the
Past 5
Years
|
|
No. of
Portfolios in
Russell
Fund
Complex
Overseen by
Trustee
|
|
Other
Directorships Held
by Trustee
During the
Past 5 Years
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
#Sandra Cavanaugh
Born
May 10, 1954
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
President and Chief Executive Officer since 2010
Trustee since
2010
|
|
Appointed until
successor is duly
elected and
qualified
Until successor is
chosen and qualified
by Trustees
|
|
President and CEO RIC and RIF
Chairman of
the Board, President and CEO, Russell Financial Services, Inc.
Chairman of the Board, President and CEO, Russell Fund Services Company (RFSC)
Chairman of the Board and President, Russell Insurance Agency, Inc.
(RIA) (insurance agency)
May 2009 to December 2009, Executive Vice President, Retail Channel, SunTrust Bank
2007 to January 2009, Senior Vice President, National Sales Retail
Distribution, JPMorgan Chase/Washington Mutual, Inc. (investment company)
1997 to 2007, President WM Funds Distributor & Shareholder Services/WM Financial Services (investment company)
|
|
[50]
|
|
None
|
|
|
|
|
|
|
##Daniel P. Connealy
Born
June 6, 1946
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since 2003
|
|
Appointed until
successor is duly
elected and qualified
|
|
June 2004 to present, Senior Vice President and Chief Financial
Officer, Waddell & Reed Financial, Inc. (investment company)
Chairman of the Audit Committee, RIC and RIF from 2005 to 2011
|
|
[50]
|
|
None
|
#
|
Ms. Cavanaugh is also an officer and/or director of one or more affiliates of RIC and RIF and is therefore an Interested Trustee.
|
##
|
Mr. Connealy is an officer of a broker-dealer that distributes shares of the Fund and is therefore an Interested Trustee.
|
-5-
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|
|
|
|
|
|
|
|
|
|
Name, Age, Address
|
|
Position(s) Held
With
Fund and Length of Time
Served
|
|
Term of
Office*
|
|
Principal Occupation(s)
During the
Past 5 Years
|
|
No. of
Portfolios in
Russell
Fund
Complex
Overseen by
Trustee
|
|
Other
Directorships Held
by Trustee
During the
Past 5 Years
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
Thaddas L. Alston
Born
April 7, 1945
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since 2006
Chairman of
the Investment Committee since 2010
|
|
Appointed until successor
is duly elected and
qualified
Appointed until successor
is duly elected and qualified
|
|
Senior Vice President, Larco Investments, Ltd. (real estate firm)
|
|
[50]
|
|
None
|
|
|
|
|
|
|
Kristianne Blake,
Born
January 22, 1954
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since
2000
Chairman since 2005
|
|
Appointed until
successor is duly
elected and
qualified
Annual
|
|
Director and Chairman of the Audit Committee, Avista Corp.
(electric utilities)
Trustee and Chairman of the Operations Committee, Principal Investor Funds and
Principal Variable Contracts Funds (investment company)
Regent, University of Washington
President, Kristianne Gates Blake, P.S. (accounting services)
|
|
[50]
|
|
Director, Avista Corp (electric utilities);
Trustee,
Principal Investor Funds (investment company);
Trustee, Principal Variable Contracts Funds (investment company)
|
-6-
|
|
|
|
|
|
|
|
|
|
|
Name, Age, Address
|
|
Position(s) Held With
Fund and Length of
Time
Served
|
|
Term of
Office*
|
|
Principal Occupation(s)
During the
Past 5
Years
|
|
No.
of
Portfolios in
Russell
Fund
Complex
Overseen by
Trustee
|
|
Other
Directorships Held
by Trustee
During the
Past 5 Years
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Fine
Born
July 8, 1954
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since 2004
|
|
Appointed until
successor is duly
elected and qualified
|
|
President and Chief Executive Officer, United Way of King County, WA (charitable
organization)
|
|
[50]
|
|
None
|
|
|
|
|
|
|
Raymond P. Tennison, Jr.
Born
December 21, 1955
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since
2000
Chairman of the
Nominating and
Governance
Committee since 2007
|
|
Appointed until successor
is duly elected and qualified.
Appointed until
successor
is duly elected and qualified
|
|
Vice Chairman of the Board, Simpson Investment Company (paper and
forest products)
Until November 2010, President, Simpson Investment Company and several additional
subsidiary companies, including Simpson Timber Company, Simpson Paper Company and Simpson Tacoma Kraft Company
|
|
[50]
|
|
None
|
|
|
|
|
|
|
Jack R. Thompson,
Born
March 21, 1949
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since
2005
Chairman of the
Audit Committee,
RIC and RIF since 2012
|
|
Appointed until
successor is duly
elected and
qualified
Appointed until
successor is duly
elected and qualified
|
|
September 2003 to September 2009, Independent Board Chair and Chairman
of the Audit Committee, Sparx Asia Funds (investment company)
September 2007 to September 2010, Director, Board Chairman and Chairman of the Audit Committee, LifeVantage Corporation (health products company)
|
|
[50]
|
|
Director, Board Chairman and Chairman of the Audit Committee,
LifeVantage Corporation until September 2010 (health products company)
Director, Sparx Asia Funds until 2009 (investment company)
|
|
|
|
|
|
|
Julie W. Weston,
Born
October 2, 1943
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee since 2002
|
|
Appointed until successor
is duly elected and qualified
|
|
Retired
Chairperson of the
Investment Committee until December 2009
|
|
[50]
|
|
None
|
*
|
Each Trustee is subject to mandatory retirement at age 72.
|
-7-
|
|
|
|
|
|
|
|
|
|
|
Name, Age, Address
|
|
Position(s) Held With
Fund and Length of
Time
Served
|
|
Term of
Office
|
|
Principal Occupation(s)
During the
Past 5 Years
|
|
No. of
Portfolios in
Russell
Fund
Complex
Overseen by
Trustee
|
|
Other
Directorships Held
by Trustee
During the
Past 5 Years
|
TRUSTEE EMERITUS
|
|
|
|
|
|
|
*George F. Russell, Jr.,
Born
July 3, 1932
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Trustee Emeritus and Chairman Emeritus since 1999
|
|
Until resignation or removal
|
|
Director Emeritus, Frank Russell Company (investment consultant
to institutional investors (FRC)); and RIMCo
Chairman Emeritus, RIC and RIF; Russell Implementation Services Inc. (broker-dealer and investment adviser (RIS)); Russell 20-20 Association (non-profit
corporation); and Russell Trust Company (non-depository trust company (RTC))
Chairman, Sunshine Management Services, LLC (investment adviser)
|
|
[50]
|
|
None
|
*
|
Mr. Russell is also a director emeritus of one or more affiliates of RIC and RIF.
|
-8-
|
|
|
|
|
|
|
Name, Age, Address
|
|
Position(s) Held With
Fund and Length of
Time
Served
|
|
Term of
Office
|
|
Principal Occupation(s) During the
Past 5 Years
|
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
Cheryl Wichers
Born
December 16, 1966
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Chief Compliance Officer since 2005
|
|
Until removed by Independent Trustees
|
|
Chief Compliance Officer, RIC
Chief
Compliance Officer, RIF
2005 2011 Chief Compliance Officer, RIMCo
Chief
Compliance Officer, RFSC
Chief Compliance Officer, Russell Exchange Traded Funds Trust
|
|
|
|
|
Sandra Cavanaugh
Born
May 10, 1954
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
President and Chief Executive Officer since 2010
|
|
Until successor is chosen and qualified by Trustees
|
|
President and CEO, RIC and RIF
Chairman of
the Board, Co-President and CEO, Russell Financial Services, Inc.
Chairman of the Board, President and CEO, RFSC
Director, RIMCo
Chairman of
the Board and President, Russell Insurance Agency, Inc. (insurance agency (RIA))
May 2009 to December 2009, Executive Vice President, Retail Channel, SunTrust
Bank
2007 to January 2009, Senior Vice President, National Sales Retail
Distribution, JPMorgan Chase/Washington Mutual, Inc.
1997 to 2007, President WM Funds Distributor & Shareholder Services/WM Financial Services
|
|
|
|
|
Mark E. Swanson,
Born
November 26, 1963
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Treasurer and Chief Accounting Officer since 1998
|
|
Until successor is chosen and qualified by Trustees
|
|
Treasurer, Chief Accounting Officer and CFO, RIC and
RIF
Treasurer, Chief Accounting Officer and CFO, Russell Exchange Traded Funds
Trust
Director, Funds Administration, RIMCo, RFSC, RTC and Russell Financial Services,
Inc.
Treasurer and Principal Accounting Officer, SSgA Funds
|
|
|
|
|
Peter Gunning,
Born
February 22, 1967
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Chief Investment Officer since 2008
|
|
Until removed by Trustees
|
|
Chief Investment Officer, RIC and RIF
Director,
FRC
Chairman of the Board, President and CEO, RIMCo
1996 to 2008
Chief Investment Officer, Russell, Asia Pacific
|
|
|
|
|
Mary Beth Rhoden,
Born
April 25, 1969
1301 Second Avenue,
18th Floor
Seattle, WA 98101
|
|
Secretary since 2010
|
|
Until successor is chosen and qualified by Trustees
|
|
1999 to 2010 Assistant Secretary, RIC and RIF
Associate
General Counsel, FRC
Secretary, RIMCo, RFSC and Russell Financial Services, Inc.
Secretary and
Chief Legal Officer, RIC and RIF
Secretary and Chief Legal Officer, Russell Exchange Traded Funds
Trust
|
-9-
TRUSTEE COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGGREGATE
COMPENSATION
FROM RIC
|
|
|
PENSION OR
RETIREMENT
BENEFITS
ACCRUED AS
PART OF
RIC EXPENSES
|
|
|
ESTIMATED ANNUAL
BENEFITS UPON
RETIREMENT
|
|
|
TOTAL
COMPENSATION
FROM RIC AND
RUSSELL FUND
COMPLEX
PAID TO
TRUSTEES
|
|
INTERESTED TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandra Cavanaugh
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Daniel P. Connealy
|
|
$
|
123,694
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
143,000
|
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thaddas L. Alston
|
|
$
|
125,119
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
144,500
|
|
Kristianne Blake
|
|
$
|
181,531
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
208,500
|
|
Jonathan Fine
|
|
$
|
111,510
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
129,000
|
|
Raymond P. Tennison, Jr.
|
|
$
|
121,514
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
140,000
|
|
Jack R. Thompson
|
|
$
|
109,960
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
127,500
|
|
Julie W. Weston
|
|
$
|
116,260
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
134,000
|
|
TRUSTEES EMERITUS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George F. Russell, Jr.
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Paul E. Anderson*
|
|
$
|
39,260
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
41,600
|
|
Lee C. Gingrich**
|
|
$
|
6,078
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,933
|
|
*
|
Effective December 31, 2011, Mr. Andersons term as Trustee Emeritus expired.
|
**
|
Effective December 31, 2010, Mr. Gingrichs term as Trustee Emeritus expired.
|
EQUITY SECURITIES BENEFICIALLY OWNED BY TRUSTEES
FOR THE CALENDAR YEAR ENDED DECEMBER 31, 2011
|
|
|
|
|
|
|
DOLLAR RANGE OF EQUITY
SECURITIES IN THE FUND
|
|
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN
ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN
BY TRUSTEES IN RUSSELL
FUND COMPLEX
|
INTERESTED TRUSTEES
|
|
|
|
|
Sandra Cavanaugh
|
|
None
|
|
None
|
Daniel P. Connealy
|
|
None
|
|
Over $100,000
|
INDEPENDENT TRUSTEES
|
|
|
|
|
Thaddas L. Alston
|
|
None
|
|
Over $100,000
|
Kristianne Blake
|
|
None
|
|
Over $100,000
|
Jonathan Fine
|
|
None
|
|
Over $100,000
|
Raymond P. Tennison, Jr.
|
|
None
|
|
Over $100,000
|
Jack R. Thompson
|
|
None
|
|
Over $100,000
|
Julie W. Weston
|
|
None
|
|
Over $100,000
|
TRUSTEES EMERITUS
|
|
|
|
|
George F. Russell, Jr.
|
|
None
|
|
None
|
Paul E. Anderson*
|
|
None
|
|
None
|
*
|
Effective December 31, 2011, Mr. Andersons term as Trustee Emeritus expired.
|
OPERATION OF RIC
SERVICE PROVIDERS
.
Most of RICs necessary day-to-day operations are performed by separate business organizations under contract to RIC. The principal
service providers are:
|
|
|
Money Manager Research Services and Trade Placement Agent
|
|
Frank Russell Company
|
|
|
Adviser
|
|
Russell Investment Management Company
|
|
|
Administrator and Transfer and Dividend Disbursing Agent
|
|
Russell Fund Services Company
|
|
|
Money Managers
|
|
Multiple professional discretionary investment management organizations
|
|
|
Custodian and Portfolio Accountant
|
|
State Street Bank and Trust Company
|
|
|
Distributor
|
|
Russell Financial Services, Inc.
|
-10-
MONEY MANAGER RESEARCH SERVICES AND TRADE PLACEMENT AGENT.
FRC, the
corporate parent of RIMCo, was responsible for organizing RIC and provides ongoing money manager research and trade placement services to RIC and RIMCo, as described in the Prospectus. Neither RIMCo nor RIC compensates FRC for its services.
FRC is a diversified financial services company that provides a variety of financial services and products to and through unincorporated
divisions and wholly owned subsidiaries.
As affiliates, FRC and RIMCo may establish certain intercompany cost allocations that reflect the
services supplied to RIMCo. George F. Russell, Jr., Trustee Emeritus and Chairman Emeritus of RIC, is the Chairman Emeritus of FRC. RIMCo is a wholly owned subsidiary of FRC.
FRC is a subsidiary of Northwestern Mutual Life Insurance Company (Northwestern Mutual). Founded in 1857, Northwestern Mutual is a mutual insurance company organized under the laws of the
state of Wisconsin. For clients seeking personal financial security or security for their business or estate, Northwestern Mutual, its subsidiaries and affiliates offer life, disability and long-term care insurance, investment products, advisory
services and trust services that address client needs for financial protection, wealth accumulation, estate preservation and asset distribution.
ADVISER.
RIMCo provides or oversees the provision of all investment advisory and portfolio management services for the Fund, including developing the investment program
for the Fund.
RIMCo allocates most of the Funds assets to multiple money managers. RIMCo exercises investment discretion over the
portion of the Funds assets that RIMCo determines not to allocate to the money managers and may also directly manage portions of the Fund during transitions between money managers. RIMCo may also manage Fund assets to manage risk in the
Funds investment portfolio.
RIMCo selects, subject to the approval of the Funds Board, money managers for the Fund, allocates
Fund assets among money managers, oversees the money managers and evaluates the performance results. The Funds money managers select the individual portfolio securities for the assets assigned to them. RIMCo, as agent for RIC, pays the money
managers fees for the Fund, as a fiduciary for the Fund, out of the advisory fee paid by the Fund to RIMCo. The remainder of the advisory fee is retained by RIMCo as compensation for the services described above and to pay expenses.
The Fund pays an advisory fee directly to RIMCo, billed monthly on a pro rata basis and calculated as a specified percentage of the average
daily net assets of the Fund. (See the Prospectus for the Funds annual advisory percentage rates.) As of the date of this SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended
October 31, 2011, 2010 and 2009.
ADMINISTRATOR.
RFSC, with the assistance of RIMCo and FRC,
provides the Fund with office space, equipment and the personnel necessary to operate and administer the Funds business and to supervise the provision of services by certain third parties such as the custodian.
The Fund pays an administrative fee directly to RFSC, billed monthly on a pro rata basis and calculated as a specified percentage of the average daily
net assets of the Fund. Services which are administrative in nature are provided by RFSC pursuant to an Administrative Agreement for an annual fee of 0.05% of the average daily net asset value of the Fund. As of the date of this SAI, the Fund had
not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended October 31, 2011, 2010 and 2009.
The Fund invests its cash reserves or cash collateral received in securities lending transactions (together, the Cash Balances) in either the
Russell U.S. Cash Management Fund or the Russell U.S. Cash Collateral Fund, unregistered funds advised by RIMCo and administered by RFSC (the Cash Management Fund and the Cash Collateral Fund, respectively). RIMCo has waived
its 0.05% advisory fee for managing Cash Balances invested in the Cash Management Fund. RIMCo charges a 0.05% advisory fee for managing Cash Balances invested in the Cash Collateral Fund. RFSC charges a 0.05% administrative fee on the Cash Balances
invested in the Cash Management Fund and the Cash Collateral Fund.
RIMCo is a wholly-owned subsidiary of FRC, a subsidiary of The
Northwestern Mutual Life Insurance Company. RIMCos mailing address is 1301 Second Avenue, 18th Floor Seattle, WA 98101.
-11-
ORGANIZATION AND MANAGEMENT OF WHOLLY-OWNED SUBSIDIARY OF RUSSELL
MULTI-STRATEGY ALTERNATIVE FUND
The Fund intends to gain exposure to commodity markets by investing up to 25% of its total assets in a
wholly-owned subsidiary of the Fund (the Subsidiary). The Subsidiary invests primarily in commodity-linked derivative instruments, including futures and options contracts with respect to indexes or individual commodities, options on
futures contracts, swap agreements and swaptions, exchange traded funds, exchange traded notes and commodity-linked structured notes.
The
Subsidiary is a company organized under the laws of the Cayman Islands, whose registered office is located at [ ]. The Subsidiarys affairs are overseen by a board consisting of [ ] directors.
The Subsidiary has entered into separate contracts with RIMCo and RFSC whereby RIMCo and RFSC provide investment advisory and administrative
services, respectively, to the Subsidiary. In addition, RIMCo has entered into money manager agreements with certain of the Funds money managers to manage the portion of the Subsidiarys assets assigned to them. Neither RIMCo, RFSC nor
the money managers receive separate compensation from the Subsidiary for providing it with investment advisory or administrative services. However, the Fund pays RIMCo and RFSC based on the Funds assets, including the assets invested in the
Subsidiary. The Subsidiary has also entered into a separate contract for the provision of custody services with the same or with an affiliate of the same service provider that provides those services to the Fund. The Fund is the sole shareholder of
the Subsidiary, and it is not currently expected that shares of the Subsidiary will be sold or offered to other investors.
The Subsidiary is
managed pursuant to compliance policies and procedures that are the same, in all material respects, as the policies and procedures adopted by the Fund. As a result, RIMCo and the money managers, in managing the Subsidiary, are subject to the same
investment policies and restrictions that apply to the management of the Fund, and, in particular, to the requirements relating to portfolio leverage, liquidity, brokerage, and the timing and method of the valuation of the Subsidiarys
portfolio investments and shares of the Subsidiary. These policies and restrictions are described elsewhere in detail in this SAI. The Funds Chief Compliance Officer oversees implementation of the Subsidiarys policies and procedures, and
makes periodic reports to the Funds Board of Trustees regarding the Subsidiarys compliance with its policies and procedures. The Fund and Subsidiary will test for compliance with certain investment restrictions on a consolidated basis,
except that with respect to its investments in certain securities that may involve leverage, the Subsidiary will comply with asset segregation or earmarking requirements to the same extent as the Fund.
Please refer to the section in this SAI titled Additional Information Concerning Taxes for information about certain tax aspects of the
Funds investment in the Subsidiary.
PORTFOLIO MANAGERS.
The RIMCo Managers (RIMCos employees
who manage the RIC Funds, oversee the money managers and have primary responsibility for the management of the Fund) are compensated by RIMCo with salaries, bonuses (paid in cash), profit sharing contributions and in some cases participation in a
long-term incentive plan. Salaries are fixed annually and are driven by the market place. Compensation is not affected by an increase in Fund assets.
Bonuses are assessed by senior management based on the following:
|
1.
|
Qualitative measures, such as a RIMCo Managers quality of decisions made for the accounts, contributions to client services efforts and improvement of
RIMCos investment process.
|
|
2.
|
Quantitative measures (fund performance). RIMCo Managers receive a quantitative performance assessment score for the funds they manage. The score is predominantly based
on 1-year and 3-year measurement horizons. A two year horizon may be used for a fund that does not have 3 years of performance history. Performance for each fund is equally assessed relative to the funds index benchmark and relevant peer
group. Fund weightings for each RIMCo Manager are determined at the beginning of each yearly assessment period and signed off by the asset class Managing Directors. RIMCo Managers may be responsible for one or more funds. These funds and the
assessment weighting for each fund is recorded in a central system at the beginning of the assessment period. Each fund may have an equal weight, could be asset weighted, could be a combination, or could be a custom set of applicable weights.
Importantly, the assessment weighting for each fund is approved by the asset class Managing Directors at the beginning of the assessment period. The central system tracks the performance of the allocations throughout the assessment period and
delivers a score at the end to be used in the RIMCo Managers evaluation.
|
-12-
In determining the relevant peer group, senior management assigns the peer group which in their judgment
most closely represents the habitat of the fund. The RIMCo Manager does not choose the peer group. The peer group assigned by senior management approximates the strategy exposures and investment mandates for the Fund. Commonly used peer groups may
include Lipper, Hedge Fund Research (HFR), Dow Jones, etc. The market index and peer group average used to evaluate the performance of the Fund are as follows:
|
|
|
|
|
Russell Multi-Strategy Alternative Fund
|
|
Barclays Capital U.S. 1-3 Month
Treasury Bill Index
HFRX Equal Weighted Index
|
|
|
RIMCo Manager evaluations, salary and bonus recommendations are conducted and reviewed by Russell asset class Managing
Directors. Russells compensation committee approves salaries and bonuses after the asset class Managing Directors recommendations have been reviewed by the Global Chief Investment Officer.
Profit sharing contributions are typically made quarterly and are calculated as a percentage of the RIMCo Managers salary. The percentage is fixed
and is the same percentage for all RIMCo employees who receive profit sharing contributions.
The long-term incentive plan provides key
professionals with future cash payments the value of which is tied to FRCs financial performance. Awards under the long-term incentive plan are based on expected future contribution to the success of FRC. The assessment of expected future
contribution is qualitative in nature and is determined by a RIMCo Managers manager and approved by senior executives.
RIMCo Managers
earning over a specified amount of cash compensation (salary plus bonus) are eligible to participate in the deferred compensation plan which allows the RIMCo Manager to elect to defer a portion of her/his cash compensation. Deferred amounts earn the
return of an asset allocated mix of funds of Russell Investment Funds selected by the RIMCo Manager.
EQUITY SECURITIES
BENEFICIALLY OWNED BY THE RIMCO MANAGER IN THE FUND
AS OF
[ ], 2012
|
|
|
|
|
|
|
Lance Babbit
|
|
None
|
|
Russell Multi-Strategy Alternative Fund
|
|
|
RIMCo Managers typically manage multiple portfolios. These portfolios may include mutual funds, separate accounts,
unregistered funds and commingled trusts. Russells investment process, which includes money manager selection and proprietary asset allocation, is guided by the principle that all portfolios will be treated in a fair and equitable manner. To
adhere to this guiding principle, RIMCo Managers follow a process of constructing portfolios in accordance with regulatory and investment guidelines and then select money managers to fulfill those needs. Specifically, RIMCo Managers make money
manager selection and allocation decisions for each portfolio based on a variety of factors relevant to that portfolio. The investment process dictates that RIMCo Managers utilize Russells manager research analysis and manager rankings to
assist in selecting the most suitable money manager(s) to meet the unique investment needs of the various portfolios they manage.
At the core
of Russells investment process is a robust oversight and peer review program for money manager selection. It includes the hiring, termination and retention of money managers. This process is overseen by Russells Investment Strategy
Committee (ISC) and the asset class Managing Directors who are responsible for monitoring the portfolio management duties performed within their specific asset class.
Occasionally, a particular money manager may restrict the total amount of capacity they will allocate to Russell portfolios. If, however, the total allocation is too small to be shared in a meaningful
size across all Russell portfolios or if the money manager restricts the absolute number of assignments they will accept from Russell, it is the RIMCo Managers responsibility to determine which portfolios receive the allocation. These
allocations are reviewed and approved by the ISC before implementation. In cases where a RIMCo Manager is managing multiple portfolios and must allocate a manager differently across his funds, both the asset class Managing Director and the ISC must
review and ratify the recommendations.
OTHER ACCOUNTS MANAGED BY THE RIMCO MANAGER
AND ASSETS UNDER MANAGEMENT IN THE ACCOUNTS
AS OF [ ], 2012
[To be Updated By Amendment]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RIMCo
Manager
|
|
Number of
Registered
Investment
Companies
|
|
|
Assets Under
Management
(in
millions)
|
|
|
Number of
Pooled
Investment
Vehicles
|
|
|
Assets Under
Management
(in
millions)
|
|
|
Other Types
of Accounts
|
|
|
Assets Under
Management
(in
millions)
|
|
|
Asset Total
(in
millions)
|
|
Lance Babbit
|
|
|
[
|
]
|
|
|
[
|
]
|
|
|
[
|
]
|
|
|
[
|
]
|
|
|
[
|
]
|
|
|
[
|
]
|
|
|
[
|
]
|
-13-
MONEY MANAGERS.
The Funds money managers are not affiliates
of RIC or RIMCo other than as discretionary managers for a portion of the Funds portfolio. Some money managers (and their affiliates) may effect brokerage transactions for the Fund (see, Brokerage Allocations and Brokerage
Commissions). Money managers may serve as advisers or discretionary managers for Russell Trust Company, other investment vehicles sponsored or advised by FRC or its affiliates, other consulting clients of FRC, other off-shore vehicles and/or
for accounts which have no business relationship with the FRC organization.
From its advisory fees, RIMCo, as agent for RIC, pays all fees to
the money managers for their investment selection services. Quarterly, each money manager is paid the pro rata portion of an annual fee, based on the average for the quarter of all the assets allocated to the money manager. As of the date of this
SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended October 31, 2011, 2010 and 2009.
Each money manager has agreed that it will look only to RIMCo for the payment of the money managers fee, after RIC has paid RIMCo. Fees paid to the money managers are not affected by any voluntary
or statutory expense limitations. Some money managers may benefit as a result of brokerage commissions received by their broker-dealer affiliates that execute portfolio transactions for the Funds.
DISTRIBUTOR.
Russell Financial Services, Inc. (the Distributor) serves as the distributor of RIC
Shares. The Distributor receives no compensation from RIC for its services other than Rule 12b-1 compensation and shareholder services compensation for certain classes of Shares pursuant to RICs Rule 12b-1 Distribution Plan and Shareholder
Services Plan, respectively. The Distributor distributes shares of the Fund continuously, but reserves the right to suspend or discontinue distribution on that basis. The Distributor is not obligated to sell any specific amount of Fund shares. The
Distributor is a wholly owned subsidiary of RIMCo and its mailing address is 1301 Second Avenue, 18th Floor, Seattle, WA 98101.
CUSTODIAN AND PORTFOLIO ACCOUNTANT.
State Street Bank and Trust Company (State Street) serves as the custodian and fund accountant for RIC. As custodian, State Street is responsible for the safekeeping of the Funds
assets and the appointment of any subcustodian banks and clearing agencies. State Street also provides basic portfolio recordkeeping required for the Fund for regulatory and financial reporting purposes. The mailing address for State Street Bank and
Trust Company is: Josiah Quincy Building, 200 Newport Avenue, North Quincy, MA 02171.
TRANSFER AND DIVIDEND
DISBURSING AGENT
. RFSC serves as transfer and dividend disbursing agent for RIC. For this service, RFSC is paid a fee for transfer agency and dividend disbursing services provided to RIC. RFSC retains a portion of this fee for its services
provided to RIC and pays the balance to unaffiliated agents who assist in providing these services. RFSCs mailing address is 1301 Second Avenue, 18th Floor, Seattle, WA 98101.
ORDER PLACEMENT DESIGNEES.
Russell Financial Services, Inc. or its affiliates have authorized certain Financial Intermediaries to accept on its behalf purchase
and redemption orders for RIC Shares. Certain Financial Intermediaries are authorized, subject to approval of RICs Distributor, to designate other intermediaries to accept purchase and redemption orders on RICs behalf. With respect to
those intermediaries, RIC will be deemed to have received a purchase or redemption order at the time such a Financial Intermediary or, if applicable, an authorized designee, accepts the order. The customer orders will be priced at the Funds
net asset value next computed after they are accepted by such a Financial Intermediary or an authorized designee, provided that Financial Intermediary or an authorized designee timely transmits the customer order to RIC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
PricewaterhouseCoopers LLP serves as the Independent Registered
Public Accounting Firm of RIC. PricewaterhouseCoopers LLP is responsible for performing annual audits of the financial statements and financial highlights of the Fund in accordance with the auditing standards of the Public Company Accounting
Oversight Board and a review of federal tax returns. The mailing address of PricewaterhouseCoopers LLP is 1420 Fifth Avenue, Suite 1900, Seattle, WA 98101.
CODES OF ETHICS.
RIC, RIMCo, Russell Financial Services, Inc. and each money manager have each adopted a code of ethics which complies in all material respects
with applicable law and which is intended to protect the interests of each Funds shareholders. The codes of ethics are designed to prevent affiliated persons of RIC, RIMCo, Russell Financial Services, Inc. and the money managers from engaging
in deceptive, manipulative, or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code of ethics). There can be no assurance that the codes of ethics will be
effective in preventing such activities. The codes of ethics generally permit investment personnel to trade securities for their own account, including securities that may be purchased or held by a Fund, subject to restrictions on personal
securities trading specified in the applicable code of ethics. Each code of ethics has been filed with the SEC and may be viewed by the public.
-14-
Because each money manager is an entity not affiliated with RIC or RIMCo, RIMCo relies on each money manager
to monitor the personal trading activities of the money managers personnel in accordance with that money managers code of ethics. Each money manager provides RIMCo with a quarterly certification of the money managers compliance
with its code of ethics and a report of any significant violations of its code.
PLAN PURSUANT TO RULE
18f-3
.
Securities and Exchange Commission (the SEC) Rule 18f-3 under the 1940 Act, permits a registered open-end investment company to issue multiple classes of Shares in accordance with a written plan approved by the
investment companys board of trustees that is filed with the SEC. For purposes of this SAI, because the Fund offers multiple classes of Shares, the Fund will also be referred to as Multiple Class Fund. The key features of the Rule
18f-3 plan are as follows: Shares of each class of the Multiple Class Fund represent an equal pro rata interest in the underlying assets of the Fund, and generally have identical voting, dividend, liquidation, and other rights, preferences, powers,
restrictions, limitations, qualifications and terms and conditions, except that: (1) each class of Shares offered in connection with a Rule 12b-1 plan may bear certain fees under its respective Rule 12b-1 plan and may have exclusive voting
rights on matters pertaining to that plan and any related agreements; (2) each class of Shares may contain a conversion feature; (3) each class of Shares may bear differing amounts of certain class expenses; (4) different policies may
be established with respect to the payment of distributions on the classes of Shares of the Multiple Class Fund to equalize the net asset values of the classes or, in the absence of such policies, the net asset value per share of the different
classes may differ at certain times; (5) each class of Shares of the Multiple Class Fund may have different exchange privileges from another class; (6) each class of Shares of the Multiple Class Fund may have a different class designation
from another class of the Fund; and (7) each class of Shares offered in connection with a shareholder servicing plan would bear certain fees under its respective plan.
DISTRIBUTION PLANS
.
Under the 1940 Act, the SEC has adopted Rule 12b-1, which regulates the circumstances under which mutual funds may, directly or indirectly,
bear distribution expenses. Rule 12b-1 provides that mutual funds may pay for such expenses only pursuant to a plan adopted in accordance with Rule 12b-1. The Multiple Class Fund has adopted a distribution plan (the Distribution Plan) in
accordance with the Rule.
Description of the Distribution Plan for the Multiple Class Fund
In adopting the Distribution Plan for the Multiple Class Fund, a majority of the Trustees, including a majority of the Trustees who are not
interested persons (as defined in the 1940 Act) of RIC and who have no direct or indirect financial interest in the operation of any Distribution Plan or in any agreements entered into in connection with any Distribution Plan (the
Independent Trustees), have concluded, in conformity with the requirements of the 1940 Act, that there is a reasonable likelihood that the Distribution Plan will benefit each respective Multiple Class Fund and its shareholders. In
connection with the Trustees consideration of whether to adopt the Distribution Plan for each Multiple Class Fund, the Distributor, as the Multiple Class Funds principal underwriter, represented to the Trustees that the Distributor
believed that the Distribution Plan was expected to result in increased sales and asset retention for the Multiple Class Fund by enabling the Multiple Class Fund to reach and retain more investors and Financial Intermediaries (such as brokers,
banks, financial planners, investment advisers and other financial institutions), although it is impossible to know for certain, in the absence of a Distribution Plan or under an alternative distribution arrangement, the level of sales and asset
retention that the Multiple Class Fund would have.
For the Multiple Class Fund, the 12b-1 fees may be used to compensate (a) Selling
Agents (as defined below) for sales support services provided, and related expenses incurred with respect to Class A and Class C Shares, by such Selling Agents, and (b) the Distributor for distribution services provided by it, and related
expenses incurred, including payments by the Distributor to compensate Selling Agents for providing support services. The Distribution Plan is a compensation-type plan. As such, RIC makes no distribution payments to the Distributor with respect to
Class A or Class C Shares except as described above. Therefore, RIC does not pay for unreimbursed expenses of the Distributor, including amounts expended by the Distributor in excess of amounts received by it from RIC, interest, carrying or
other financing charges in connection with excess amounts expended, or the Distributors overhead expenses. However, the Distributor may be able to recover such amount or may earn a profit from future payments made by RIC under the Distribution
Plan.
For the Multiple Class Fund, the Distribution Plan provides that it may spend annually, directly or indirectly, up to 0.75% of the
average daily net asset value of its Class A and Class C Shares for any activities or expenses primarily intended to result in the sale of Class A and Class C Shares of the Multiple Class Fund. Such payments by RIC will be calculated daily
and paid as billed. Any amendment to increase materially the costs that Shares may bear for distribution pursuant to the Distribution Plan shall be effective upon a vote of the holders of the affected Class of the lesser of (a) more than fifty
percent (50%) of the outstanding Shares of
-15-
the affected Class of the Multiple Class Fund or (b) sixty-seven percent (67%) or more of the Shares of the affected Class of the Multiple Class Fund present at a shareholders
meeting, if the holders of more than 50% of the outstanding Shares of the affected Class of the Fund are present or represented by proxy (a 1940 Act Vote) and a vote of the Trustees, including a majority of the Independent Trustees. For
the Multiple Class Fund, the Distribution Plan does not provide for the Fund to be charged for interest, carrying or any other financing charges on any distribution expenses carried forward to subsequent years. A quarterly report of the amounts
expended under the Distribution Plan, and the purposes for which such expenditures are incurred, must be made to the Trustees for their review. To remain in effect, the Distribution Plan must be approved annually by a vote of the Trustees, including
a majority of the Independent Trustees. Also, any material amendments must be approved by a vote of the Trustees, including a majority of the Independent Trustees. While the Distribution Plan is in effect, the selection and nomination of the
Independent Trustees shall be committed to the discretion of such Independent Trustees. For the Multiple Class Fund, the Distribution Plan is terminable without penalty at any time by (a) a vote of a majority of the Independent Trustees, or
(b) a vote of the holders of the lesser of (i) more than fifty percent (50%) of the outstanding Shares of the affected Class of the Multiple Class Fund or (ii) a 1940 Act Vote.
Selling Agent Agreements for the Multiple Class Fund
Under the Distribution Plan, the Distributor may also enter into agreements (Selling Agent Agreements) with Financial Intermediaries to provide sales support services with respect to the
Multiple Class Fund Shares held by or for the customers of the Financial Intermediaries. Financial Intermediaries that have entered into Selling Agent Agreements are referred to in this SAI as Selling Agents.
As of the date of this SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended
October 31, 2011, 2010 and 2009.
SHAREHOLDER SERVICES PLAN
.
A majority of the Trustees,
including a majority of Independent Trustees, adopted and amended a Shareholder Services Plan for certain classes of Shares of the Fund. This plan is referred to as the Service Plan.
Under the Service Plan, RIC may compensate the Distributor or any investment advisers, insurance companies, banks, investment advisers, broker-dealers,
financial planners or other financial institutions that are dealers of record or holders of record or that have a servicing relationship with the beneficial owners or record holders of Shares of Class C or Class E, offering such Shares
(Servicing Agents), for any activities or expenses primarily intended to assist, support or service their clients who beneficially own or are primarily intended to assist, support or service their clients who beneficially own or are
record holders of Shares of RICs Class C or Class E. Such payments by RIC will be calculated daily and paid quarterly at a rate or rates set from time to time by the Trustees, provided that no rate set by the Trustees for Shares of Class C or
Class E may exceed, on an annual basis, 0.25% of the average daily net asset value of the Funds Shares.
Among other things, the Service
Plan provides that (1) the Distributor shall provide to RICs officers and Trustees, and the Trustees shall review at least quarterly, a written report of the amounts expended by it pursuant to the Service Plan, or by Servicing Agents
pursuant to Service Agreements, and the purposes for which such expenditures were made; (2) the Service Plan shall continue in effect for so long as its continuance is specifically approved at least annually, and any material amendment thereto
is approved, by a majority of the Trustees, including a majority of the Independent Trustees, cast in person at a meeting called for that purpose; (3) while the Service Plan is in effect, the selection and nomination of the Independent Trustees
shall be committed to the discretion of such Independent Trustees; and (4) the Service Plan is terminable, as to the Multiple Class Funds Shares, by a vote of a majority of the Independent Trustees.
As of the date of this SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended
October 31, 2011, 2010 and 2009.
FUND EXPENSES
.
The Fund will pay all its expenses other
than those expressly assumed by RIMCo and RFSC. The principal expenses of the Fund are the annual advisory fee and the annual administrative fee, payable to RIMCo and RFSC, respectively. The Funds other expenses include: fees for independent
accountants, legal, transfer agent, registrar, custodian, dividend disbursement, portfolio and shareholder recordkeeping services, and maintenance of tax records; state taxes; brokerage fees and commissions; insurance premiums; association
membership dues; fees for filing of reports and registering Shares with regulatory bodies; and such extraordinary expenses as may arise, such as federal taxes and expenses incurred in connection with litigation proceedings and claims and the legal
obligations of RIC to indemnify the Trustees, officers, employees, shareholders, distributors and agents with respect thereto. Whenever an expense can be attributed to the Fund, the expense is charged to it. Other common expenses are allocated to
the Fund based primarily upon its relative net assets.
PURCHASE, EXCHANGE AND REDEMPTION OF FUND SHARES.
As described in the Prospectus, the Fund provides you with different classes of shares based upon your individual investment needs.
-16-
Each class of shares of the Fund represents an interest in the same portfolio of investments. Each class is
identical in all respects except that each class bears its own class expenses, including distribution and service fees, and each class has exclusive voting rights with respect to any distribution or service plan applicable to its shares. As a result
of the differences in the expenses borne by each class of shares, net income per share, dividends per share and net asset value per share will vary for each class of shares. There are no conversion, preemptive or other subscription rights.
Shareholders of each class will share expenses proportionately for services that are received equally by all shareholders. A particular class
of shares will bear only those expenses that are directly attributable to that class, where the type or amount of services received by a class varies from one class to another. The expenses that may be borne by specific classes of shares may include
(i) payments pursuant to the distribution plan or shareholder services plan for that specific class, (ii) transfer agency fees attributable to a specific class of shares, (iii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports, prospectuses and proxy statements to current shareholders of a specific class of shares, (iv) SEC and state securities registration fees incurred by a specific class, (v) the expense of
administrative personnel and services required to support the shareholders of a specific class of shares, (vi) litigation or other legal expenses relating to a specific class of shares, (vii) audit or accounting expenses relating to a
specific class of shares, (viii) the expense of holding meetings solely for shareholders of a specific class and (ix) any additional incremental expenses subsequently identified and determined to be properly allocated to one or more
classes of shares.
The following classes of shares are available for purchase. See the Prospectus for a discussion of factors to consider in
selecting which class of shares to purchase and for applicable service/distribution fees.
Class A Shares of the Fund
Class A Shares are sold at offering price, which is the net asset value plus a front-end sales charge as follows.
The Fund receives the entire net asset value of all Class A Shares that are sold. The Distributor receives the full
applicable sales charge from which it pays the broker/dealer commission shown in the table below.
Front-End Sales Charge
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
your investment
|
|
Front-end sales
charge as a %
of offering price
|
|
|
Front-end sales
charge as a % of
net amount invested
|
|
|
Broker/Dealer
commission
as
a % of
offering price
|
|
Less than $50,000
|
|
|
5.75
|
%
|
|
|
6.10
|
%
|
|
|
5.00
|
%
|
$50,000 but less than $100,000
|
|
|
4.50
|
%
|
|
|
4.71
|
%
|
|
|
3.75
|
%
|
$100,000 but less than $250,000
|
|
|
3.50
|
%
|
|
|
3.63
|
%
|
|
|
2.75
|
%
|
$250,000 but less than $500,000
|
|
|
2.50
|
%
|
|
|
2.56
|
%
|
|
|
2.00
|
%
|
$500,000 but less than $1,000,000
|
|
|
2.00
|
%
|
|
|
2.04
|
%
|
|
|
1.60
|
%
|
$1,000,000 or more
|
|
|
0
|
|
|
|
0
|
|
|
|
up to 1.00
|
%
|
Investments of $1,000,000 or more.
You do not pay a front-end sales charge when you buy $1,000,000 or more of
shares of RIC Funds (other than money market funds). However, if your Financial Intermediary was paid a commission by the Funds Distributor on those Class A Shares and you redeem those Class A Shares within one year of purchase, you
will pay a deferred sales charge of up to 1.00%.
The Funds distributor keeps a portion of the front-end sales charge imposed on
Class A Shares. Financial Intermediaries receive the remaining amount of the front-end sales charge imposed on Class A Shares and may be deemed to be underwriters of the Fund as defined in the Securities Act of 1933. Financial
Intermediaries that sell Class A shares may also receive the distribution fee payable under the Funds distribution plan at an annual rate equal to up to 0.75% (presently limited to 0.25%) of the average daily net assets represented by the
Class A Shares sold by them.
Commissions are paid to Financial Intermediaries on Class A share purchases by a single shareholder
which are not subject to a front-end sales charge at the following rates: 1.00% on purchase up to $4 million, 0.50% on purchases over $4 million to $10 million and 0.25% on purchases over $10 million. Commissions are paid based on cumulative
purchases by a shareholder over time, not on purchases made during a calendar year.
-17-
Sales Charge Waivers and Reductions
Please see the Funds Prospectus for information about sales charge waivers and reductions, including front-end sales charge waivers, cumulative purchase discounts, accumulation privileges,
letters of intent, reinstatement privileges, exchange privileges, and deferred sales charge waivers.
Class C Shares of the Fund
Financial Intermediaries that sell Class C Shares will receive the shareholder services fee payable under the Funds shareholder
services plan at an annual rate equal to 0.25% of the average daily net assets represented by Class C Shares sold by them and the distribution fee payable under the Funds distribution plan at an annual rate equal to 0.75% of the average daily
net assets represented by the Class C Shares sold by them.
Class E Shares of the Fund
Financial Intermediaries that sell Class E Shares will receive the shareholder services fee payable under the Funds shareholder services plan at an
annual rate equal to 0.25% of the average daily net assets represented by Class E Shares sold by them.
Class S and Y Shares of the Fund
Financial intermediaries will receive no shareholder services or distribution fees for these classes of shares.
Class S Shares of the Fund
MOVING FROM CLASS S TO CLASS A SHARES. You can redeem Class S Shares held in an account that charges an advisory fee, management fee, consulting fee, fee
in lieu of brokerage commissions or other similar fee for services (a fee-based program) and with the redemption proceeds purchase Class A Shares without paying a front-end sales charge if all of the following conditions are met:
(a) you are leaving or have left the fee-based program, (b) you have held the Class S Shares in the fee-based program for at least one year, (c) the purchase of the Class A Shares is part of a series of transactions designed to
move you from Class S Shares to Class A Shares of the Fund and (d) you notify your Financial Intermediary that you meet the preceding three conditions. RFSC believes that an exchange between classes of the Fund is not a taxable event;
however, you must check with your Financial Intermediary to determine if they will process the exchange as non-taxable. Please consult with your Financial Intermediary and your tax adviser for more information.
Class E and Class S Shares of the Fund
Class E and Class S Shares of the Fund may only be purchased by:
|
(1)
|
clients of Financial Intermediaries who charge an advisory fee, management fee, consulting fee, fee in lieu of brokerage commissions or other similar fee for their
services for the shareholder account in which the Class E or S Shares are held or clients of Financial Intermediaries where the Financial Intermediary would typically charge such a fee but has determined to waive its fee in a particular instance as
the result of a potential conflict of interest;
|
|
(2)
|
employee benefit and other plans, such as 401(k) plans, 457 plans, employer sponsored 403(b) plans, HSAs (Health Savings Accounts), profit sharing plans, money purchase
plans, defined benefit plans and non-qualified deferred compensation plans, that consolidate and hold all Fund Shares in plan level or omnibus accounts on behalf of participants. SEPs, SIMPLE-IRA and individual 403(b) Plans are not considered plans
for purposes of this paragraph;
|
|
(3)
|
clients of Financial Intermediaries who are members of Russell Investments;
|
|
(4)
|
individuals pursuant to employee investment programs of Russell or its affiliates; or
|
|
(5)
|
current and retired registered representatives of broker-dealers having sales agreements with the Funds Distributor to sell such Class E or S Shares and current
spouses or the equivalent thereof, children, step-children (with respect to current union only), parents, step-parents or parents-in-law of such registered representative or to a family trust in the name of such registered representative.
|
The Fund generally does not have the ability to enforce these limitations on access to Class E or Class S Shares. It is the
sole responsibility of each Financial Intermediary to ensure that it only makes Class E or Class S Shares available to those categories of investors listed above that qualify for access to Class E or Class S Shares. However, the Fund will not
knowingly sell Class E or Class S Shares to any investor not meeting one of the foregoing criteria.
-18-
Minimum Initial Investment Requirements
.
If you invest less than the required minimum
investment in a Fund, the Fund reserves the right to refuse your order or to correct, within a reasonable period, your purchase transaction and notify you promptly of that correction. The Fund reserves the right to close any account whose balance
falls below $1,000 and to change the categories of investors eligible to purchase its Shares.
For purposes of the minimum investment
requirements, an account is at the shareholder level, not at the omnibus level. For retirement plans held by the Fund at a plan level, the plan is considered the shareholder for minimum investment requirements.
The following lists the exceptions to the minimum initial investment requirements:
|
1.
|
A transfer of an existing account from one Financial Intermediary or financial platform to another is not subject to the minimum initial investment requirements. For
the purpose of this exception, a transfer is a transfer-in-kind or the sale and purchase of shares of the same class of the same Fund within 30 days.
|
|
2.
|
For Class Y Shares, upon prior notice to the Transfer Agent, multiple related party accounts will not be subject to the minimum initial investment requirements if the
average Class Y account balance per Fund of these related party accounts exceeds $5 million.
|
|
3.
|
For Class Y Shares, there is no required minimum initial investment for (i) any Russell Investment Company or Russell Investment Funds fund of funds, (ii) for
investment companies that have entered into contractual arrangement with the Funds or their service providers to acquire Class Y Shares or (iii) shares acquired by any collective vehicle or other discretionary account actively managed by
Russell Investments.
|
Uncashed Checks
.
Please make sure you promptly cash checks issued to you by the Fund. If you
do not cash a dividend, distribution, or redemption check, the Fund will act to protect itself and you. This may include restricting certain activities in your account until the Fund is sure that they have a valid address for you. After 180 days,
the Fund will no longer honor the issued check and, after attempts to locate you, the Fund will follow governing escheatment regulations in disposition of check proceeds. No interest will accrue on amounts represented by uncashed checks.
VALUATION OF FUND SHARES
. The net asset value per share of each Class of Shares is calculated separately for each
Fund Class on each business day on which Shares are offered or orders to redeem are tendered. A business day is one on which the New York Stock Exchange (NYSE) is open for regular trading. Currently, the NYSE is open for trading every
weekday except New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Net asset value per share is computed for each class of Shares of the Fund by dividing the current value of the Funds assets attributable to each class of Shares, less liabilities attributable to
that class of Shares, by the number of each individual class of Shares of the Fund outstanding, and rounding to the nearest cent.
The Fund
may actively trade on foreign exchanges which may trade on Saturdays and on days that the Fund does not offer or redeem Shares. The trading of portfolio securities on foreign exchanges on such days may significantly increase or decrease the net
asset value of Fund Shares when the shareholder is not able to purchase or redeem Fund Shares. Further, because foreign securities markets may close prior to the time the Fund determines its net asset value, events affecting the value of the
portfolio securities occurring between the time prices are determined and the time the Fund calculates its net asset value may not be reflected in the calculations of net asset value unless RFSC determines that a particular event would materially
affect the net asset value.
VALUATION OF PORTFOLIO SECURITIES.
With the exceptions noted below, the
Fund values its portfolio securities at fair market value. This generally means that equity securities listed and principally traded on any national securities exchange are valued on the basis of the last sale price or, if there were no
sales, at the closing bid price, on the primary exchange on which the security is traded. Equity securities traded over-the-counter (OTC) are valued on the basis of official closing price. Fixedincome securities are valued on the
basis of the closing bid price, and options and futures contracts are valued on the basis of last sale price or settlement price for futures.
-19-
Because many fixedincome securities do not trade each day, last sale or bid prices often are not
available. As a result, these securities may be valued using prices provided by a pricing service or broker when the prices are believed to be reliablethat is, when the prices reflect the fair market value of the securities.
International equity securities traded on a national securities exchange or OTC are valued on the basis of official closing price.
Short term securities maturing within 60 days of the valuation date held by the Fund are valued using the amortized cost method. Under this method, a
portfolio instrument is initially valued at cost, and thereafter a constant accretion/amortization to maturity of any discount or premium is assumed. The effect of changes in the market value of a security as a result of fluctuating interest rates
is not taken into account. The Fund utilizes the amortized cost valuation method in accordance with Rule 2a7 under the 1940 Act. The money market instruments are valued at amortized cost unless the Board determines that amortized
cost does not represent fair value.
Short-term securities maturing within 60 days at time of purchase held by the Fund are also valued at
amortized cost unless the Board determines that amortized cost does not represent fair value. While amortized cost provides certainty in valuation, it may result in periods when the value of an instrument is higher or lower than the
price a Fund would receive if it sold the instrument.
Municipal obligations are appraised or priced by an independent pricing source,
approved by the Board, which utilizes relevant information, such as bond transactions, quotations from bond dealers, market transactions in comparable securities and various relationships between securities.
PRICING OF SECURITIES.
The Fund may value certain securities for which market quotations are not readily available
at fair value, as determined in good faith pursuant to procedures established by the Board of Trustees and delegated to RFSC to administer. Market quotations for non-U.S. securities, either individually or collectively, may not be
considered to be readily available if a significant event, including but not limited to an increase or decrease in U.S. market indices meeting standards of significance specified in the procedures established by the Board (which standards of
significance are subject to change), occurs after the close of the non-U.S. markets on which such securities are traded. If the Fund holds portfolio securities listed primarily on non-U.S. exchanges, the net asset value of the Funds Shares may
change on a day when you will not be able to purchase or redeem the Funds Shares. This is because the value of those portfolio securities may change on weekends or other days when the Fund does not price its Shares.
PORTFOLIO TRANSACTION POLICIES.
The Fund may sell securities for a variety of reasons including to realize gains,
limit losses, to make funds available for other investment opportunities or to meet redemption requests. The Fund may also sell a security if there is a significant change to the securitys risk/return profile or if a money manager determines
that holding the security is no longer consistent with the investment strategies it pursues for the Fund. The Fund trades more actively to realize gains and/or to increase yields on investments by trading to take advantage of short-term market
variations. This policy is expected to result in higher portfolio turnover for the Fund.
The portfolio turnover rates for certain
multimanager Funds are likely to be somewhat higher than the rates for comparable mutual funds with a single money manager. Decisions to buy and sell securities for the Fund are made by a money manager independently from other money managers.
Thus, one money manager could decide to sell a security when another money manager decides to purchase the same security, thereby increasing the Funds portfolio turnover ratios and brokerage commissions. The Funds changes of money
managers may also result in a significant number of portfolio sales and purchases as the new money manager restructures the former money managers portfolio.
The Fund does not give significant weight to attempting to realize longterm capital gains when making portfolio management decisions.
PORTFOLIO TURNOVER RATE.
Portfolio turnover measures how frequently securities held by the Fund are bought and sold. The portfolio turnover rate for the Fund is
calculated by dividing the lesser of purchases or sales of portfolio securities for the particular year, by the monthly average value of the portfolio securities owned by the Fund during the past 13 months. For purposes of determining the rate, all
shortterm securities, including options, futures, forward contracts, and repurchase agreements, are excluded. Significant variations in the portfolio turnover rates for the Fund generally are primarily attributable to money manager changes,
market volatility, and/or duration of portfolio investments. As of the date of this SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years ended October 31, 2011, 2010 and 2009.
A high portfolio turnover rate generally will result in higher brokerage transaction costs and may result in higher levels of realized
capital gains or losses with respect to the Funds portfolio securities (see Taxes).
-20-
DISCLOSURE OF PORTFOLIO HOLDINGS.
The Fund maintains portfolio holdings
disclosure policies that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding the portfolio investments held by the Fund. These portfolio holdings disclosure policies have been approved by the
Board of Trustees. Disclosures of portfolio holdings information may only be made pursuant to these Board-approved policies and procedures.
Disclosure of the Funds portfolio holdings may only occur if such disclosure is consistent with the anti-fraud provisions of the federal securities
laws and the fiduciary duties of the Fund and its adviser. Disclosure is permissible only when the Fund, as determined by the Board of Trustees or Chief Compliance Officer, has legitimate business purposes for such disclosure and the recipients are
subject to a written confidentiality agreement, which includes a duty not to trade on non-public information.
Public Disclosures of
Portfolio Holdings Information
Disclosure of the Funds complete holdings as of the end of each fiscal quarter is required to be made
quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database on the
SECs website at www.sec.gov. The Fund will also make these reports available on its website, www.russell.com. Disclosure of the Funds complete portfolio holdings will be available on the Funds website following each month end. Such
disclosure will be available no later than 60 calendar days following each month end. Disclosure of the Funds top ten portfolio holdings as of the last day of each month will be available on the Funds website no later than 15 calendar
days after each month end.
Upon the occurrence of an unexpected, out of the ordinary event with respect to one or more portfolio holdings or
the market as a whole, RIMCo may, consistent with the statement of policy set forth above and with the prior approval of the Chief Compliance Officer, prepare and make available on the Funds website a statement relating to such event which may
include information regarding the Funds portfolio holdings.
Portfolio managers and other senior officers or spokespersons of the Fund
may disclose or confirm the ownership of any individual portfolio holdings position to reporters, brokers, shareholders, consultants or other interested persons only if such information has been previously publicly disclosed in accordance with the
portfolio holdings disclosure policies.
The Fund may pay for any portion of a redemption amount by a distribution of in-kind securities from
the Funds portfolio, instead of in cash. Prior to making an in-kind distribution, RIMCo will notify the redeeming Shareholder that all information regarding the Funds portfolio holdings is non-public and confidential, may not be
disclosed to others and may not be used as the basis for any trading decisions.
Non-Public Disclosures of Portfolio Holdings Information
RIMCo and the money managers may periodically distribute lists of applicable investments held by the Fund for the purpose of facilitating
management of the Funds portfolios and receipt of relevant research. Mellon Analytical Solutions, FactSet Research Systems Inc., Vestek, Advent Software, Inc., Brown Brothers Harriman, Pace, Interactive Data Corporation and Electra Information
Systems provide such services to RIMCo and the money managers and as such receive monthly, weekly and daily portfolio holdings. RIMCo and the money managers may periodically distribute a list of the issuers and securities which are covered by their
respective research departments as of a particular date, but in no case will such a list identify an issuers securities as either currently held or anticipated to be held by the Fund or identify Fund position sizes.
In addition, the Funds custodian generates daily portfolio holdings information in connection with its services to the Fund. Confluence
Technologies, Inc. (CTI) and Risk Metrics Group, Inc. (RiskMetrics) provide performance reporting services, tax filing services, and proxy voting and class action registration services to RIMCo, respectively. CTI and
RiskMetrics receive daily portfolio holdings information in connection with their services to RIMCo. Such service providers must keep the portfolio holdings information confidential and cannot trade based on the non-public information. There is no
lag between the date of such portfolio holdings information and the date on which the information is disclosed to the service providers.
From
time to time rating and ranking organizations such as iMoneyNet, Crane Data LLC, Standard & Poors, Moodys, Morningstar, Inc. and Lipper Analytical Services may request complete portfolio holdings information in connection with
rating the Fund. In order to facilitate the review of the Fund by these rating agencies, the Fund may distribute (or authorize its service providers to distribute) portfolio holdings information to such ratings agencies before their public
disclosure is required or authorized, provided that (a) the recipient does not distribute the information or results of analyses to third parties, other departments or persons who are likely to use the information for purposes of purchasing or
selling the Fund shares before the information or results of analyses become public information and (b) the recipient is subject to a confidentiality agreement, which includes a duty not to trade on non-public information.
Administration of the Portfolio Holdings Disclosure Policies
The Chief Compliance Officer will exercise oversight of disclosures of the Funds portfolio holdings. It is the duty of the Chief Compliance Officer or her designee to ensure that all disclosures of
the portfolio holdings of the Fund are in the best interests of the Funds shareholders. It is the responsibility of each business unit with access to portfolio holdings, including RFSC Fund Administration and RIMCos Investment Management
and Research Division, to inform the Chief Compliance Officer of any third parties receiving portfolio holdings information which has not previously been disclosed. The Chief Compliance Officer is also responsible for
-21-
monitoring for conflicts of interest between the interests of Fund shareholders and the interests of the Funds investment adviser, principal underwriter, or any affiliated person of the
Fund, its investment adviser or its principal underwriter. Every violation of the portfolio holdings disclosure policies must be reported to the Funds Chief Compliance Officer. If the Chief Compliance Officer deems that such violation
constitutes a Material Compliance Matter within the meaning of Rule 38a-1 under the 1940 Act, the violation will be reported to the Funds Board of Trustees, as required by Rule 38a-1. The Chief Compliance Officer also has the
discretion to report other compliance matters arising under the portfolio holdings disclosure policies to the Board of Trustees.
Disclosure
of the Funds portfolio holdings made in accordance with these procedures is authorized by the Funds Board of Trustees. The portfolio holdings disclosure policies may not be waived, and exceptions may not be made, without the consent of
the Funds Board of Trustees; provided, however that waivers or exceptions in connection with operational or administrative functions may be made with the prior consent of the Chief Compliance Officer. All such waivers and exceptions by the
Chief Compliance Officer will be disclosed to the Board of Trustees no later than its next regularly scheduled quarterly meeting.
PROXY VOTING POLICIES AND PROCEDURES.
The Board has delegated to RIMCo, as RICs investment adviser, the primary responsibility for monitoring, evaluating and voting proxies solicited by or with respect to issuers of securities in which
assets of the Fund may be invested. RIMCo has established a proxy voting committee (Committee) and has adopted written proxy voting policies and procedures (P&P) and proxy voting guidelines (Guidelines). RIMCo
has also hired a third party service provider to serve as proxy administrator (Administrator), although RIMCo (whether acting directly or through the Committee) retains final authority with respect to proxy voting.
The P&P are designed to ensure that proxy voting decisions are made in accordance with the best interests of RIMCos clients and to enable the
Committee to resolve any material conflicts of interest between the Fund on the one hand, and RIMCo or its affiliates, on the other, before voting proxies with respect to a matter in which such a conflict may be present. In order to assure that
proxies are voted in accordance with the best interests of clients at all times, the P&P authorize votes to be cast in accordance with the Guidelines and delegate to the Administrator responsibility for performing research and making
recommendations in accordance with the Guidelines. Conflicts are addressed in the P&P by requiring the implementation of a process requiring additional diligence and documentation if ballots are not voted in accordance with the Guidelines or
pursuant to the recommendation of the Proxy Administrator.
The Guidelines address matters that are commonly submitted to shareholders of a
company for voting, including, but not limited to, issues relating to corporate governance, auditors, the board of directors, capital structure, executive and director compensation, and mergers and corporate restructurings. Subject to the
supervision and oversight of the Committee, and the authority of the Committee to intervene with respect to a particular proxy matter, the Administrator is obligated to vote all proxies as set forth in the Guidelines.
The following are examples of certain types of issues that are covered in the Guidelines and how the proxies are generally voted.
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Proxies will generally be voted for routine agenda items such as the opening of the shareholder meeting; the presence of quorum; regulatory filings;
the designation of inspector or shareholder representatives of minutes of meeting; the allowance of questions; the publication of minutes; and the closing of the shareholder meeting.
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In connection with director and officer indemnification and liability protection, proxies will generally be voted: against proposals to eliminate
entirely director and officer liability for monetary damages for violating the duty of care or for proposals that expand protection beyond the standards set forth by Delaware law; against proposals that would expand indemnification beyond coverage
of legal expenses to coverage of acts that are more serious violations of fiduciary obligations than mere carelessness; and for proposals that would provide indemnification for an Italian companys internal auditors or expanded indemnification
where a directors or officers legal defense was unsuccessful if the director was found to have acted in good faith and in a manner that he reasonably believed was in the best interests of the company.
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In certain corporate governance matters, proxies will generally be voted: for proposals seeking to amend a companys articles of association,
procedures, processes and/or other company documents unless the Administrator recommends a vote against such matter, in which case such vote will be determined on a case-by-case basis; for mergers and acquisitions proposals unless the Administrator
recommends a vote against, in which case such vote will be determined on a case-by-case basis; for corporate restructuring proposals, including minority squeezeouts, leveraged buyouts, spin-offs, liquidations, asset sales and creation of holding
companies, unless the Administrator recommends a vote against, in which case such vote will be determined on a case-by-case basis; against proposals to classify the board; for shareholder proposals that ask a company to submit its poison pill for
shareholder ratification unless the Administrator recommends a vote against, in which case such vote will be determined on a case-by-case basis; and against management proposals to require a supermajority shareholder vote to approve charter and
bylaw amendments.
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In regards to changes to a companys capital structure, proxies are generally voted against proposals that seek to increase the authorized common
or preferred stock by twice the present limit, unless the increase is in connection with a stock split or merger that was voted in favor of; against proposals to create preferred stock, unless the Administrator recommends a vote for, in which case
such vote will be determined on a case-by-case basis; if the company does not have any preferred shares outstanding, proxies will generally be voted against the requested authorization.
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Generally, proxies are voted for executive and director stock option plans unless the Administrator recommends a vote against such matter, in which
case additional criteria specified in the Guidelines will apply and such vote may be determined on a case-by-case basis.
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In connection with social and environmental matters, proxies will generally be voted for management social, political or environmental proposals unless
the Administrator recommends a vote against such matter, in which case such vote will be determined on a case-by-case basis. However, in regards to shareholder social, political, nuclear safety, land use, ecological or environmental proposals,
proxies will be registered as abstentions.
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Where a voting matter is not specifically addressed in the Guidelines or there
is a question as to the outcome, the Administrator is obligated to request additional direction from the Committee. The Administrator is obligated to maintain records of all votes received, all votes cast and other relevant information.
To the extent that any shares of the Fund are owned directly by any other RIC Fund, those shares will be voted directly by the Fund in the same
proportion as all other votes received from the other holders of the Funds shares.
BROKERAGE
ALLOCATIONS.
Subject to the arrangements and provisions described below, the selection of a broker or dealer to execute portfolio transactions is made either by the money manager or by RIMCo. RICs arrangements with RIMCo and the money
managers provide that in executing portfolio transactions and selecting brokers or dealers, the principal objective is to seek best execution. The factors that may be considered in assessing the best execution available for any transaction include
the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, the reasonableness of the commission, if any, and the value of research services (as that term is defined
in Section 28(e) of the Securities Exchange Act of 1934). In assessing whether the best overall terms have been obtained, RIMCo and the money managers are not obligated to select the broker offering the lowest commission. Any commission, fee or
other remuneration paid to an affiliated brokerdealer is paid in compliance with RICs procedures adopted in accordance with Rule 17e1 of the 1940 Act.
In the case of securities traded in the over-the-counter market and depending on where the money manager or RIMCo believes best execution is available, portfolio transactions may be effected either
(1) on an agency basis, which involves the payment of negotiated brokerage commissions to the broker-dealer, including electronic communication networks, or (2) on a principal basis at net prices, which include compensation to the
broker-dealer in the form of a mark-up or mark-down without commission.
A money manager may effect portfolio transactions for the segment of
the Funds portfolio assigned to the money manager with a brokerdealer affiliated with RIMCo or the money manager, as well as with brokers affiliated with other money managers.
The Fund effects certain transactions through Russell Implementation Services, Inc. (RIS) and its global network of unaffiliated correspondent brokers. RIS is a registered broker and
investment adviser and an affiliate of RIMCo. Trades placed through RIS and its correspondents are made (i) to manage trading associated with changes in managers, rebalancing across existing managers, cash flows and other portfolio transitions
or (ii) to execute portfolio securities transactions for the portion of the Funds assets that RIMCo determines not to allocate to money managers, including assets RIMCo may manage to manage risk in the Funds investment portfolio,
and for the Funds cash reserves.
The Fund will effect transactions through Recapture Services, a division of BNY ConvergEX Execution
Solutions LLC (Recapture Services) and its global network of unaffiliated correspondent brokers. Trades placed through Recapture Services and its correspondents are used (i) to obtain research services for RIMCo to assist RIMCo in
its investment decision-making process in its capacity as Advisor to the Fund or (ii) to generate commission rebates to the Fund. For purposes of trading to obtain research services for RIMCo or to generate commission rebates to the Fund, the
Funds money managers are requested to, and RIMCo may with respect to transactions it places, effect transactions with or through Recapture Services and its correspondents or other brokers only to the extent that the money managers or RIMCo
believe that the Fund will receive best execution. In addition, RIMCo recommends targets for the amount of trading that money managers direct though Recapture Services based upon several factors including asset class and investment style, among
others. Research services provided to RIMCo by Recapture Services or other brokers include performance measurement statistics, fund analytics systems and market monitoring
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systems. Research services will generally be obtained from unaffiliated third parties at market rates, which may be included in commission costs. Research provided to RIMCo may benefit the Fund
and may also benefit other Funds within RIC and other funds and clients managed or advised by RIMCo or its affiliates. Similarly, the Fund may benefit from research provided with respect to trading by those other funds and clients.
Decisions concerning the acquisition of research services by RIMCo are approved and monitored by a FRC Soft Commission Committee (SCC), which
consists principally of employees in research and investment management roles. The SCC acts as an oversight body with respect to purchases of research services acquired by RIMCo using soft commissions generated by funds managed by FRC affiliates,
including the Fund.
Recapture Services or other brokers may also rebate to the Fund a portion of commissions earned on certain trading by the
Fund through Recapture Services and its correspondents in the form of commission recapture. Commission recapture is paid solely to those Funds generating the applicable commission. Commission recapture is generated on the instructions of the SCC
once RIMCos research needs have been met.
Recapture Services retains a portion of all commissions generated, regardless of whether the
trades were used to provide research services to RIMCo or commission recapture to the Fund. Trades through Recapture Services and its correspondents for transition services and manager funding (i.e. brokerage arrangements designed to reduce costs
and optimize performance during the transition of Fund assets upon the hiring, termination or additional funding of a money manager) are at ordinary and customary commission rates and do not result in commission rebates or accrued credits for the
procurement of research related services.
Additionally, a money manager may independently effect transactions through Recapture Services and
its correspondents or a broker affiliated with the money manager or another broker to obtain research services for its own use. Research services provided to a money manager may benefit the Fund generating the trading activity but may also benefit
other funds and clients managed or advised by the money manager. Similarly, the Fund may benefit from research services provided with respect to trading by those other funds and clients.
BROKERAGE COMMISSIONS.
As of the date of this SAI, the Fund had not yet commenced operations and thus, no shares of the Fund were issued during the fiscal years
ended October 31, 2011, 2010 and 2009.
INVESTMENT RESTRICTIONS, POLICIES AND CERTAIN
INVESTMENTS
The Funds investment objective is non-fundamental. Having a non-fundamental investment objective means that
it may be changed without the approval of a majority of the Funds shareholders. If the Funds investment objective is changed by the Board of Trustees, the Prospectus will be supplemented to reflect the new investment objective. Certain
investment policies and restrictions may be fundamental which means that they may only be changed with the approval of a majority of the Funds shareholders. The vote of a majority of the outstanding voting securities of the Fund means the vote
of the lesser of (a) 67% or more of the voting securities of the Fund present at the meeting, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of the Fund. Other policies and restrictions may be changed by the Fund without shareholder approval. The Funds investment objective is set forth in the Prospectus. The Fund will look through the Subsidiary to the
Subsidiarys assets for the purposes of complying with the investment restrictions noted below.
INVESTMENT RESTRICTIONS.
The Fund is subject to the following fundamental investment restrictions. Unless otherwise
noted, these restrictions apply at the time an investment is being made.
Unless otherwise stated, all restrictions, percentage limitations
and credit quality limitations on Fund investments listed in this SAI apply at the time of investment. There would be no violation of any of these requirements unless the Fund fails to comply with any such limitation immediately after and as a
result of an investment. A later change in circumstances will not require the sale of an investment if it was proper at the time it was made.
The Fund may not:
1. Purchase securities if, as a result of such purchase, the Funds investments would be concentrated, within the meaning of the
1940 Act, in securities of issuers in a particular industry or group of industries.
Investments in other investment companies
shall not be considered an investment in any particular industry or group of industries for purposes of this investment restriction.
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This investment restriction shall not apply to securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities or securities of other investment companies.
2. Purchase or sell
real estate; provided that the Fund may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein.
3. Purchase or sell physical commodities except that the Fund may purchase or sell currencies, may enter into futures contracts on
securities, currencies and other indices or any other financial instruments, and may purchase and sell options on such futures contracts.
This restriction shall not prevent the Fund from purchasing or selling commodity-linked derivative instruments (including futures and options contracts with respect to indexes or individual commodities,
options on futures contracts, swap agreements and swaptions), exchange traded funds, exchange traded notes and commodity-linked securities, or from investing in securities or other instruments backed by physical commodities or by indices.
4. Borrow money, except that the Fund may borrow money to the extent permitted by the 1940 Act, or to the extent
permitted by any exemptions therefrom which may be granted by the SEC.
5. Act as an underwriter except to the extent the
Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
6. Make
loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt securities, loan participations and/or engaging in direct corporate loans in accordance with its investment objectives and
policies, (c) to the extent the entry into a repurchase agreement is deemed to be a loan, or (d) to affiliated investment companies to the extent permitted by the 1940 Act or any exemptions therefrom that may be granted by the SEC.
7. Issue securities senior to the Funds presently authorized shares of beneficial interest except that this
restriction shall not be deemed to prohibit the Fund from (a) making any permitted borrowings, loans, mortgages or pledges, (b) entering into options, futures contracts, forward contracts, repurchase transactions, or reverse repurchase
transactions, or (c) making short sales of securities to the extent permitted by the 1940 Act and any rule or order thereunder.
With
regard to investment restriction 1, above, the staff of the SEC has taken the position that a fund is concentrated if it invests 25% or more of the value of its total assets in any one industry or group of industries. Industry is defined
by reference to the Bloomberg Industry Classification Standard (BICs) methodology.
With regard to investment restriction 1,
above, mortgage-backed securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities are not subject to the Funds industry concentration restrictions, by virtue of the exclusion from that test available to
all U.S. Government securities.
With regard to investment restriction 4, above, this restriction applies constantly and not only at the time
a borrowing is made.
With regard to investment restriction 6, above, the Fund may lend its portfolio securities in an amount not to exceed 33
1/3% of total fund assets. The Fund may invest without limit in repurchase agreements so long as it abides by its investment objective, investment restrictions, and all 1940 Act requirements, including diversification requirements. Loans to
affiliated investment companies are not presently permitted by the 1940 Act in the absence of an exemption from the SEC. The Fund has received exemptive relief from the SEC to loan money to affiliated investment companies.
With regard to investment restriction 7, above, permitted borrowings refer to borrowings by the Fund as permitted by the 1940 Act.
The Fund is also subject to the following nonfundamental investment restriction (one that can be changed by the Trustees without shareholder
approval):
The Fund may not borrow money for purposes of leveraging or investment. Provisional credits related to contractual
settlements shall not be considered to be a form of leverage.
Under the 1940 Act, the Fund is presently permitted to borrow up to 5% of its
total assets from any person for temporary purposes, and may also borrow from banks, provided that if borrowings exceed 5%, the Fund must have assets totaling at least 300% of the borrowing when the amount of the borrowing is added to the
companys other assets. Put another way, an
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investment company may borrow, in the aggregate, from banks and others, amounts up to one-third (33 1/3%) of its total assets (including those assets represented by the borrowing). Accordingly,
if the Fund were required to pledge assets to secure a borrowing, it would pledge no more than one-third (33 1/3%) of its assets.
The Fund
will not purchase additional securities while outstanding cash borrowings exceed 5% of total assets.
The Fund may, from time to time, take
temporary defensive positions that are inconsistent with the Funds principal investment strategies in attempting to respond to adverse market, economic, political or other conditions. During these times, the Fund may invest up to 100% of its
assets in cash or cash equivalents, shares of money market mutual funds, commercial paper, zero coupon bonds, repurchase agreements, and other securities RIMCo believes to be consistent with the Funds best interests. During a period in which
the Fund takes a temporary defensive position, the Fund may not achieve its investment objective.
INVESTMENT
POLICIES
The investment objective and principal investment strategies for the Fund are provided in its Prospectus. The following table
illustrates the principal and non-principal investments in which the Fund invests. The Fund may not invest in all of the investments listed below. The Fund uses investment techniques commonly used by other mutual funds. The securities and investment
strategies listed below are discretionary, which means that RIMCo or its money managers may or may not use them.
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Fund
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Principal Investments
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Non-Principal Investments
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Russell Multi-Strategy Alternative Fund
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Equity Securities
Investments
in Emerging Markets
Rights and Warrants
Convertible Securities
REITs
Depositary Receipts
Foreign
Securities
Debt Instruments and Money Market Instruments
High Risk Bonds
Mortgage-Related and Other Asset-Backed Securities
Dollar Rolls
Loans and Other Direct
Indebtedness
Yankee Bonds and Yankee CDs
Variable and Floating Rate Securities
Commodity-Linked Derivatives
Options, Futures and Other Financial Instruments
Investment in the Subsidiary
Swap Agreements and
Swaptions
Credit Default Swaps
STRIPS
Credit Linked Notes, Credit Options and
Similar Investments
Illiquid and Restricted Securities
Commercial Paper
Short Sales
Investment Company Securities and Pooled Investment Vehicles
Exchange Traded Funds
Special Situation Companies
Cash
Reserves
Hedging Strategies
Risk
Management
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Repurchase Agreements
Brady
Bonds
When-Issued Securities and Delayed-Delivery Transactions
Lending Portfolio Securities
Interfund Lending
Reverse Repurchase Agreements
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The following discussion describes certain investment strategies which the Fund may pursue and certain types of
securities in which the Fund may invest as listed in the foregoing table.
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Unless otherwise stated, all percentage and credit quality limitations on Fund investments listed in this
SAI apply at the time of investment. There would be no violation of any of these limitations unless an excess or deficiency exists immediately after and as a result of an investment.
INVESTMENT STRATEGIES AND PORTFOLIO INSTRUMENTS.
Cash Reserves
.
The Fund at times has to sell portfolio securities in order to meet redemption requests. The selling of securities may
affect the Funds performance since securities are sold for other than investment reasons. The Fund can avoid selling its portfolio securities by holding adequate levels of cash to meet anticipated redemption requests (cash
reserves). The cash reserves may also include cash awaiting investment or to pay expenses.
The Fund invests its cash reserves in the
Russell U.S. Cash Management Fund, an unregistered fund advised by RIMCo and administered by RFSC (the Cash Management Fund). RIMCo has waived its 0.05% advisory fee with respect to cash reserves invested in the Cash Management Fund.
RFSC charges a 0.05% administrative fee on the cash reserves invested in the Cash Management Fund.
The Cash Management Fund seeks to preserve
principal and provide liquidity and current income. The Cash Management Fund invests in a portfolio of high quality U.S. Dollar denominated money market securities. The dollar-weighted average maturity of the Cash Management Funds
portfolio is 90 days or less. The Cash Management Fund primarily invests in (1) securities issued by U.S. and foreign banks, commercial paper, including asset-backed commercial paper, and short-term debt of U.S. and foreign corporations and
trusts, (2) bank instruments, including certificates of deposit, Eurodollar certificates of deposit, Eurodollar time deposits and Yankee certificates of deposit, (3) Yankee Bonds, (4) funding agreements, (5) other money market
funds, (6) demand notes, (7) repurchase agreements, (8) investment-grade municipal debt obligations, (9) securities issued or guaranteed by the U.S. government or its agencies and (10) asset backed securities. An investment
in the U.S. Cash Management Fund, like any investment, has risks. The principal risks of investing in the Cash Management Fund are those associated with: active security selection, the ability to maintain a stable $1.00 net asset value, Counterparty
risk, liquidity risk, market volatility, government intervention in financial markets, possible large redemptions and subscriptions and investing in (1) fixed income securities (including instruments of U.S. and foreign banks and U.S. and
foreign corporations), (2) commercial paper (including asset-backed commercial paper), (4) funding agreements, (5) illiquid securities, (6) demand notes and (7) repurchase agreements.
Commodity-Linked Derivatives
.
The Fund invests in commodity-linked derivative instruments, such as structured notes, swap agreements,
commodity options, futures and options on futures. The prices of commodity-linked derivative instruments may move in different directions than investments in traditional equity and debt securities when the value of those traditional securities is
declining due to adverse economic conditions. As an example, during periods of rising inflation, historically debt securities have tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those same
periods of rising inflation, historically the prices of certain commodities, such as oil and metals, have tended to increase. Of course, there cannot be any guarantee that derivative instruments will perform in that manner in the future, and at
certain times the price movements of commodity-linked investments have been parallel to those of debt and equity securities.
In selecting
investments for the Funds portfolio, money managers evaluate the merits of the investments primarily through the exercise of their own investment analysis. In the case of derivative instruments, that process may include the evaluation of the
underlying commodity, futures contract, index or other economic variables that are linked to the instrument, the issuer of the instrument, and whether the principal of the instrument is protected by any form of credit enhancement or guarantee.
The Funds primary method for gaining exposure to the commodities markets is expected to be through derivative instruments (including
futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and swaptions), exchange traded funds, exchange traded notes and commodity-linked securities. These instruments have one
or more commodity dependent components. They are derivative instruments because at least part of their value is derived from the value of an underlying commodity index, commodity futures contract, index or other readily measurable economic variable.
The Fund will invest in these instruments directly and indirectly, through investments in the Subsidiary, a wholly owned subsidiary of the Fund formed in the Cayman Islands, futures contracts on individual commodities or a subset of commodities and
options on them.
Principal Protection.
The Fund may invest in commodity-linked instruments. Commodity linked structured notes and
certain other commodity-linked instruments may be principal protected, partially protected, or offer no principal protection. A principal protected hybrid instrument means that the issuer will pay, at a minimum, the par value of the note at
maturity. Therefore, if the commodity value to which the hybrid instrument is linked declines over the life of the note, the Fund will receive at maturity the face or stated value of the note.
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With a principal protected commodity-linked instrument, the Fund would receive at maturity the greater of
the par value of the note or the increase in value of the underlying commodity index. This protection is, in effect, an option whose value is subject to the volatility and price level of the underlying commodity index. This optionality can be added
to an instrument, but only for a cost higher than that of a partially protected (or no protection) instrument. A money managers decision on whether to use principal protection depends in part on the cost of the protection. The Fund will,
however, limit commodity-linked notes without principal protection to 10% of its total assets. In addition, the utility of the protection feature depends upon the ability of the issuer to meet its obligation to buy back the security, and therefore
depends on the creditworthiness of the issuer.
With full principal protection, the Fund will receive at maturity of the commodity-linked
instrument either the stated par value of the commodity-linked instrument, or, potentially, an amount greater than the stated par value if the underlying commodity index, futures contract or economic variable to which the commodity-linked instrument
is linked has increased in value. Partially protected commodity-linked instruments may suffer some loss of principal if the underlying commodity index, futures contract or economic variable to which the commodity-linked instrument is linked declines
in value during the term of the commodity-linked instrument. However, partially protected commodity-linked instruments have a specified limit as to the amount of principal that they may lose.
The Fund may also invest in commodity-linked instruments that offer no principal protection. At maturity, there is a risk that the underlying commodity index, futures contract or other economic variable
may have declined sufficiently in value such that some or all of the face value of the instrument might not be returned. Some of the instruments that the Fund may invest in may have no principal protection and the instrument could lose all of its
value.
With a partially-protected or no-principal-protection commodity-linked instrument, the Fund may receive at maturity an amount less
than the instruments par value if the commodity index or other economic variable to which the note is linked declines over the term of the note. A money manager, at its discretion, may invest in a partially protected principal structured note
or, within the 10% limitation set forth above, a note without principal protection. In deciding to purchase a note without principal protection, a money manager may consider, among other things, the expected performance of the underlying commodity
index, commodity futures contract or other economic variable over the term of the note, the cost of the note, and any other economic factors which the money manager believes are relevant.
The Fund does not currently expect to invest more than 25% of its total assets in structured notes under whose terms the potential loss, either at redemption or maturity, is expected to exceed 50% of the
face value of the notes, calculated at the time of investment. The Fund does not currently intend to invest more than 10% of its total assets in notes that mature in more than 19 months.
Hedging Strategies
.
Financial futures contracts may be used by the Fund during or in anticipation of adverse market events. For example: if interest rates were anticipated to rise, financial
futures contracts may be sold (short hedge) which would have an effect similar to selling bonds. Once interest rates increase, fixedincome securities held in the Funds portfolio may decline, but the futures contract value may increase,
partly offsetting the loss in value of the fixedincome security by enabling the Fund to repurchase the futures contract at a lower price to close out the position.
The Fund may purchase a put and/or sell a call option on a stock index futures contract instead of selling a futures contract in anticipation of an equity market decline. Purchasing a call and/or selling
a put option on a stock index futures contract is used instead of buying a futures contract in anticipation of an equity market advance, or to temporarily create an equity exposure for cash reserves until those balances are invested in equities.
Options on financial futures are used in a similar manner in order to hedge portfolio securities against anticipated market changes.
Risk
Associated with Hedging Strategies
.
There are certain investment risks involved with using futures contracts and/or options as a hedging technique. One risk is the imperfect correlation between price movement of the futures contracts
or options and the price movement of the portfolio securities, stock index or currency subject of the hedge. Another risk is that a liquid secondary market may not exist for a futures contract causing the Fund to be unable to close out the futures
contract thereby affecting the Funds hedging strategy.
In addition, foreign currency options and foreign currency futures involve
additional risks. Such transactions may not be regulated as effectively as similar transactions in the United States; may not involve a clearing mechanism and related guarantees; and are subject to the risk of governmental actions affecting trading
in, or the prices of, foreign securities. The value of such positions could also be adversely affected by (1) other complex foreign, political, legal and economic factors, (2) lesser availability than in the United States of data on which
to make trading decisions, (3) delays in the Funds ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (5) lesser trading volume.
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Lending Portfolio Securities
.
RIC is a party to an Amended and Restated Securities
Lending Authorization Agreement with State Street Bank and Trust Company, an unaffiliated lending agent, pursuant to which the Fund may lend securities to other parties (typically brokers, dealers, banks or other financial institutions) who may need
to borrow securities in order to complete certain transactions such as covering short sales, avoiding failures to deliver securities or completing arbitrage operations. The borrower provides the Fund with collateral in an amount at least equal to
the value of the securities loaned. By lending its portfolio securities, the Fund attempts to increase its net investment income through investment earnings from collateral received or the receipt of negotiated fees on the securities lent.
The Fund retains most rights of beneficial ownership, including interest or other distributions on the loaned securities. Any gain or loss in
the market price of the securities lent that occurs during the term of the loan would be for the account of the Fund. Voting rights may pass with the lending. The Fund may call loans to vote proxies if a material issue affecting the investment is to
be voted upon. Payments received by the Fund in lieu of any dividends paid on the loaned securities will not be treated as qualified dividend income for purposes of determining what portion of the Funds dividends received by the
Fund and distributed to its shareholders may be taxed at the rates generally applicable to long-term capital gains.
If the borrower defaults
on its obligations to return the securities lent because of insolvency or other reasons, the Fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays could be greater for foreign
securities. If the Fund is not able to recover the securities lent, the Fund may sell the collateral and purchase a replacement security in the market. The value of the collateral could decrease below the value of the replacement security or the
value of the replacement security could increase above the value of the collateral by the time the replacement security is purchased.
The
Fund may invest cash collateral received, at its own risk, in (1) direct obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities, (2) highquality shortterm debt instruments eligible for
purchase by Russell Investment Company domestic money market mutual funds, (3) repurchase transactions with certain Counterparties or (4) registered or unregistered short-term investment funds advised by RIMCo or third parties. Income
generated from the investment of the cash collateral is first used to pay any negotiated rebate to the borrower of the securities then to pay for lending transaction costs. Any remaining income is divided between the Fund and the lending agent in
accordance with the Amended and Restated Securities Lending Authorization Agreement.
The Fund may incur costs or possible losses in excess of
the interest income and fees received in connection with securities lending transactions. To the extent that the value of the cash collateral as invested is insufficient to return the full amount of the collateral plus any negotiated rebate to the
borrower upon termination of the loan, the Fund must immediately pay the amount of the shortfall to the borrower.
The Fund may not lend
portfolio securities in an amount that exceeds 33 1/3% of total fund assets.
Risk Management
.
As described in the Prospectus,
RIMCo may manage Fund assets to manage risk in the Funds investment portfolio. While RIMCo recognizes that a certain level of risk is necessary to achieve the Funds investment objectives, RIMCo monitors, and may seek to manage, risk
consistent with the Funds objectives and strategies. RIMCo monitors risk using a variety of risk measurements such as tracking error for equity funds and duration for fixed income funds. RIMCo may, based on the facts and circumstances of each
case, including the specific characteristics of a Funds investment portfolio and general market conditions, directly manage a portion of the Funds assets or reallocate assets among money managers for purposes of seeking to manage the
Funds risk profile. RIMCo may seek to manage risk in the Funds investment portfolio by increasing cash reserves, buying and selling portfolio securities, including exchange traded funds or notes, or through the use of various
instruments, including futures, options, swaps or short term investments.
Illiquid and Restricted Securities
.
No more than
15% of the Funds net assets will be invested in securities, including repurchase agreements of more than seven days duration, that are illiquid. This limitation is applied at the time of purchase. A security is illiquid if it cannot be
disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued such security. There may be delays in selling illiquid securities at prices representing their fair value.
The Board of Trustees of the Fund has adopted procedures to permit the Fund to deem as liquid the following types of securities that are otherwise
presumed to be illiquid securities: (i) certain restricted securities that are eligible for resale pursuant to Rule 144A (Rule 144A Securities) under the Securities Act of 1933, as amended (the Securities Act);
(ii) certain commercial paper issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act (Section 4(2) Paper); (iii) certain interest-only and principal-only fixed mortgage-backed
securities issued by the United States government or its agencies and instrumentalities (collectively, Eligible MBS); (iv) certain municipal lease obligations and certificates of participation in municipal lease obligations
(collectively, Municipal Lease Obligations); and (v) certain restricted debt securities that are subject to unconditional puts or demand features exercisable within seven days (Demand Feature Securities).
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The expenses of registration of restricted securities that are illiquid (excluding securities that may be
resold by the Fund pursuant to Rule 144A) may be negotiated at the time such securities are purchased by the Fund. When registration is required, a considerable period may elapse between a decision to sell the securities and the time the sale would
be permitted. Thus, the Fund may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Fund also may acquire, through private placements, securities having contractual resale restrictions, which might
lower the amount realizable upon the sale of such securities.
Interfund Lending
.
All RIC Funds have been granted permission
from the SEC to participate in a joint lending and borrowing facility (the Credit Facility). RIC Funds may borrow money from each other for temporary purposes. All such borrowing and lending will be subject to a participating funds
fundamental investment limitations. Typically, RIC Funds will borrow from the Russell Money Market Fund. The Russell Money Market Fund will lend through the program only when the returns are higher than those available from an investment in
repurchase agreements or short-term reserves and the Portfolio Manager determines it is in the best interest of the Russell Money Market Fund. The Fund will borrow through the program only when the costs are equal to or lower than the cost of bank
loans. Interfund loans and borrowings normally extend overnight, but can have a maximum duration of seven days. Loans may be called on one business days notice and may be repaid on any day by the borrowing fund. A participating fund may have
to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment to the Russell Money Market Fund could result in reduced returns and/or additional borrowing costs.
When-Issued Securities and Delayed-Delivery Transactions.
The Fund may utilize its assets to purchase securities on a when-issued
basis or purchase or sell securities for delayed delivery (i.e., payment or delivery occur beyond the normal settlement date at a stated price and yield). The Fund will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage, but may sell the securities before the settlement date if the money manager deems it advantageous to do so. The payment obligation and the interest rate that will be received on when-issued securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations in the value of securities purchased or sold on a when-issued or delayed-delivery basis, the yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued
or delayed-delivery securities, its custodian will set aside cash or liquid securities that are acceptable as collateral to the appropriate regulatory authority equal to the amount of the commitment in a segregated account. Normally, the custodian
will set aside portfolio securities to satisfy a purchase commitment, and in such a case the Fund may be required subsequently to place additional assets in the segregated account in order to ensure that the value of the account remains equal to the
amount of the Funds commitment. It may be expected that the Funds net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash. When the Fund
engages in when-issued or delayed-delivery transactions, it relies on the other party to consummate the trade. Failure of the seller to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be
advantageous.
Investment Company Securities and Pooled Investment Vehicles
.
The Fund may invest in securities of other open-end
or closed-end investment companies. If the Fund invests in other investment companies, shareholders will bear not only their proportionate share of the funds expenses (including operating expenses and the fees of the adviser), but also,
indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies.
Some emerging market countries have laws and regulations that currently preclude direct foreign investments in the securities of their
companies. However, indirect foreign investments in the securities of companies listed and traded on the stock exchanges in these countries are permitted through pooled investment vehicles or investment funds that have been specifically authorized.
Exchange Traded Funds or ETFs.
The Fund may invest in shares of open-end mutual funds or unit
investment trusts that are traded on a stock exchange, called exchange-traded funds or ETFs. Typically, an ETF seeks to track the performance of an index, such as the S&P 500
®
or the NASDAQ 100, by holding in its portfolio either the same securities that comprise the index, or a representative sample of the index. Investing in an ETF will
give the Fund exposure to the securities comprising the index on which the ETF is based, and the Fund will gain or lose value depending on the performance of the index. ETFs have expenses, including advisory and administrative fees paid by ETF
shareholders, and, as a result, an investor in the Fund is subject to a duplicate level of fees if the Fund invests in ETFs.
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Unlike shares of typical mutual funds or unit investment trusts, shares of ETFs are bought and sold based on
market values throughout each trading day, and not at net asset value. For this reason, shares could trade at either a premium or discount to net asset value. Currently, the Fund intends to invest only in ETFs that track equity market indices. The
portfolios held by these ETFs are publicly disclosed on each trading day, and an approximation of actual net asset value is disseminated throughout the trading day. Because of this transparency, the trading prices of these index-based ETFs tend to
closely track the actual net asset value of the underlying portfolios. If available, the Fund may invest in ETFs that are based on fixed income indices, or that are actively managed. Actively managed ETFs will likely not have the transparency of
index based ETFs, and therefore, may be more likely to trade at a discount or premium to actual net asset values. If an ETF held by the Fund trades at a discount to net asset value, the Fund could lose money even if the securities in which the ETF
invests go up in value.
Short Sales.
The Fund may utilize short selling strategies. In a short sale, the seller sells a
security that it does not own, typically a security borrowed from a broker or dealer. Because the seller remains liable to return the underlying security that it borrowed from the broker or dealer, the seller must purchase the security prior to the
date on which delivery to the broker or dealer is required. The Fund 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 Fund replaces the borrowed
security. The Fund will realize a gain if the security declines in price between those dates. The making of short sales exposes the Fund to the risk of liability for the market value of the security that is sold (the amount of which liability
increases as the market value of the underlying security increases), in addition to the costs associated with establishing, maintaining and closing out the short position.
Although the Funds potential for gain as a result of a short sale is limited to the price at which it sold the security short less the cost of borrowing the security, its potential for loss is
theoretically unlimited because there is no limit to the cost of replacing the borrowed security. The proceeds of the short sale will be retained as collateral in a segregated account for the brokers benefit at the Funds custodian, to
the extent necessary to meet margin requirements, until the short position is closed out. Until a Fund replaces a borrowed security in connection with a short sale, the Fund will: (a) maintain daily a segregated account, containing cash, cash
equivalents, or liquid marketable securities, at such a level that the amount deposited in the segregated account plus the amount deposited with the broker as collateral will equal the current value of the security sold short; or (b) otherwise
cover its short position in accordance with positions taken by the staff of the SEC (e.g., taking an offsetting long position in the security sold short).
Short Sales Against the Box.
The Fund may utilize a short sale that is against the box. A short sale is against the box to the extent that the Fund
contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. Not more than 10% of the Funds net assets (taken at current value) may be held as collateral for short sales against the box at any
one time. The Fund does not intend to engage in short sales against the box for investment purposes. The Fund may, however, make a short sale as a hedge, when it believes that the price of a security may decline, causing a decline in the value of a
security owned by the Fund (or a security convertible or exchangeable for such security). In such case, any future losses in the Funds long position should be offset by a gain in the short position and, conversely, any gain in the long
position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns. There will be certain additional
transaction costs associated with short sales against the box, but the Fund will endeavor to offset these costs with the income from the investment of the cash proceeds of short sales.
Foreign Securities
Investment In Foreign Securities.
The Fund may invest in
foreign (non-U.S.) securities traded on U.S. or foreign exchanges or in the overthecounter market. Investing in securities issued by foreign governments and corporations involves considerations and possible risks not typically associated
with investing in obligations issued by the U.S. government and domestic corporations. Less information may be available about foreign companies than about domestic companies, and foreign companies generally are not subject to the same uniform
accounting, auditing and financial reporting standards or other regulatory practices and requirements comparable to those applicable to domestic companies. The values of foreign investments are affected by changes in currency rates or exchange
control regulations, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the United States or abroad) or changed circumstances in dealings between nations. Costs are
incurred in connection with conversions between various currencies. In addition, foreign brokerage commissions are generally higher than in the United States, and foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United States. Investments in foreign countries could be affected by other factors not present in the United States, including nationalization, expropriation, confiscatory taxation, lack of uniform accounting and
auditing standards and potential difficulties in enforcing contractual obligations and could be subject to extended settlement periods or restrictions affecting the prompt return of capital to the United States. To the extent that the Funds
principal investment strategies involve foreign (non-U.S.) securities, the Fund may tend to have a greater exposure to liquidity risk.
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Investment In Emerging Markets.
The Fund may invest in emerging markets stocks. The Fund may
invest in the following types of emerging market debt: bonds; notes and debentures of emerging market governments; debt and other fixedincome securities issued or guaranteed by emerging market government agencies, instrumentalities or central
banks; and other fixedincome securities issued or guaranteed by banks or other companies in emerging markets which the money managers believe are suitable investments for the Funds. Emerging markets consist of countries determined by the money
managers of the Fund to have developing or emerging economies and markets. These countries generally include every country in the world except Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Iceland,
Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. Foreign investment may include emerging market stock and emerging market
debt.
Risks Associated with Emerging Markets
. The considerations outlined above when making investments in foreign securities also
apply to investments in emerging markets. The risks associated with investing in foreign securities are often heightened for investments in developing or emerging markets. Investments in emerging or developing markets involve exposure to economic
structures that are generally less diverse and mature, and to political systems which can be expected to have less stability, than those of more developed countries. Moreover, the economies of individual emerging market countries may differ
favorably or unfavorably from the U.S. economy in such respects as the rate of growth in gross domestic product, the rate of inflation, capital reinvestment, resource selfsufficiency and balance of payments position. Because the Funds
foreign securities will generally be denominated in foreign currencies, the value of such securities to the Fund will be affected by changes in currency exchange rates and in exchange control regulations. A change in the value of a foreign currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar value of the Funds foreign securities. In addition, some emerging market countries may have fixed or managed currencies which are not freefloating against
the U.S. dollar. Further, certain emerging market countries currencies may not be internationally traded. Certain of these currencies have experienced devaluations relative to the U.S. dollar. Many emerging market countries have experienced
substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging
market countries.
Investments in emerging market country government debt securities involve special risks. Certain emerging market countries
have historically experienced high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging market countrys debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. As a result, a government obligor may default on
its obligations. If such an event occurs, the Fund may have limited legal recourse against the issuer and/or guarantor.
Foreign
Government Securities.
Foreign government securities which the Fund may invest in generally consist of obligations issued or backed by the national, state or provincial government or similar political subdivisions or central banks in foreign
countries. Foreign government securities also include debt obligations of supranational entities, which include international organizations designated or backed by governmental entities to promote economic reconstruction or development,
international banking institutions and related government agencies. These securities also include debt securities of quasigovernment agencies and debt securities denominated in multinational currency units of an issuer.
The recent global economic crisis brought several European governments close to bankruptcy and many other economies into recession and weakened the
banking and financial sectors of many European countries. For example, the governments of Greece, Spain, Portugal, and the Republic of Ireland have all recently experienced large public budget deficits, the effects of which remain unknown and may
slow the overall recovery of European economies from the recent global economic crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or
multilateral agencies and offices. Such assistance may require a country to implement reforms or reach a certain level of performance. If a country receiving assistance fails to reach certain objectives or receives an insufficient level of
assistance it could cause a deep economic downturn which could significantly affect the value of the Funds European investments.
Privatizations.
The Fund may invest in privatizations (i.e., foreign government programs of selling interests in government-owned or controlled
enterprises). The ability of U.S. entities, such as the Fund, to participate in privatizations may be limited by local law, or the terms for participation may be less advantageous than for local investors. There can be no assurance that
privatization programs will be available or successful.
Equity Linked Notes.
The Fund may invest in equity linked notes, which
are instruments whose return is determined by the performance of a single equity security, a basket of equity securities or an equity index. The principal payable at maturity is based on the current price of the linked security, basket or index.
Equity linked notes are generally subject to the risks associated with the securities of foreign issuers and with securities denominated in foreign currencies and, because they are equity-linked, may return a lower amount at maturity because of a
decline in value of the linked security or securities. Equity linked notes are also subject to default risk and Counterparty risk.
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Foreign Currency Exchange.
Since the Fund may invest in securities denominated in currencies other
than the U.S. dollar, and since the Fund may temporarily hold funds in bank deposits or other money market investments denominated in foreign currencies, the Fund may be affected favorably or unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. A change in the value of a foreign currency relative to the U.S. dollar will result in a corresponding change in the dollar value of the Fund assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply and demand in the foreign exchange markets. Changes in the exchange rate may result over time from the interaction of many factors directly or
indirectly affecting economic and political conditions in the U.S. and a particular foreign country, including economic and political developments in other countries. Governmental intervention may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in response to economic forces. Sovereign governments use a variety of techniques, such as intervention by a countrys central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies. The Fund may use hedging techniques with the objective of protecting against loss through the fluctuation of the value of foreign currencies against the U.S. dollar, particularly the forward market in
foreign exchange, currency options and currency futures.
Equity Securities
Common Stocks.
The Fund may invest in common stocks, which are shares of a corporation or other entity that entitle the holder to a pro rata share of the profits of the corporation, if any,
without preference over any other shareholder or class of shareholders, including holders of the entitys preferred stock and other senior equity. Common stock usually carries with it the right to vote and frequently an exclusive right to do
so.
Preferred Stocks
.
The Fund may invest in preferred stocks, which are shares of a corporation or other entity that pay
dividends at a specified rate and have precedence over common stock in the payment of dividends. If the corporation or other entity is liquidated or declares bankruptcy, the claims of owners of preferred stock will have precedence over the claims of
owners of common stock, but not over the claims of owners of bonds. Some preferred stock dividends are non-cumulative, but some are cumulative, meaning that they require that all or a portion of prior unpaid dividends be paid to
preferred stockholders before any dividends are paid to common stockholders. Certain preferred stock dividends are participating and include an entitlement to a dividend exceeding the specified dividend rate in certain cases. Investments
in preferred stocks carry many of the same risks as investments in common stocks and debt securities.
Convertible Securities
.
The Fund may invest in convertible securities, which entitle the holder to acquire the issuers common stock by exchange or purchase for a predetermined rate. Convertible securities can be bonds, notes, debentures, preferred stock or other
securities which are convertible into common stock. Convertible securities are subject both to the credit and interest rate risks associated with fixed income securities and to the stock market risk associated with equity securities. Convertible
securities rank senior to common stocks in a corporations capital structure. They are consequently of higher quality and entail less risk than the corporations common stock, although the extent to which such risk is reduced depends in
large measure upon the degree to which the convertible security sells above its value as a fixed income security. The Fund may purchase convertible securities rated Ba or lower by Moodys Investors Service, Inc. (Moodys), BB
or lower by Standard & Poors Ratings Group (S&P) or BB+ or lower by Fitch Investors Services, Inc. (Fitch) and may also purchase non-rated securities considered by the manager to be of comparable quality.
Although the Fund selects these securities primarily on the basis of their equity characteristics, investors should be aware that debt securities rated in these categories are considered high risk securities; the rating agencies consider them
speculative, and payment of interest and principal is not considered well assured. To the extent that such convertible securities are acquired by the Fund, there is a greater risk as to the timely payment of the principal of, and timely payment of
interest or dividends on, such securities than in the case of higher rated convertible securities.
Rights and Warrants
.
The
Fund may invest in rights and warrants. Rights and warrants are instruments which entitle the holder to buy an equity security at a specific price for a specific period of time. Rights are similar to warrants but typically have shorter durations and
are offered to current stockholders of the issuer. Changes in the value of a right or a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a right or a warrant may be more volatile than the price
of its underlying security, and a right or a warrant may offer greater potential for capital loss.
Real Estate Investment Trusts or
REITs
.
The Fund may invest in REITs. REITs are characterized as equity REITs, mortgage REITs and hybrid REITs. An equity REIT invests primarily in the fee ownership or leasehold ownership of land and buildings and derives its
income primarily from rental income. An equity REIT may also realize capital gains (or losses) by
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selling real estate properties in its portfolio that have appreciated (or depreciated) in value. A mortgage REIT invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A mortgage REIT generally derives its income primarily from interest payments on the credit it has extended. A hybrid REIT combines the characteristics of equity REITs and mortgage REITs, generally by holding both
ownership interests and mortgage interests in real estate.
The Funds investments in REITs are subject to the risks associated with
particular properties and with the real estate market in general, including the risks of a general downturn in real estate values. Mortgage REITs may be affected by the creditworthiness of the borrower. The value of securities issued by REITs is
affected by tax and regulatory requirements and by perceptions of management skill. The Funds investment in REITs is also subject to changes in availability of debt financing, heavy cash flow dependency, tenant defaults, self-liquidation, and,
for U.S. REITs, the possibility of failing to qualify for tax-free status under the Internal Revenue Code of 1986, as amended (the Code) or failing to maintain exemption from the 1940 Act. By investing in REITs indirectly through the
Fund, a shareholder will bear expenses of the REITs in addition to expenses of the Fund.
Depositary Receipts
.
The Fund may
hold securities of foreign issuers in the form of American Depositary Receipts (ADRs), American Depositary Shares (ADSs) and European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs), or
other securities convertible into securities of eligible non-U.S. issuers. These securities may not necessarily be denominated in the same currency as the securities for which they may be exchanged. ADRs and ADSs typically are issued by an American
bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts (CDRs), are issued in Europe typically by foreign banks and
trust companies and evidence ownership of either foreign or domestic securities. Generally, ADRs and ADSs in registered form are designed for use in United States securities markets and EDRs in bearer form are designed for use in European securities
markets. GDRs allow companies in Europe, Asia, the United States and Latin America to offer shares in many markets around the world. GDRs are traded on major stock exchanges, particularly the London SEAQ International trading system. For purposes of
the Funds investment policies, the Funds investments in ADRs, ADSs, GDRs and EDRs will be deemed to be investments in the equity securities representing securities of foreign issuers into which they may be converted.
ADR facilities may be established as either unsponsored or sponsored. While ADRs issued under these two types of facilities are
in some respects similar, there are distinctions between them relating to the rights and obligations of ADR holders and the practices of market participants. A depositary may establish an unsponsored facility without participation by (or even
necessarily the acquiescence of) the issuer of the deposited securities, although typically the depositary requests a letter of nonobjection from such issuer prior to the establishment of the facility. Holders of unsponsored ADRs generally
bear all the costs of such facilities. The depositary usually charges fees upon the deposit and withdrawal of the deposited securities, the conversion of dividends into U.S. dollars, the disposition of noncash distributions, and the
performance of other services. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through voting rights to ADR holders
with respect to the deposited securities. Sponsored ADR facilities are created in generally the same manner as unsponsored facilities, except that the issuer of the deposited securities enters into a deposit agreement with the depositary. The
deposit agreement sets out the rights and responsibilities of the issuer, the depositary and the ADR holders. With sponsored facilities, the issuer of the deposited securities generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depositary), although ADR holders continue to bear certain other costs (such as deposit and withdrawal fees). Under the terms of most sponsored arrangements, depositories agree to distribute notices of shareholder
meetings and voting instructions, and to provide shareholder communications and other information to the ADR holders at the request of the issuer of the deposited securities. Unsponsored depositary receipts tend to trade over the counter, and are
issued without the involvement of the underlying non-US company whose stock underlies the depositary receipts. Shareholder benefits, voting rights and other attached rights may not be extended to the holder of an unsponsored depositary receipt. The
Fund may invest in sponsored and unsponsored ADRs.
Special Situation Companies.
The Fund may invest in special
situation companies. Special situation companies are companies involved in an actual or prospective acquisition or consolidation; reorganization; recapitalization; merger, liquidation or distribution of cash, securities or other
assets; a tender or exchange offer; a breakup or workout of a holding company; or litigation which, if resolved favorably, would improve the value of the companys stock. If the actual or prospective situation does not materialize as
anticipated, the market price of the securities of a special situation company may decline significantly. The Fund believes, however, that if a money manager analyzes special situation companies carefully and invests in the
securities of these companies at the appropriate time, it may assist the Fund in achieving its investment objective. There can be no assurance, however, that a special situation that exists at the time of its investment will be consummated under the
terms and within the time period contemplated.
Investment in Unseasoned Companies.
The Fund may invest in companies (including
predecessors) which have operated less than three years. The securities of such companies may have limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in unseasoned
companies are more speculative and entail greater risk than do investments in companies with an established operating record.
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Debt Instruments and Money Market Instruments
To the extent the Fund invests in the following types of debt securities, its net asset value may change as the general levels of interest rates
fluctuate. When interest rates decline, the value of debt securities can be expected to rise. Conversely, when interest rates rise, the value of debt securities can be expected to decline. The Funds investments in debt securities with longer
terms to maturity are subject to greater volatility than the Funds shorter-term obligations. Debt securities may have all types of interest rate payment and reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features.
U.S. Government Obligations.
The types of U.S. government obligations the Fund may
purchase include: (1) a variety of U.S. Treasury obligations which differ only in their interest rates, maturities and times of issuance: (a) U.S. Treasury bills at time of issuance have maturities of one year or less, (b) U.S.
Treasury notes at time of issuance have maturities of one to ten years and (c) U.S. Treasury bonds at time of issuance generally have maturities of greater than ten years; (2) obligations issued or guaranteed by U.S. government agencies
and instrumentalities and supported by any of the following: (a) the full faith and credit of the U.S. Treasury (such as Government National Mortgage Association participation certificates), (b) the right of the issuer to borrow an amount
limited to a specific line of credit from the U.S. Treasury, (c) discretionary authority of the U.S. government agency or instrumentality or (d) the credit of the instrumentality (examples of agencies and instrumentalities are: Federal
Land Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks and Federal National Mortgage Association). No assurance can be given that the U.S. government will provide financial
support to such U.S. government agencies or instrumentalities described in (2)(b), (2)(c) and (2)(d) in the future, other than as set forth above, since it is not obligated to do so by law. Accordingly, such U.S. government obligations may
involve risk of loss of principal and interest. The Funds may invest in fixedrate and floating or variable rate U.S. government obligations. The Fund may purchase U.S. government obligations on a forward commitment basis.
The Fund may also purchase Treasury Inflation Protected Securities (TIPS). TIPS are U.S. Treasury securities issued at a fixed rate of
interest but with principal adjusted every six months based on changes in the Consumer Price Index. As changes occur in the inflation rate, as represented by the designated index, the value of the securitys principal is adjusted by the same
proportion. If the inflation rate falls, the principal value of the security will be adjusted downward, and consequently, the interest payable on the securities will be reduced.
STRIPS.
The Fund may invest in STRIPS (Separate Trading of Registered Interest and Principal of Securities). STRIPS are created by separating the interest and principal components of an
outstanding U.S. Treasury or agency note or bond and selling them as individual securities. STRIPS generally trade like zero coupon securities, which do not pay interest periodically but accrue interest until maturity. STRIPS tend to be subject to
the same risks as zero coupon securities. The market prices of STRIPS generally are more volatile than the market prices of securities with similar maturities that pay interest periodically and are likely to respond to changes in interest rates to a
greater degree than do non-zero coupon securities having similar maturities and credit quality.
Repurchase Agreements.
The Fund
may enter into repurchase agreements. A repurchase agreement is an agreement under which the Fund acquires a fixed income security from a commercial bank, broker or dealer and simultaneously agrees to resell such security to the seller at an agreed
upon price and date (normally the next business day). The resale price reflects an agreed upon interest rate effective for the period the security is held by the Fund and is unrelated to the interest rate on the security. The securities acquired by
the Fund constitute collateral for the repurchase obligation. In these transactions, the securities acquired by the Fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and must
be held by the custodian bank until repurchased. Subject to the overall limitations described in Illiquid Securities, the Fund will not invest more than 15% of its net assets (taken at current market value) in repurchase agreements
maturing in more than seven days.
Risk Factors.
The use of repurchase agreements involves certain risks. One risk is the sellers
ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the Fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under bankruptcy
laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under bankruptcy or other laws, a court may determine that the
underlying securities are collateral for a loan by the Fund not within its control and therefore the realization by the Fund on such collateral may be automatically stayed. It is possible that the Fund may not be able to substantiate its interest in
the underlying securities and may be deemed an unsecured creditor of the other party to the agreement.
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Reverse Repurchase Agreements and Dollar Rolls.
The Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is a transaction whereby a Fund transfers possession of a portfolio security to a bank or brokerdealer in return for a percentage of the portfolio securitys market value. The Fund retains record
ownership of the security involved including the right to receive interest and principal payments. At an agreed upon future date, the Fund repurchases the security by paying an agreed upon purchase price plus interest. Liquid assets of the Fund
equal in value to the repurchase price, including any accrued interest, will be segregated on the Funds records while a reverse repurchase agreement is in effect.
The Fund may purchase dollar rolls. A dollar roll is similar to a reverse repurchase agreement in certain respects. In a dollar roll transaction, the Fund sells a mortgage-related
security, such as a security issued by Government National Mortgage Association (GNMA), to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A
dollar roll can be viewed, like a reverse repurchase agreement, as a collateralized borrowing in which the Fund pledges a mortgage-related security to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements, the
dealer with which the Fund enters into a dollar roll transaction is not obligated to return the same securities as those originally sold by the Fund, but only securities which are substantially identical. To be considered
substantially identical, the securities returned to the Fund generally must: (1) be collateralized by the same types of underlying mortgages; (2) be issued by the same agency and be part of the same program; (3) have a
similar original stated maturity; (4) have identical net coupon rates; (5) have similar market yields (and therefore price); and (6) satisfy good delivery requirements, meaning that the aggregate principal amounts of the
securities delivered and received back must be within 0.01% of the initial amount delivered.
The Funds obligations under a dollar roll
agreement must be covered by segregated or earmarked liquid assets equal in value to the securities subject to repurchase by the Fund. As with reverse repurchase agreements, to the extent that positions in dollar roll agreements are not
covered by segregated or earmarked liquid assets at least equal to the amount of any forward purchase commitment, such transactions would be subject to the Funds restrictions on borrowings. Furthermore, because dollar roll
transactions may be for terms ranging between one and six months, dollar roll transactions may be deemed illiquid and subject to the Funds overall limitations on investments in illiquid securities.
Successful use of mortgage dollar rolls depends on the Funds ability to predict interest rates and mortgage payments. Dollar roll transactions
involve the risk that market value of the securities the Fund is required to purchase may decline below the agreed upon repurchase price.
Corporate Debt Securities.
The Fund may invest in debt securities, such as convertible and non-convertible bonds, preferred stock, notes
and debentures, issued by corporations, limited partnerships and other similar entities. Investments in securities that are convertible into equity securities and preferred stock have characteristics of equity as well as debt securities, and their
value may be dependent in part on the value of the issuers equity securities. The Fund may also invest in debt securities that are accompanied by warrants which are convertible into the issuers equity securities, which have similar
characteristics. See Equity Securities above for a fuller description of convertible securities.
The Fund may invest in corporate
debt securities issued by infrastructure companies.
Securities Issued in Connection with Reorganizations and Corporate Restructuring.
In connection with reorganizing or restructuring of an issuer or its capital structure, an issuer may issue common stock or other securities to holders of debt instruments. The Fund may hold such common stock and other securities even though it
does not ordinarily purchase or may not be permitted to purchase such securities.
Zero Coupon Securities.
The Fund may invest
in zero coupon securities. Zero coupon securities are notes, bonds and debentures that (1) do not pay current interest and are issued at a substantial discount from par value, (2) have been stripped of their unmatured interest coupons and
receipts or (3) pay no interest until a stated date one or more years into the future. These securities also include certificates representing interests in such stripped coupons and receipts. Zero coupon securities trade at a discount from
their par value and are subject to greater fluctuations of market value in response to changing interest rates.
Government Zero Coupon
Securities.
The Fund may invest in (i) Government Securities that have been stripped of their unmatured interest coupons, (ii) the coupons themselves and (iii) receipts or certificates representing interests in stripped Government
Securities and coupons (collectively referred to as Government zero coupon securities).
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MortgageRelated And Other AssetBacked Securities.
The forms of
mortgagerelated and other assetbacked securities the Fund may invest in include the securities described below.
Mortgage
PassThrough Securities.
Mortgage passthrough securities are securities representing interests in pools of mortgages in which payments of both interest and principal on the securities are generally made monthly. The
securities are passthrough securities because they provide investors with monthly payments of principal and interest which in effect are a passthrough of the monthly payments made by the individual borrowers on
the underlying mortgages, net of any fees paid to the issuer or guarantor. The principal governmental issuer of such securities is the Government National Mortgage Association (GNMA), which is a wholly owned U.S. government corporation
within the Department of Housing and Urban Development. Government related issuers include the Federal Home Loan Mortgage Corporation (FHLMC), a corporate instrumentality of the United States created pursuant to an Act of Congress, and
which is owned entirely by the Federal Home Loan Banks, and the Federal National Mortgage Association (FNMA), a government sponsored corporation owned entirely by private stockholders. Commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and other secondary market issuers also create passthrough pools of conventional residential mortgage loans. Such issuers may be the originators of the underlying mortgage loans as well as
the guarantors of the mortgagerelated securities.
Collateralized Mortgage Obligations.
Collateralized mortgage obligations
(CMOs) are hybrid instruments with characteristics of both mortgagebacked bonds and mortgage passthrough securities. Similar to a bond, interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may
be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage passthrough securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are structured into multiple classes (or tranches), with each class
bearing a different stated maturity.
AssetBacked Securities.
Assetbacked securities represent undivided fractional
interests in pools of instruments, such as consumer loans, and are similar in structure to mortgagerelated passthrough securities. Payments of principal and interest are passed through to holders of the securities and are typically
supported by some form of credit enhancement, such as a letter of credit liquidity support, surety bond, limited guarantee by another entity or by priority to certain of the borrowers other securities. The degree of enhancement varies,
generally applying only until exhausted and covering only a fraction of the securitys par value. If the credit enhancement held by the Fund has been exhausted, and if any required payments of principal and interest are not made with respect to
the underlying loans, the Fund may experience loss or delay in receiving payment and a decrease in the value of the security.
To-Be-Announced Mortgage-Backed Securities.
The Fund may invest in to-be announced mortgage-backed securities. As with other delayed-delivery
transactions, a seller agrees to issue a to be announced mortgage-backed security (a TBA) at a future date. A TBA transaction arises when a mortgage-backed security, such as a GNMA pass-through security, is purchased or sold with
specific pools that will constitute that GNMA pass-through security to be announced on a future settlement date. However, at the time of purchase, the seller does not specify the particular mortgage-backed securities to be delivered. Instead, a Fund
agrees to accept any mortgage-backed security that meets specified terms. Thus, the Fund and the seller would agree upon the issuer, interest rate and terms of the underlying mortgages, but the seller would not identify the specific underlying
mortgages until shortly before it issues the mortgage-backed security. TBAs increase interest rate risks because the underlying mortgages may be less favorable than anticipated by the Fund.
Risk Factors.
The value of the Funds mortgage-backed securities (MBS) may be affected by, among other things, changes or perceived changes in interest rates, factors concerning
the interests in and structure of the issuer or the originator of the mortgage, or the quality of the mortgages underlying the securities. The mortgages underlying the securities may default or decline in quality or value. Through its investments in
MBS, the Fund has exposure to subprime loans, Alt-A loans and non-conforming loans as well as to the mortgage and credit markets generally. Underlying collateral related to subprime, Alt-A and non-conforming mortgage loans has become increasingly
susceptible to defaults and declines in quality or value, especially in a declining residential real estate market. In addition, regulatory or tax changes may adversely affect the mortgage securities markets as a whole.
MBS often have stated maturities of up to thirty years when they are issued, depending upon the length of the mortgages underlying the securities. In
practice, however, unscheduled or early payments of principal and interest on the underlying mortgages may make the securities effective maturity shorter than this, and the prevailing interest rates may be higher or lower than the current
yield of the Funds portfolio at the time the Fund receives the payments for reinvestment.
Rising or high interest rates may result in
slower than expected principal payments which may tend to extend the duration of MBS, making them more volatile and more sensitive to changes in interest rates. This is known as extension risk. MBS may have less potential for capital appreciation
than comparable fixed income securities due to the likelihood of increased prepayments of
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mortgages resulting from foreclosures or declining interest rates. These foreclosed or refinanced mortgages are paid off at face value (par) or less, causing a loss, particularly for any investor
who may have purchased the security at a premium or a price above par. In such an environment, this risk limits the potential price appreciation of these securities.
MBS held by the Fund may be issued by private issuers including commercial banks, savings associations, mortgage companies, investment banking firms, finance companies and special purpose finance entities
(called special purpose vehicles or SPVs) and other entities that acquire and package mortgage loans for resale as MBS. These privately issued non-governmental MBS may offer higher yields than those issued by government entities, but also may be
subject to greater price changes and other risks than governmental issues. Subprime loans refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. Alt-A loans refer to loans
extended to borrowers who have incomplete documentation of income, assets, or other variables that are important to the credit underwriting processes. Non-conforming mortgages are loans that do not meet the standards that allow purchase by
government-sponsored enterprises. MBS with exposure to subprime loans, Alt-A loans or non-conforming loans have had in many cases higher default rates than those loans that meet government underwriting requirements. The risk of non-payment is
greater for MBS that are backed by mortgage pools that contain subprime, Alt-A and non-conforming loans, but a level of risk exists for all loans.
Unlike MBS issued or guaranteed by the U.S. government or a government sponsored entity (e.g., Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage
Corporation), MBS issued by private issuers do not have a government or government-sponsored entity guarantee, but may have credit enhancements provided by external entities such as banks or financial institutions or achieved through the structuring
of the transaction itself. Examples of such credit support arising out of the structure of the transaction include the issue of senior and subordinated securities (e.g., the issuance of securities by an SPV in multiple classes or
tranches, with one or more classes being senior to other subordinated classes as to the payment of principal and interest, with the result that defaults on the underlying mortgage loans are borne first by the holders of the subordinated
class); creation of reserve funds (in which case cash or investments, sometimes funded from a portion of the payments on the underlying mortgage loans, are held in reserve against future losses); and overcollateralization (in
which case the scheduled payments on, or the principal amount of, the underlying mortgage loans exceeds that required to make payment on the securities and pay any servicing or other fees). However, there can be no guarantee that credit
enhancements, if any, will be sufficient to prevent losses in the event of defaults on the underlying mortgage loans. In addition, MBS that are issued by private issuers are not subject to the underwriting requirements for the underlying mortgages
that are applicable to those MBS that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying private MBS may, and frequently do, have less favorable collateral, credit risk or other underwriting
characteristics than government or government-sponsored MBS and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently include second mortgages,
high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label MBS pool may vary to a greater extent than those included in a government guaranteed pool, and the pool
may include subprime mortgage loans.
Privately issued MBS are not traded on an exchange and there may be a limited market for the securities,
especially when there is a perceived weakness in the mortgage and real estate market sectors. Without an active trading market, MBS held in the Funds portfolio may be particularly difficult to value because of the complexities involved in
assessing the value of the underlying mortgage loans.
Asset-backed securities may include MBS, loans, receivables or other assets. The value
of the Funds asset-backed securities may be affected by, among other things, actual or perceived changes in interest rates, factors concerning the interests in and structure of the issuer or the originator of the receivables, the markets
assessment of the quality of underlying assets or actual or perceived changes in the creditworthiness of the individual borrowers, the originator, the servicing agent or the financial institution providing the credit support.
Payment of principal and interest may be largely dependent upon the cash flows generated by the assets backing the securities. Rising or high interest
rates tend to extend the duration of asset-backed securities, making them more volatile and more sensitive to changes in interest rates. The underlying assets are sometimes subject to prepayments, which can shorten the securitys weighted
average life and may lower its return. Defaults on loans underlying asset-backed securities have become an increasing risk for asset-backed securities that are secured by home-equity loans related to sub-prime, Alt-A or non-conforming mortgage
loans, especially in a declining residential real estate market.
Asset-backed securities (other than MBS) present certain risks that are not
presented by MBS. Primarily, these securities may not have the benefit of any security interest in the related assets. 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. 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
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often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors on underlying assets to make payments, the securities
may contain elements of credit support which 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 results from payment of the insurance obligations on
at least a portion of the assets in the pool. This protection may be provided through guarantees, policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a
combination of such approaches. The Fund 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. The availability of asset-backed securities may be
affected by legislative or regulatory developments. It is possible that such developments may require the Fund to dispose of any then existing holdings of such securities.
Collateralized Loan Obligations.
The Fund may invest in collateralized loan obligations (CLOs). CLOs are special purpose entities which are collateralized mainly by a pool of loans,
which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. CLOs may charge management and
other administrative fees. Payments of principal and interest are passed through to investors in a CLO and divided into several tranches of rated debt securities and typically at least one tranche of unrated subordinated securities, which may be
debt or equity (CLO Securities). CLO Securities generally receive some variation of principal and/or interest installments and, with the exception of certain subordinated securities, bear different interest rates. If there are defaults
or a CLOs collateral otherwise underperforms, scheduled payments to senior tranches typically take priority over less senior tranches.
Risk Factors
In addition to normal
risks associated with debt obligations and fixed income and/or asset-backed securities as discussed elsewhere in this SAI and the Prospectus (e.g., credit risk, interest rate risk, market risk, default risk and prepayment risk), CLOs carry
additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments and one or more tranches may be subject to up to 100% loss of invested
capital; (ii) the quality of the collateral may decline in value or default; (iii) the Fund may invest in CLOs that are subordinate to other classes; and (iv) the complex structure of the security may not be fully understood at the
time of investment and may produce disputes with the issuer or unexpected investment results.
A CLOs investments in its underlying
assets may be CLO Securities that are privately placed and thus are subject to restrictions on transfer to meet securities law and other legal requirements. In the event that the Fund does not satisfy certain of the applicable transfer restrictions
at any time that it holds CLO Securities, it may be forced to sell the related CLO Securities and may suffer a loss on sale. CLO Securities generally will be considered illiquid as there may be no secondary market for the CLO Securities.
Structured Investment Vehicles.
Certain investments in derivatives, including structured instruments as well as investments in
mortgage-backed securities and asset-backed securities, involve the purchase of securities from structured investment vehicles (SIVs). SIVs are legal entities that are sponsored by banks, broker-dealers or other financial firms specifically created
for the purpose of issuing particular securities or instruments. SIVs are often leveraged and securities issued by SIVs may have differing credit ratings. Investments in SIVs present Counterparty risks, although they may be subject to a guarantee or
other financial support by the sponsoring entity. Investments in SIVs may be more volatile, less liquid and more difficult to price accurately than other types of investments.
Because SIVs depend on short-term funding through the issuance of new debt, if there is a slowdown in issuing new debt or a smaller market of purchasers of the new debt, the SIVs may have to liquidate
assets at a loss. Also, with respect to SIVs assets in finance companies, the Fund may have significant exposure to the financial services market which, depending on market conditions, could have a negative impact on the Fund.
Loans and Other Direct Indebtedness.
The Fund may purchase loans or other direct indebtedness, or participations in loans or other direct
indebtedness, that entitles the acquiror of such interest to payments of interest, principal and/or other amounts due under the structure of the loan or other direct indebtedness. In addition to being structured as secured or unsecured, such
investments could be structured as novations or assignments or represent trade or other claims owed by a company to a supplier. Loan participations typically represent direct participation in a loan to a corporate borrower, and generally are offered
by banks or other financial institutions or lending syndicates.
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Risk Factors.
Loans and other direct indebtedness involve the risk that the Fund will not receive
payment of principal, interest and other amounts due in connection with these investments and will depend primarily on the financial condition of the borrower. Loans that are fully secured offer the Fund more protection than an unsecured loan in the
event of non-payment of scheduled interest or principal, although there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrowers obligation, or that the collateral can be liquidated. Some
loans or claims may be in default at the time of purchase. Certain of the loans and the other direct indebtedness acquired by the Fund may involve revolving credit facilities or other standby financing commitments which obligate the Fund to pay
additional cash on a certain date or on demand. These commitments may require the Fund to increase its investment in a company at a time when the Fund might not otherwise decide to do so (including at a time when the companys financial
condition makes it unlikely that such amounts will be repaid). To the extent that the Fund is committed to advance additional funds, it will at all times hold and maintain in a segregated account cash or other high-grade debt obligations in an
amount sufficient to meet such commitments.
As the Fund may be required to rely upon another lending institution to collect and pass onto the
Fund amounts payable with respect to the loan and to enforce the Funds rights under the loan and other direct indebtedness, an insolvency, bankruptcy or reorganization of the lending institution may delay or prevent the Fund from receiving
such amounts. The highly leveraged nature of many such loans and other direct indebtedness may make such loans and other direct indebtedness especially vulnerable to adverse changes in economic or market conditions. Investments in such loans and
other direct indebtedness may involve additional risk to the Fund.
In purchasing loans or loan participations, the Fund assumes the credit
risk associated with the corporate buyer and may assume the credit risk associated with the interposed bank or other financial intermediary. The participation may not be rated by a nationally recognized rating service. Further, loan participations
may not be readily marketable and may be subject to restrictions on resale. Loan participations are generally illiquid investments and are priced through a nationally recognized pricing service which determines loan prices by surveying available
dealer quotations. If the corporate borrower defaults on its obligations, the Fund may end up owning the underlying collateral.
Credit
Linked Notes, Credit Options and Similar Instruments.
The Fund may invest in credit linked notes, credit options and similar instruments. Credit linked notes are obligations between two or more parties where the payment of principal and/or
interest is based on the performance of some obligation, basket of obligations, index or economic indicator (a reference instrument). In addition to the credit risk associated with the reference instrument and interest rate risk, the
buyer and seller of a credit linked note or similar structured investment are subject to counterparty risk. Credit options are options whereby the purchaser has the right, but not the obligation, to enter into a transaction involving either an asset
with inherent credit risk or a credit derivative, at terms specified at the initiation of the option. These transactions involve counterparty risk.
Brady Bonds.
The Fund may invest in Brady Bonds, the products of the Brady Plan, under which bonds are issued in exchange for cash and certain of a countrys outstanding
commercial bank loans. The Brady Plan offers relief to debtor countries that have effected substantial economic reforms. Specifically, debt reduction and structural reform are the main criteria countries must satisfy in order to obtain Brady Plan
status. Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily U.S.dollar) and are actively traded on the overthecounter market.
Bank Instruments.
The Fund may invest in bank instruments, which include Eurodollar certificates of deposit (ECDs), Eurodollar time deposits (ETDs) and Yankee
Certificates of Deposit (Yankee CDs).
Risk Factors.
ECDs, ETDs, and Yankee CDs are subject to somewhat different risks
from the obligations of domestic banks. ECDs are U.S. dollar denominated certificates of deposit issued by foreign branches of U.S. and foreign banks; ETDs are U.S. dollar denominated time deposits in a foreign branch of a U.S. bank or a foreign
bank; and Yankee CDs are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the United States.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan limitations, examinations, accounting, auditing and recordkeeping, and the public availability of information.
High Risk Bonds.
The Fund may invest their assets in securities rated BBB or lower by S&P, Baa3 or lower by Moodys or BBB or lower by Fitch (using highest of split ratings),
or in unrated securities judged by the money managers to be of similar credit quality to those designations. Securities rated BBB by S&P, Baa3 by Moodys or BBB by Fitch are the lowest ratings which are considered investment
grade, although Moodys considers securities rated Baa3, S&P considers bonds rated BBB and Fitch considers bonds rated BBB, to have some speculative characteristics. The Fund may be required by their prospectus or investment
guidelines to dispose of, in a prudent and orderly fashion, a security if its ratings drop below these minimum ratings.
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Risks Associated with High Risk Bonds.
These lower rated debt securities are commonly referred to as
junk bonds. Lower rated debt securities, or junk bonds, generally offer a higher yield than that available from higher grade issues but involve higher risks because they are especially subject to adverse changes in general economic
conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates,
highly leveraged issuers may experience financial stress which could adversely affect their ability to make payments of principal and interest and increase the possibility of default. Conversely, periods of economic expansion or falling interest
rates enhance the ability of issuers to make payments of principal and interest and decrease the possibility of default. The market for lower rated debt securities is generally thinner and less active than that for higher quality securities, which
would limit the Funds ability to sell such securities at fair value in response to changes in the economy or the financial markets. While such debt may have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Securities rated BBB by S&P Baa3 by Moodys or BBB by Fitch may
involve greater risks than securities in higher rating categories. Securities receiving S&Ps BBB rating are regarded as having adequate capacity to pay interest and repay principal. Such securities typically exhibit adequate investor
protections but adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rating categories. For further description of the
various rating categories, see Ratings of Debt Instruments.
Securities possessing Moodys Baa3 rating are considered medium
grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security is judged adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such securities lack outstanding investment characteristics and in fact may have speculative characteristics as well.
Securities possessing Fitchs BBB rating indicate that there are currently expectations of low credit risk. The capacity for payment of financial
commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity. This is the lowest investment grade category.
Lower rated or unrated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of low rated debt
securities have been found to be less sensitive to interest rate changes than investment grade securities, but more sensitive to economic downturns, individual corporate developments, and price fluctuations in response to changing interest rates. A
projection of an economic downturn or of a period of rising interest rates, for example, could cause a sharper decline in the prices of low rated debt securities because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If the issuer of low rated debt securities defaults, the Fund may incur additional expenses to seek financial recovery.
In addition, the markets in which low rated or unrated debt securities are traded are generally thinner, more limited and less active than those for higher rated securities. The existence of limited
markets for particular securities may diminish the Funds ability to sell the securities at fair value either to meet redemption requests or to respond to changes in the economy or in the financial markets and could adversely affect and cause
fluctuations in the daily net asset value of the Funds Shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of low rated securities may be more complex than for issuers of other
investment grade securities, and the ability of the Fund to achieve its investment objectives may be more dependent on credit analysis than would be the case if the Fund was investing only in investment grade securities.
The money managers of the Fund may use ratings to assist in investment decisions. Ratings of debt securities represent a rating agencys opinion
regarding their quality and are not a guarantee of quality. Rating agencies attempt to evaluate the safety of principal and interest payments and do not evaluate the risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an issuers current financial condition may be better or worse than a rating indicates.
Auction Market and Remarketed Preferred Stock.
The Fund may purchase certain types of auction market preferred stock (AMPS) or remarketed preferred stock (RPS) subject to a
demand feature. These purchases may include AMPS and RPS issued by closed-end investment companies. AMPS and RPS may be deemed to meet the maturity and quality requirements of money market funds if they are structured to comply with conditions
established by the SEC. AMPS and RPS subject to a demand feature, despite their status as equity securities, are economically similar to variable rate debt securities subject to a demand feature. Both AMPS and RPS allow the holder to sell the stock
at a liquidation preference value at specified periods, provided that the auction or remarketing, which are typically held weekly, is successful. If the auction or remarketing fails, the
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holder of certain types of AMPS or RPS may exercise a demand feature and has the right to sell the AMPS or RPS to a third party guarantor or Counterparty at a price that can reasonably be
expected to approximate its amortized cost. The ability of a bank or other financial institution providing the demand feature to fulfill its obligations might be affected by possible financial difficulties of its borrowers, adverse interest rate or
economic conditions, regulatory limitations, or other factors.
Alternative Minimum Tax Bonds.
The Fund may invest without limit in
Alternative Minimum Tax Bonds, which are certain bonds issued after August 7, 1986 to finance certain non-governmental activities. While the income from Alternative Minimum Tax Bonds is exempt from regular federal income tax, it is
a tax preference item for purposes of the federal individual and corporate alternative minimum tax. The alternative minimum tax is a special tax that applies to taxpayers who have certain adjustments or tax preference items. Available
returns on Alternative Minimum Tax Bonds acquired by the Fund may be lower than those from other Municipal Obligations acquired by the Fund due to the possibility of federal, state and local alternative minimum or minimum income tax liability on
Alternative Minimum Tax Bonds.
Event-Linked Bonds.
The Fund may invest in event-linked bonds. Event-linked bonds are fixed
income securities for which the return of principal and payment of interest is contingent on the non-occurrence of a specific trigger event, such as a hurricane, earthquake, or other physical or weather-related phenomenon. They may be
issued by government agencies, insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore entities. If a trigger event causes losses exceeding a specific amount in the geographic region and time period specified in
a bond, the Fund may lose a portion or all of its principal invested in the bond. If no trigger event occurs, the Fund will recover its principal plus interest. For some event-linked bonds, the trigger event or losses may be based on company-wide
losses, index-portfolio losses, industry indices, or readings of scientific instruments rather than specified actual losses. Often the event-linked bonds provide for extensions of maturity that are mandatory, or optional at the discretion of the
issuer, in order to process and audit loss claims in those cases where a trigger event has, or possibly has, occurred. In addition to the specified trigger events, event-linked bonds may also expose the Fund to certain unanticipated risks including
but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations, and adverse tax consequences.
Event-linked
bonds are a relatively new type of financial instrument. As such, there is no significant trading history for these securities, and there can be no assurance that a liquid market in these instruments will develop. Lack of a liquid market may impose
the risk of higher transaction costs and the possibility that the Fund may be forced to liquidate positions when it would not be advantageous to do so. Event-linked bonds are typically rated, and the Fund will only invest in catastrophe bonds that
meet the credit quality requirements for the Fund.
Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds
.
The
Funds investments in fixed income securities may include deferred interest, pay-in-kind (PIK) and capital appreciation bonds. Deferred interest and capital appreciation bonds are debt securities issued or sold at a discount from
their face value and which do not entitle the holder to any periodic payment of interest prior to maturity or a specified date. The original issue discount varies depending on the time remaining until maturity or cash payment date, prevailing
interest rates, the liquidity of the security and the perceived credit quality of the issuer. These securities also may take the form of debt securities that have been stripped of their unmatured interest coupons, the coupons themselves or receipts
or certificates representing interests in such stripped debt obligations or coupons. The market prices of deferred interest, capital appreciation bonds and PIK securities generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest rates than interest bearing securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the issuer with the option of paying interest or dividends on such obligations in cash or in the form of additional securities
rather than cash. Similar to deferred interest bonds, PIK securities are designed to give an issuer flexibility in managing cash flow. PIK securities that are debt securities can be either senior or subordinated debt and generally trade flat (i.e.,
without accrued interest). The trading price of PIK debt securities generally reflects the market value of the underlying debt plus an amount representing accrued interest since the last interest payment.
Deferred interest, capital appreciation and PIK securities involve the additional risk that, unlike securities that periodically pay interest to
maturity, the Fund will realize no cash until a specified future payment date unless a portion of such securities is sold and, if the issuer of such securities defaults, the Fund may obtain no return at all on its investment. In addition, even
though such securities do not provide for the payment of current interest in cash, the Fund is nonetheless required to accrue income on such investments for each taxable year and generally is required to distribute such accrued amounts (net of
deductible expenses, if any) to avoid being subject to tax. Because no cash is generally received at the time of the accrual, the Fund may be required to liquidate other portfolio securities to obtain sufficient cash to satisfy federal tax
distribution requirements applicable to the Fund. A portion of the discount with respect to stripped tax-exempt securities or their coupons may be taxable.
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Municipal Debt Instruments.
The recent economic downturn and budgetary constraints have made
municipal securities more susceptible to downgrade, default and bankruptcy. In addition, difficulties in the municipal securities markets could result in increased illiquidity, price volatility and credit risk, and a decrease in the number of
municipal securities investment opportunities. The value of municipal securities may also be affected by uncertainties involving the taxation of municipal securities or the rights of municipal securities holders in the event of a bankruptcy.
Proposals to restrict or eliminate the federal income tax exemption for interest on municipal securities are introduced before Congress from time to time. These uncertainties could affect the municipal securities market generally, certain specific
segments of the market, or the relative credit quality of particular securities.
Municipal Obligations and Bonds.
The Fund may
invest in municipal obligations. Municipal obligations are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities,
or multistate agencies or authorities the interest from which may be exempt from federal income tax in the opinion of bond counsel to the issuer. Municipal obligations include debt obligations issued to obtain funds for various public purposes
and certain industrial development bonds issued by or on behalf of public authorities. Municipal obligations are classified as general obligation bonds, revenue bonds and notes. Municipal bonds generally have maturities of more than one year when
issued and have two principal classifications General Obligation Bonds and Revenue Bonds.
General Obligation
Bonds
are secured by the issuers pledge of its faith, credit and taxing power for the payment of principal and interest.
Revenue Bonds
are payable only from the revenues derived from a particular facility or group of facilities or from the proceeds of special excise or other specific revenue service.
Industrial Development Bonds
are a type of revenue bond and do not generally constitute the pledge of credit of
the issuer of such bonds but rather the pledge of credit by the core obligor. The payment of the principal and interest on such bonds is dependent on the facilitys user to meet its financial obligations and the pledge, if any, of real and
personal property financed as security for such payment. Industrial development bonds are issued by or on behalf of public authorities to raise money to finance public and private facilities for business, manufacturing, housing, ports, pollution
control, airports, mass transit and other similar type projects.
Municipal Notes.
The Fund may invest in municipal notes.
Municipal notes generally have maturities of one year or less when issued and are used to satisfy shortterm capital needs. Municipal notes include:
Tax Anticipation Notes
issued to finance working capital needs of municipalities and are generally issued in anticipation of future tax revenues.
Bond Anticipation Notes
issued in expectation of a municipality issuing a longterm bond in the future. Usually the
longterm bonds provide the money for the repayment of the notes.
Revenue Anticipation Notes
issued in
expectation of receipt of other types of revenues such as certain federal revenues.
Construction Loan Notes
sold
to provide construction financing and may be insured by the Federal Housing Administration. After completion of the project, FNMA or GNMA frequently provides permanent financing.
Pre-Refunded Municipal Bonds
bonds no longer secured by the credit of the issuing entity, having been escrowed with U.S.
Treasury securities as a result of a refinancing by the issuer. The bonds are escrowed for retirement either at original maturity or at an earlier call date.
Tax Free Commercial Paper
a promissory obligation issued or guaranteed by a municipal issuer and frequently accompanied by a letter of credit of a commercial bank. It is used by agencies of
state and local governments to finance seasonal working capital needs, or as shortterm financing in anticipation of longterm financing.
Variable Rate Demand Notes
long term, taxable, or tax-exempt bonds issued on a variable rate basis that can be tendered for purchase at par whenever rates reset upon contractual notice by
the investor. The bonds tendered are then resold by the remarketing agent in the secondary market to other investors. Variable Rate Demand Notes can be converted to a long term fixed rate security upon appropriate notice by the issuer. The
Funds money managers will continually monitor the pricing, quality and liquidity of the floating and variable rate demand instruments held by the Fund.
-43-
Tax Free Participation Certificates
tax free floating, or variable rate demand
notes which are issued by a municipal or governmental entity that sells a participation in the note. They are usually purchased by the Fund to maintain liquidity. The Funds money managers will continually monitor the pricing, quality and
liquidity of the participation certificates.
A participation certificate gives the Fund an undivided interest in the municipal
obligation in the proportion that the Funds participation interest bears to the total principal amount of the municipal obligation and provides the demand feature described below. Each participation is backed by: an irrevocable letter of
credit or guaranty of a bank which may be the bank issuing the participation certificate, a bank issuing a confirming letter of credit to that of the issuing bank, or a bank serving as agent of the issuing bank with respect to the possible
repurchase of the certificate of participation; or an insurance policy of an insurance company that the money manager has determined meets the prescribed quality standards for the Fund. The Fund has the right to sell the participation certificate
back to the institution and draw on the letter of credit or insurance on demand after thirty days notice for all or any part of the full principal amount of the Funds participation interest in the security plus accrued interest. The
Funds money managers intend to exercise the demand feature only (1) upon a default under the terms of the bond documents, (2) as needed to provide liquidity to the Fund in order to make redemptions of Fund Shares, or (3) to
maintain the required quality of its investment portfolios.
The institutions issuing the participation certificates will
retain a service and letter of credit fee and a fee for providing the demand feature, in an amount equal to the excess of the interest paid on the instruments over the negotiated yield at which the participations were purchased by the Fund. The
total fees generally range from 5% to 15% of the applicable prime rate or other interest rate index. The Fund will attempt to have the issuer of the participation certificate bear the cost of the insurance. The Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be a capitalized expense of the Fund.
Demand Notes.
The Fund
may purchase obligations with the right to a put or stand by commitment. A put on a municipal obligation obligates the seller of the put to buy within a specified time and at an agreed upon price a municipal
obligation the put is issued with. A standby commitment is a commitment by an underwriter to purchase for resale any part of a new issue offered to current shareholders in a rights offering which remains unsubscribed.
The Fund may also invest in demand notes and the Fund may invest in variable rate demand notes that are supported by credit and liquidity enhancements
from U.S. government agencies. Demand notes are obligations with a put right obligating the provider of the put to buy the security within a specified time and at an agreed upon price. Variable rate demand notes are floating rate
instruments with terms of as much as 40 years which pay interest monthly or quarterly based on a floating rate that is reset daily or weekly based on an index of short-term municipal rates. Liquidity is provided with a put feature, which allows the
holder to put the security at par plus accrued interest on any interest rate reset date, usually with one or seven days notice. Variable rate demand notes almost always have credit enhancement in the form of either a letter of credit or bond
insurance.
The Fund will enter into put and standby commitments with institutions such as banks and brokerdealers that the
Funds money managers continually believe satisfy the Funds credit quality requirements.
Risk Factors.
The ability of the
Fund to exercise the put or standby commitment may depend on the sellers ability to purchase the securities at the time the put or standby commitment is exercised or on certain restrictions in the buy back arrangement. Such
restrictions may prohibit the Fund from exercising the put or standby commitment except to maintain portfolio flexibility and liquidity. In the event the seller would be unable to honor a put or standby commitment for financial reasons,
the Fund may, in the opinion of Funds management, be a general creditor of the seller. There may be certain restrictions in the buy back arrangement which may not obligate the seller to repurchase the securities. (See, Certain
Investments Municipal Notes Tax Free Participation Certificates.)
The Fund may purchase from issuers floating
or variable rate municipal obligations some of which are subject to payment of principal by the issuer on demand by the Fund (usually not more than thirty days notice). The Fund may also purchase floating or variable rate municipal obligations
or participations therein from banks, insurance companies or other financial institutions which are owned by such institutions or affiliated organizations. Each participation is usually backed by an irrevocable letter of credit, or guaranty of a
bank or insurance policy of an insurance company.
Variable Amount Master Demand Notes.
The Fund may invest in variable amount
master demand notes. Variable amount master demand notes are unsecured obligations redeemable upon notice that permit investment of fluctuating amounts at varying rates of interest pursuant to direct arrangements with the issuer of the instrument. A
variable amount master demand note differs from ordinary commercial paper in that (1) it is issued pursuant to a written agreement between the issuer and the holders, (2) its amount may, from time to time, be increased (may be subject to
an agreed maximum) or decreased by the holder of the issue, (3) it is payable on demand, (4) its rate of interest payable varies with an agreed upon formula and (5) it is not typically rated by a rating agency.
-44-
Variable and Floating Rate Securities.
The Fund may invest in variable and floating rate
securities. A floating rate security is one whose terms provide for the automatic adjustment of an interest rate whenever the specified interest rate changes. A variable rate security is one whose terms provide for the automatic establishment of a
new interest rate on set dates. The interest rate on floating rate securities is ordinarily tied to and is a specified margin above or below the prime rate of a specified bank or some similar objective standard, such as the yield on the 90day
U.S. Treasury Bill rate, and may change as often as daily. Generally, changes in interest rates on variable and floating rate securities will reduce changes in the securities market value from the original purchase price resulting in the
potential for capital appreciation or capital depreciation being less than for fixedincome obligations with a fixed interest rate.
The
Fund may purchase variable rate U.S. government obligations which are instruments issued or guaranteed by the U.S. government, or an agency or instrumentality thereof, which have a rate of interest subject to adjustment at regular intervals but no
less frequently than every 762 days. Variable rate U.S. government obligations whose interest rates are readjusted no less frequently than every 762 days will be deemed to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
Commercial Paper.
The Fund may invest in commercial paper, which consists of short-term (usually 1 to 270
days) unsecured promissory notes issued by corporations in order to finance their current operations.
Asset-Backed Commercial
Paper.
The Fund may invest in asset-backed commercial paper. This is commercial paper issued by a bankruptcy remote special purpose entity to fund the acquisition of financial assets (such as trade receivables, commercial loans, auto and
equipment loans, leases or collateral debt obligations) that is repaid from the cash flows of those receivables on a specific date.
Indexed Commercial Paper.
The Fund may invest in indexed commercial paper, which is U.S.dollar denominated commercial paper the yield
of which is linked to certain foreign exchange rate movements. The yield to the investor on indexed commercial paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency as of or about
that time. The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields
on U.S.dollar denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
While such commercial paper entails risk of loss of principal, the potential risk for realizing gains as a result of changes in foreign currency exchange
rates enables the Fund to hedge (or crosshedge) against a decline in the U.S. dollar value of investments denominated in foreign currencies while providing an attractive money market rate of return.
Funding Agreements.
The Fund may invest in various types of funding agreements. A funding agreement is an obligation of indebtedness
negotiated privately between an investor and an insurance company. A funding agreement has a fixed maturity date and may have either a fixed or variable interest rate that is based on an index and guaranteed for a set time period. Because there is
normally no secondary market for these investments, funding agreements purchased by the Fund may be regarded as illiquid and therefore will be subject to the Funds limitation on illiquid investments.
Investment in the Subsidiary
The Fund
will invest up to 25% of its total assets in the shares of its wholly-owned and controlled Subsidiary. Investments in the Subsidiary are expected to provide the Fund with exposure to the commodity markets within the limitations of Subchapter M of
the Code and recent IRS rulings, as discussed below under TaxesTax Treatment of Commodity-Linked Swaps and Structured Notes. The Subsidiary is managed by RIMCo and advised by certain of the money managers. The Subsidiary (unlike
the Fund) may invest without limitation in commodity-linked securities and derivative instruments (including futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and
swaptions), exchange traded funds, exchange traded notes and commodity-linked structured notes. However, the Subsidiary is otherwise subject to the same fundamental, non-fundamental and certain other investment restrictions as the Fund, including
the timing and method of the valuation of the Subsidiarys portfolio investments and shares of the Subsidiary. The Subsidiary is managed pursuant to compliance policies and procedures that are the same, in all material respects, as the policies
and procedures adopted by the Fund. The Subsidiary is a company organized under the laws of the Cayman Islands, and is overseen by its own board of directors. The Fund is the sole shareholder of the Subsidiary, and it is not currently expected that
shares of the Subsidiary will be sold or offered to other investors.
-45-
By investing in the Subsidiary, the Fund would be indirectly exposed to the risks associated with the
Subsidiarys investments. The derivatives and other investments held by the Subsidiary would provide exposure similar to that held by the Fund and would be subject to the same risks that apply to similar investments if held directly by the
Fund. The Subsidiary invests primarily in commodity-linked derivative instruments, including futures and options contracts with respect to indexes or individual commodities, options on futures contracts, swap agreements and swaptions. Although the
Fund may enter into these commodity-linked derivative instruments directly, the Fund will likely gain exposure to these derivative instruments indirectly by investing in the Subsidiary. To the extent that a money manager believes that these
commodity-linked derivative instruments are better suited to provide exposure to the commodities market than commodity index linked notes, the Funds investment in the Subsidiary will likely increase. The Subsidiary will also invest in fixed
income instruments, some of which are intended to serve as margin or collateral for the Subsidiarys derivatives position.
The Fund or
the Subsidiary may invest in derivative instruments linked to the value of a particular commodity or commodity futures contract, or a subset of commodities or commodity futures contracts, including swaps on commodity futures, or certain commodity
indices. The portion of the Funds or Subsidiarys assets exposed to any particular commodity or commodity sector will vary based on market conditions, but from time to time the portion could be substantial. To the extent that the Fund
invests in the Subsidiary, it may be subject to the risks associated with those derivative instruments and other securities discussed above.
Subject to its investment management agreement with the Subsidiary, RIMCo selects money managers for the Subsidiary, allocates Subsidiary assets among
money managers, oversees the money managers and evaluates the performance results. The Subsidiarys money managers select the individual portfolio securities for the assets assigned to them. Neither RIMCo nor the money managers receive any
additional compensation for doing so. The Subsidiary also has entered into an administration agreement with RFSC, pursuant to which RFSC provides certain administrative services for the Subsidiary, but receives no additional compensation for doing
so. The Subsidiary has also entered into separate contracts for the provision of custody, transfer agency, and accounting agent services with the same or with affiliates of the same service providers that provide those services to the Fund.
The Subsidiary is not registered under the 1940 Act, and, unless otherwise noted in the Prospectus or this SAI, is not subject to all the
investor protections of the 1940 Act. However, the Fund wholly owns and controls the Subsidiary, and the Fund and the Subsidiary are both managed by RIMCo, making it unlikely that the Subsidiary will take action contrary to the interests of the Fund
and its shareholders. The Funds Board of Trustees has oversight responsibility for the investment activities of the Fund, including its investment in the Subsidiary, and the Funds role as sole shareholder of the Subsidiary. As noted
above, the Subsidiary will be subject to the same investment restrictions and limitations, and follow the same compliance policies and procedures, as the Fund. In addition, changes in the laws of the United States and/or the Cayman Islands could
result in the inability of the Fund and/or the Subsidiary to operate as described in the Prospectus and the SAI and could adversely affect the Fund. For example, the Cayman Islands does not currently impose any income, corporate or capital gains
tax, estate duty, inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman Islands law changes such that the Subsidiary must pay Cayman Islands taxes, Fund shareholders would likely suffer decreased investment returns.
Other Financial Instruments Including Derivatives
Options, Futures and Other Financial Instruments.
The Fund may use various types of financial instruments, some of which are derivatives, to attempt to manage the risk of the Funds
investments or, in certain circumstances, for investment purposes (e.g., as a substitute for investing in securities). These financial instruments include options, futures, forward contracts and swaps. Positions in these financial instruments, other
than purchased options, expose the Fund to an obligation to another party. The Fund will not enter into any such transaction unless it owns (1) an offsetting (covered) position in securities, currencies or other options, futures
contracts or forward contracts or (2) cash or liquid assets with a value, marked-to-market daily, sufficient to cover their obligations to the extent not covered as provided in (1) above. The Fund will comply with SEC guidelines regarding
cover for these instruments and will, if the guidelines so require, designate the prescribed amount of cash or liquid assets as segregated.
Assets used as cover or held as segregated cannot be sold while the position in the corresponding financial instrument is open unless they are replaced
with other appropriate assets.
Options and Futures
.
The Fund may purchase and sell (write) both call and put
options on securities, securities indexes, and foreign currencies, and enter into interest rate, foreign currency and index futures contracts and purchase and sell options on such futures contracts for hedging purposes or to effect investment
transactions consistent with the Funds investment objective and strategies. If other types of options, futures contracts, or options on futures contracts are traded in the future, the Fund may also
-46-
use those instruments, provided that their use is consistent with the Funds investment objectives, and provided that their use is consistent with restrictions applicable to options and
futures contracts currently eligible for use by the Fund (i.e., that written call or put options will be covered or secured and that futures contracts and options on futures contracts will be used for the purposes of hedging
or effecting a Funds permitted investment strategies, provided that initial margin and premiums required to establish such non-hedging positions will not exceed 5% of the Funds net assets).
Options on Securities and Indexes.
The Fund may purchase and write both call and put options on securities and securities indexes in
standardized contracts traded on foreign or national securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on a regulated foreign or national overthecounter market, and agreements, sometimes called cash puts,
which may accompany the purchase of a new issue of bonds from a dealer. The Fund intend to treat options in respect of specific securities that are not traded on a national securities exchange and the securities underlying covered call options as
not readily marketable and therefore subject to the limitations on the Funds ability to hold illiquid securities. The Fund intends to purchase and write call and put options on specific securities.
Exchange-listed options are issued by a regulated intermediary, such as the Options Clearing Corporation (OCC), which guarantees the
performance of the obligations of the parties to such options. This discussion uses the OCC as an example but is also applicable to other financial intermediaries. With certain exceptions, OCC-issued and exchange-listed options generally settle by
physical delivery of the underlying security or currency although cash settlements may sometimes be available. Index options and Eurodollar instruments are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instruments exceeds, in the case of a call option, or is less than, in the case of a put option, the exercise price of the option) at the time the option is exercised. Frequently, rather than taking or making
delivery of the underlying instrument through the process of exercising the option, listed options are closed by entering into offsetting purchase or sale transactions that do not result in ownership of the new option.
The Funds ability to close out its position as a purchaser or seller of an OCC or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. If one or more exchanges decide to discontinue the trading of options (or a particular class or series of options), the relevant market for that option on that exchange would cease to exist, although outstanding
options on that exchange would generally continue to be exercisable in accordance with their terms.
Overthecounter options
(OTC Options) are purchased from or sold to securities dealers, financial institutions or other parties (Counterparties) through a direct bilateral agreement with the Counterparty. In contrast to exchange-listed options,
which generally have standardized terms and performance mechanics, all the terms of an OTC Option, including such terms as method of settlement, term, exercise price, premium, guarantees and security, are set by negotiation of the parties. The staff
of the SEC takes the position that OTC options and the assets used as cover for written OTC options are illiquid.
Unless the
parties provide for it, there is no central clearing or guaranty function in an OTC Option. As a result, if the Counterparty fails to make or take delivery of the security, currency or other instrument underlying an OTC Option it has entered into
with the Fund or fails to make a cash settlement payment due in accordance with the terms of that option, the Fund will lose any premium paid for the option and any anticipated benefits of the transaction. Accordingly, RIMCo or the money manager
must assess the creditworthiness of each such Counterparty or any guarantor or credit enhancement of the Counterpartys credit to determine the likelihood that the terms of the OTC Option will be satisfied. The Fund will engage in 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 have received (or the
guarantors or the obligations of which have received) a minimum long-term Counterparty credit rating, including reassignments, of A- or better as defined by S&P or an equivalent rating from any nationally recognized statistical rating
organization (using highest of split ratings) or, in the case of OTC currency transactions, determined to be of equivalent credit by RIMCo or the money manager for the Fund.
An option on a security (or securities index) is a contract that gives the purchaser of the option, in return for a premium, the right (but not the obligation) to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option the security underlying the option at a specified exercise price at any time during the option period. The writer of an option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price, in the case of a call option, or to pay the exercise price upon delivery of the underlying security, in the case of a put option. Upon exercise, the writer of an option on an index is
obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier (established by the exchange upon which the stock index is traded) for the index option. (An index is designed to
reflect specified facets of a particular financial or securities market, a specified group of financial instruments or securities, or certain economic indicators.) Options on securities indexes are similar to options on specific securities except
that settlement is in cash and gains and losses depend on price movements in the stock market generally (or in a particular industry or segment of the market), rather than price movements in the specific security.
-47-
The Fund may purchase a call option on securities to protect against substantial increases in prices of
securities the Fund intends to purchase pending its ability or desire to purchase such securities in an orderly manner or as a cost-efficient alternative to acquiring the securities for which the option is intended to serve as a proxy. The Fund may
purchase a put option on securities to protect holdings in an underlying or related security against a substantial decline in market value. Securities are considered related if their price movements generally correlate positively to one another.
The Fund will write call options and put options only if they are covered. In the case of a call option on a security, the option
is covered if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, liquid assets in such
amount are segregated) upon conversion or exchange of other securities held by the Fund. For a call option on an index, the option is covered if the Fund maintains liquid assets equal to the contract value. A call option is also covered if the Fund
holds a call on the same security or index as the call written where the exercise price of the call held is (1) equal to or less than the exercise price of the call written, or (2) greater than the exercise price of the call written,
provided the difference is maintained by the Fund in liquid segregated assets. A put option on a security or an index is covered if the Fund maintains liquid segregated assets equal to the exercise price. A put option is also covered if
the Fund holds a put on the same security or index as the put written where the exercise price of the put held is (1) equal to or greater than the exercise price of the put written, or (2) less than the exercise price of the put written,
provided the difference is maintained by the Fund in liquid segregated assets.
If an option written by the Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss (long or shortterm depending on whether the Funds holding period for
the option is greater than one year) equal to the premium paid.
To close out a position when writing covered options, the Fund may make a
closing purchase transaction, which involves purchasing an option on the same security with the same exercise price and expiration date as the option which it previously wrote on the security. To close out a position as a purchaser of an
option, the Fund may make a closing sale transaction, which involves liquidating the Funds position by selling the option previously purchased. The Fund will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and the amount received from the sale thereof.
Prior to the
earlier of exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price and expiration). There can be no assurance, however, that
a closing purchase or sale transaction can be effected when the Fund desires.
The Fund will realize a capital gain from a closing transaction
on an option it has written if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than
the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. With respect to closing transactions on purchased options, the capital gain or loss realized will be short or
longterm depending on the holding period of the option closed out. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an asset of the Fund. The premium received for an option written by the Fund is recorded as a liability. The value of an option purchased
or written is markedtomarket daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the last bid.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options on securities and
indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and judgment, and even a wellconceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security, in the case of
a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment (i.e., the premium paid) on the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
-48-
There can be no assurance that a liquid market will exist when the Fund seeks to close out an option
position. If the Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If the Fund were unable to close out a covered call
option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise.
As
the writer of a covered call option, the Fund forgoes, during the options life, the opportunity to profit from increases in the market value of the underlying security above the exercise price, but, as long as its obligation as a writer
continues, has retained a risk of loss should the price of the underlying security decline. Where the Fund writes a put option, it is exposed during the term of the option to a decline in the price of the underlying security.
If trading were suspended in an option purchased by the Fund, the Fund would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a
loss to the Fund; however, such losses may be mitigated by changes in the value of the Funds securities during the period the option was outstanding.
Options on Foreign Currency.
The Fund may buy and sell put and call options on foreign currencies either on exchanges or in the overthecounter market for the purpose of hedging against
changes in future currency exchange rates or to effect investment transactions consistent with the Funds investment objectives and strategies. Call options convey the right to buy the underlying currency at a price which is expected to be
lower than the spot price of the currency at the time the option expires. Put options convey the right to sell the underlying currency at a price which is anticipated to be higher than the spot price of the currency at the time the option expires.
Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Fund to reduce foreign currency risk using such options. OTC Options differ from traded options in that they are twoparty
contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchangetraded options.
Futures Contracts and Options on Futures Contracts
.
The Fund may invest in interest rate futures contracts, foreign currency futures contracts, Eurodollar futures or stock index futures
contracts, and options thereon that are traded on a U.S. or foreign exchange or board of trade or overthecounter. An interest rate, foreign currency or index futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of financial instruments (such as GNMA certificates or Treasury Bonds) or foreign currency or the cash value of an index at a specified price at a future date. A futures contract on an index (such as the S&P
500
®
) is an agreement between two parties (buyer and seller) to take or make delivery of an amount of cash equal
to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. In the case of futures contracts traded on U.S. exchanges, the exchange itself or
an affiliated clearing corporation assumes the opposite side of each transaction (i.e., as buyer or seller). A futures contract may be satisfied or closed out by delivery or purchase, as the case may be, of the financial instrument or by payment of
the change in the cash value of the index. Although the value of an index may be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering several
indexes as well as a number of financial instruments and foreign currencies. For example: the S&P 500
®
; the
Russell 2000
®
; Nikkei 225; CAC40; FTSE 100; and the NYSE composite; U.S. Treasury bonds; U.S.
Treasury notes; GNMA Certificates; threemonth U.S. Treasury bills; Eurodollar certificates of deposit; the Australian Dollar; the Canadian Dollar; the British Pound; the German Mark; the Japanese Yen; the French Franc; the Swiss Franc; the
Mexican Peso and certain multinational currencies, such as the Euro. It is expected that other futures contracts will be developed and traded in the future. Eurodollar futures are typically dollar-denominated futures contracts or options on those
contracts that are linked to the London Interbank Offered Rate (LIBOR). In addition, 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. The Fund 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.
Frequently, using futures to affect a particular strategy instead of using the underlying or related security or index will result in lower
transaction costs being incurred.
The Fund may also purchase and write call and put options on futures contracts. Options on futures
contracts possess many of the same characteristics as options on securities and indexes (discussed above). A futures option gives the holder the right, in return for the premium paid, to assume a long position (in the case of a call) or short
position (in the case of a put) in a futures contract at a specified exercise price at any time during the period of the option. Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned
the opposite short position. In the case of a put option, the opposite is true. An option on a futures contract may be closed out (before exercise or expiration) by an offsetting purchase or sale of an option on a futures contract of the same
series.
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There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a
futures contract or an option position. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single day. Once the daily limit has been reached on a particular contract, no trades
may be made that day at a price beyond that limit. In addition, certain of these instruments are relatively new and without a significant trading history. As a result, there is no assurance that an active secondary market will develop or continue to
exist. Lack of a liquid market for any reason may prevent the Fund from liquidating an unfavorable position and the Fund would remain obligated to meet margin requirements until the position is closed.
The Fund will only enter into futures contracts or options on futures contracts which are standardized and traded on a U.S. or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system. The Fund will enter into a futures contract only if the contract is covered or if the Fund at all times maintains liquid, segregated assets equal to or greater than
the fluctuating value of the contract (less any margin or deposit). The Fund will write a call or put option on a futures contract only if the option is covered. For a discussion of how to cover a written call or put option, see
Options On Securities and Indexes above.
The Fund may enter into futures contracts and options on futures contracts for
bona fide hedging purposes, as defined under the rules of the Commodity Futures Trading Commission (the CFTC). The Fund may also enter into futures contracts and options on futures contracts for non hedging purposes provided
the aggregate initial margin and premiums required to establish such non-hedging positions will not exceed 5% of the Funds net assets.
The Fund will limit its use of futures contracts and options on futures contracts to hedging transactions and, within such 5% limits, to effect
investment transactions consistent with its investment objective and strategies. For example, the Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Funds
securities or the price of the securities which the Fund intends to purchase. Additionally, the Fund may use futures contracts to create equity exposure for its cash reserves for liquidity purposes or, conversely, to reduce market exposure.
When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with the broker a specified amount of cash
or U.S. government securities (initial margin). The margin required for a futures contract is set by the exchange on which the contract is traded and, in certain cases by the Funds futures commission merchant (FCM). The
required margin may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Fund upon termination of the contract, assuming all
contractual obligations have been satisfied. The Fund expects to earn interest income on its initial margin deposits.
A futures contract held
by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called variation margin, equal to the daily change in value of the futures contract. This
process is known as markingto-market. Variation margin does not represent a borrowing or loan by the Fund, but is instead a settlement between the Fund and the FCM of the amount one would owe the other if the futures contract
expired. In computing daily net asset value, the Fund will marktomarket its open futures positions.
The Fund is also required to
deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current
market value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery
of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (same exchange, underlying security or index, and delivery month). If an offsetting purchase
price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or
if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations. In the case of transactions, if any, involving certain regulated futures contracts, any gain or loss arising from the lapse, closing
out or exercise of such positions generally will be treated as 60% long-term and 40% short-term capital gain or loss. In addition, at the close of each taxable year, such positions generally will be marked to market (
i.e.,
treated as
sold for fair market value), and any resulting gain or loss will be treated as 60% long-term and 40% short-term capital gain or loss.
Limitations on Use of Futures and Options on Futures Contracts.
The Fund will not enter into a futures contract or futures option contract
for purposes other than hedging if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are
inthemoney, would exceed 5% of the Funds total assets. A call option is inthemoney if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option
is inthemoney if the exercise price exceeds the value of the futures contract that is the subject of the option.
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When purchasing a futures contract, the Fund will maintain (and marktomarket on a daily basis)
liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Fund may cover its position by purchasing a put option on the
same futures contract with a strike price equal to or higher than the price of the contract held by the Fund.
When selling a futures
contract, the Fund will maintain (and marktomarket on a daily basis) liquid assets that, when added to the amount deposited with a futures commission merchant as margin, are equal to the market value of the instruments underlying the
contract. Alternatively, the Fund may cover its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in
segregated, liquid assets).
When selling a call option on a futures contract, the Fund will maintain (and marktomarket on a daily
basis) liquid assets that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Fund may cover its position
by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund (or at a higher price if the difference is maintained in segregated, liquid assets).
When selling a put option on a futures contract, the Fund will maintain (and marktomarket on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to
sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Fund.
The Fund is limited in entering into futures contracts and options on futures contracts to positions which constitute bona fide hedging positions within the meaning and intent of applicable
CFTC rules and, with respect to positions for non-hedging purposes, to positions for which the aggregate initial margins and premiums will not exceed 5% of the net assets of the Fund.
The requirements for qualification as a regulated investment company also may limit the extent to which the Fund may enter into futures, options on futures contracts or forward contracts. See
Taxes.
Risks Associated with Futures and Options on Futures Contracts
. There are several risks associated with the
use of futures and options on futures contracts as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets,
causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and options on futures contracts on securities, including technical
influences in futures trading and options on futures contracts, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels,
maturities and creditworthiness of issuers. An incorrect correlation could result in a loss on both the hedged securities in the Fund and the hedging vehicle so that the portfolio return might have been greater had hedging not been attempted. A
decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a wellconceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate or other trends.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary either up or down from the previous days settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures contract or a futures option position. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices
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during a single day. Once the daily limit has been reached on a particular contract, no trades may be made that day at a price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is no assurance that an active secondary market will develop or continue to exist. Lack of a liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin requirements until the position is closed.
Foreign Currency
Futures Contracts.
The Fund is also permitted to enter into foreign currency futures contracts in accordance with its investment objectives and as limited by the procedures outlined above.
A foreign currency futures contract is a bilateral agreement pursuant to which one party agrees to make, and the other party agrees to accept delivery of
a specified type of debt security or currency at a specified price. Although such futures contracts by their terms call for actual delivery or acceptance of debt securities or currency, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
The Fund may sell a foreign currency futures contract to hedge against possible
variations in the exchange rate of the foreign currency in relation to the U.S. dollar or other currencies or to effect investment transactions consistent with the Funds investment objectives and strategies. When a manager anticipates a
significant change in a foreign exchange rate while intending to invest in a foreign security, the Fund may purchase a foreign currency futures contract to hedge against a rise in foreign exchange rates pending completion of the anticipated
transaction or as a means to gain portfolio exposure to that currency. Such a purchase would serve as a temporary measure to protect the Fund against any rise in the foreign exchange rate which may add additional costs to acquiring the foreign
security position. The Fund may also purchase call or put options on foreign currency futures contracts to obtain a fixed foreign exchange rate. The Fund may purchase a call option or write a put option on a foreign exchange futures contract to
hedge against a decline in the foreign exchange rates or the value of its foreign securities. The Fund may write a call option on a foreign currency futures contract as a partial hedge against the effects of declining foreign exchange rates on the
value of foreign securities or as a means to gain portfolio exposure to a currency.
Forward Foreign Currency Exchange Transactions
(Forward Currency Contracts).
The Fund may engage in forward currency contracts to hedge against uncertainty in the level of future exchange rates or to effect investment transactions consistent with the Funds investment
objectives and strategies. The Fund will conduct their forward foreign currency exchange transactions either on a spot (i.e. cash) basis at the rate prevailing in the currency exchange market, or through entering into forward currency exchange
contracts (forward contract) to purchase or sell currency at a future date. A forward contract involves an obligation to purchase or sell a specific currency. For example, to exchange a certain amount of U.S. dollars for a certain amount
of Japanese Yenat 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 of the contract. Forward currency contracts are (a) traded in an interbank
market conducted directly between currency traders (typically, commercial banks or other financial institutions) and their customers, (b) generally have no deposit requirements and (c) are consummated without payment of any commissions.
The Fund may, however, enter into forward currency contracts containing either or both deposit requirements and commissions. In order to assure that a Funds forward currency contracts are not used to achieve investment leverage, the Fund will
segregate liquid assets in an amount at all times equal to or exceeding the Funds commitments with respect to these contracts. The Fund may engage in a forward contract that involves transacting in a currency whose changes in value are
considered to be linked (a proxy) to a currency or currencies in which some or all of the Funds portfolio securities are or are expected to be denominated. A Funds dealings in forward contracts may involve hedging involving either
specific transactions or portfolio positions or taking a position in a foreign currency. Transaction hedging is the purchase or sale of foreign currency with respect to specific receivables or payables of the Funds generally accruing in connection
with the purchase or sale of their portfolio securities. Position hedging is the sale of foreign currency with respect to portfolio security positions denominated or quoted in the currency. A Fund may not enter into a forward currency contract to
sell a particular currency to an extent greater than the aggregate market value (at the time of making such sale) of the securities held in its portfolio denominated or quoted in or currency convertible into that particular currency (or another
currency or aggregate of currencies which act as a proxy for that currency). The Fund may enter into a forward currency contract to purchase a currency other than that held in the Funds portfolios. If the Fund enters into a forward currency
contract, liquid assets will be segregated in an amount equal to the value of the Funds total assets committed to the consummation of the forward contract. If the value of the securities that are segregated declines, additional liquid assets
will be segregated so that the value of the segregated, liquid assets will equal the amount of the Funds commitment with respect to the contract. Forward currency transactions may be made from any foreign currency into U.S. dollars or into
other appropriate currencies.
At or before the maturity of a forward foreign currency contract, the Fund may either sell a portfolio security
and 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 Fund will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward currency contract prices.
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Should forward prices decline during the period between the Funds entering into a forward contract for the sale of a currency and the date that it enters into an offsetting contract for the
purchase of the currency, the Fund will realize a gain to the extent that the price of the currency that it has agreed to sell exceeds the price of the currency that it has agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent that the price of the currency it has agreed to purchase exceeds the price of the currency that it has agreed to sell. There can be no assurance that new forward currency contracts or offsets will be available to the Fund.
Upon maturity of a forward currency contract, the Fund may (a) pay for and receive, or deliver and be paid for, the underlying currency,
(b) negotiate with the dealer to roll over the contract into a new forward currency contract with a new future settlement date or (c) negotiate with the dealer to terminate the forward contract by entering into an offset with the currency
trader whereby the parties agree to pay for and receive the difference between the exchange rate fixed in the contract and the then current exchange rate. The Fund also may be able to negotiate such an offset prior to maturity of the original
forward contract. There can be no assurance that new forward contracts or offsets will be available to the Fund.
The cost to the Fund of
engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because transactions in currency exchange are usually conducted on a principal basis,
no fees or commissions are involved. The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition,
although forward foreign currency contracts limit the risk of loss due to a decline in the value of a hedged currency, at the same time, they limit any potential gain that might result should the value of the currency increase.
If a devaluation is generally anticipated, the Fund may be able to contract to sell the currency at a price above the devaluation level that it
anticipates. The Fund will not enter into a currency transaction if, as a result, it will fail to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the Code), for a given year.
Forward foreign currency contracts are not currently regulated by the SEC or CFTC. They are traded through financial institutions acting as
marketmakers. In the forward foreign currency market, there are no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited extent over a period of time. Moreover, as with foreign currency futures
contracts, a trader of forward contracts could lose amounts substantially in excess of its initial investments, due to the collateral requirements associated with such positions.
The market for forward currency contracts may be limited with respect to certain currencies. These factors will restrict the Funds ability to hedge against the risk of devaluation of currencies in
which the Fund holds a substantial quantity of securities and are unrelated to the qualitative rating that may be assigned to any particular portfolio security. Where available, the successful use of forward currency contracts draws upon a money
managers special skills and experience with respect to such instruments and usually depends on the money managers ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in
an unexpected manner, the Fund may not achieve the anticipated benefits of forward currency contracts or may realize losses and thus be in a worse position than if such strategies had not been used. Unlike many exchange traded futures
contracts and options on futures contracts, there are no daily price fluctuation limits with respect to forward currency contracts, and adverse market movements could therefore continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of such instruments and movements in the price of the securities and currencies hedged or used for cover will not be perfect. In the case of proxy hedging, there is also a risk that the perceived linkage
between various currencies may not be present or may not be present during the particular time the Fund is engaged in that strategy.
The
Funds ability to dispose of its positions in forward currency contracts will depend on the availability of active markets in such instruments. It is impossible to predict the amount of trading interest that may exist in various types of
forward currency contracts. Forward currency contracts may be closed out only by the parties entering into an offsetting contract. Therefore, no assurance can be given that the Fund will be able to utilize these instruments effectively for the
purposes set forth above. Forward foreign currency transactions are subject to the additional risk of governmental actions affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely
affected by (1) other complex foreign, political, legal and economic factors, (2) lesser availability than in the United States of data on which to make trading decisions, (3) delays in the Funds ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, (5) lesser trading
volume and (6) that a perceived linkage between various currencies may not persist throughout the duration of the contracts.
Additional Risks of Options on Securities, Futures Contracts, Options on Futures Contracts, and Forward Currency Exchange Contract and Options
Thereon
. Options on securities, futures contracts, options on futures contracts, currencies and options on
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currencies may be traded on foreign exchanges. Such transactions may not be regulated as effectively as similar transactions in the United States; may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities. The value of such positions also could be adversely affected by (1) other complex foreign, political, legal and economic
factors, (2) lesser availability than in the United States of data on which to make trading decisions, (3) delays in a Funds ability to act upon economic events occurring in foreign markets during non business hours in the
United States, (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, and (5) lesser trading volume.
Swap Agreements and Swaptions
. The Fund may enter into swap agreements, on either an asset-based or liability-based basis, depending on whether it is hedging its assets or its liabilities, and will
usually enter into swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. When the Fund enters into a swap, it exchanges its obligations to
pay or rights to receive payments for the obligations or rights to receive payments of another party (e.g., an exchange of floating rate payments for fixed rate payments).
The Fund may enter into several different types of swap agreements including interest rate, credit and currency swaps. Interest rate swaps are agreements that can be customized to meet each partys
needs, and involve the exchange of a fixed payment per period for a payment that is not fixed. Currency swaps are agreements where two parties exchange specified amounts of different currencies which are followed by each paying the other a series of
interest payments that are based on the principal cash flow. At maturity the principal amounts are returned. Credit default swaps are agreements which allow the transfer of third-party credit risk (the possibility that an issuer will default on its
obligation by failing to pay principal or interest in a timely manner) from one party to another. The lender faces the credit risk from a third party and the Counterparty in the swap agrees to insure this risk in exchange for regular periodic
payments.
The Fund expects to enter into these transactions primarily to preserve a return or spread on a particular investment or portion of
their portfolios or to protect against any increase in the price of securities they anticipate purchasing at a later date or for return enhancement. The net amount of the excess, if any, of the Funds obligations over their entitlements with
respect to each swap will be accrued on a daily basis and an amount of cash or liquid high-grade debt securities having an aggregate net asset value at least equal to the accrued excess will be segregated. To the extent that the Fund enters into
swaps on other than a net basis, the amount maintained in a segregated account will be the full amount of the Funds obligations, if any, with respect to such interest rate swaps, accrued on a daily basis. If there is a default by the other
party to such a transaction, the Fund will have contractual remedies pursuant to the agreement related to the transaction.
The Fund may enter
into swap agreements with Counterparties that meet RIMCos credit quality limitations. The Fund will not enter into any swap agreement unless the Counterparty has a minimum senior unsecured credit rating or long term Counterparty credit rating,
including reassignments, of A- or better as defined by S&P or an equivalent rating from any nationally recognized statistical rating organization (using highest of split ratings) at the time of entering into such transaction.
There is a possibility of future regulatory changes altering, perhaps to a material extent, the nature of an investment in the Fund or the ability of the
Fund to continue to implement its investment strategies. The futures markets are subject to comprehensive statutes, regulations, and margin requirements. In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions in
the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of swaps and
futures transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial
and adverse.
In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into
law by President Obama on July 21, 2010. The Dodd-Frank Act will change the way in which the U.S. financial system is supervised and regulated. Title VII of the Dodd-Frank Act sets forth a new legislative framework for over-the-counter
(OTC) derivatives, including financial instruments, such as swaps, in which the Fund may invest. Title VII of the Dodd-Frank Act makes broad changes to the OTC derivatives market, grants significant new authority to the SEC and the CFTC
to regulate OTC derivatives and market participants, and will require clearing and exchange trading of many OTC derivatives transactions.
Provisions in the Dodd-Frank Act include new registration, recordkeeping, capital and margin requirements for swap dealers and major
swap participants as determined by the Dodd-Frank Act and applicable regulations; and the required use of clearinghouse mechanisms for many OTC derivative transactions. The CFTC, SEC and other federal regulators have been tasked with
developing the rules and regulations enacting the provisions of the Dodd-Frank Act. Because the rulemaking and regulations implementing the Dodd-Frank Act have not been completed, it is not possible at this time to gauge the exact nature and scope
of the impact of the Dodd-Frank Act on the Fund, but it is expected that swap dealers, major market participants and swap
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counterparties, including the Fund, will experience new and/or additional regulations, requirements, compliance burdens and associated costs. The new law and the rules to be promulgated may
negatively impact the Funds ability to meet its investment objective either through limits or requirements imposed on it or upon its counterparties. In particular, new position limits imposed on the Fund or its counterparties may impact the
Funds ability to invest in a manner that efficiently meets its investment objective, and new requirements, including capital and mandatory clearing, may increase the cost of the Funds investments and cost of doing business, which could
adversely affect investors.
The Fund may enter into credit default swaps. A credit default swap can refer to corporate issues, asset-backed
securities or an index of assets, each known as the reference entity or underlying asset. The Fund may act as either the buyer or the seller of a credit default swap. Depending upon the terms of the contract, the credit default swap may be closed
via physical settlement. However, due to the possible or potential instability in the market, there is a risk that a Fund may be unable to deliver the underlying debt security to the other party to the agreement. Additionally, the Fund may not
receive the expected amount under the swap agreement if the other party to the agreement defaults or becomes bankrupt. Currently, the market for credit default swap agreements is largely unregulated. In an unhedged credit default swap, the Fund
enters into a credit default swap without owning the underlying asset or debt issued by the reference entity. Credit default swaps allow the Fund to acquire or reduce credit exposure to a particular issuer, asset or basket of assets.
As the seller of protection in a credit default swap, the Fund would be required to pay the par or other agreed-upon value (or otherwise perform
according to the swap contract) of a reference debt obligation to the Counterparty in the event of a default (or other specified credit event), and the Counterparty would be required to surrender the reference debt obligation. In return, the Fund
would receive from the Counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no credit event occurs, the Fund would keep the stream of payments and would have no payment obligations.
As a seller of protection, the Fund would effectively add leverage to its portfolio because in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
The Fund may also purchase protection via credit default swap contracts in order to offset the risk of default of debt securities held in its portfolio,
in which case the Fund would function as the Counterparty referenced in the preceding paragraph.
Credit default swap agreements on corporate
issues involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default or other credit event. If a credit event occurs and cash settlement is not elected, a variety of
other deliverable obligations may be delivered in lieu of the specific reference obligation. The ability to deliver other obligations may result in a cheapest-to-deliver option (the buyer of protections right to choose the deliverable
obligation with the lowest value following a credit event). The Fund may use credit default swaps on corporate issues to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where the Fund owns or has exposure to the
reference obligation) or to take an active long or short position with respect to the likelihood (as measured by the credit default swaps spread) of a particular issuers default.
Credit default swap agreements on asset-backed securities involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default
or other credit event. Unlike credit default swaps on corporate issues, deliverable obligations in most instances would be limited to the specific reference obligation as performance for asset-backed securities can vary across deals. Prepayments,
principal paydowns, and other write-down or loss events on the underlying mortgage loans will reduce the outstanding principal balance of the reference obligation. These reductions may be temporary or permanent as defined under the terms of the swap
agreement and the notional amount for the swap agreement generally will be adjusted by corresponding amounts. The Fund may use credit default swaps on asset-backed securities to provide a measure of protection against defaults (or other defined
credit events) of the reference obligation or to take an active long or short position with respect to the likelihood of a particular reference obligations default (or other defined credit events).
Credit default swap agreements on credit indices involve one party making a stream of payments to another party in exchange for the right to receive a
specified return in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the reference obligations comprising the credit index. A credit index is a basket of credit instruments or exposures designed to be
representative of some part of the credit market as a whole. These indices are made up of reference credits that are judged by a poll of dealers to be the most liquid entities in the credit default swap market based on the sector of the index.
Components of the indices may include, but are not limited to, investment grade securities, high yield securities, asset backed securities, emerging markets, and/or various credit ratings within each sector. Credit indices are traded using credit
default swaps with standardized terms including a fixed spread and standard maturity dates. An index credit default swap references all the names in the index, and if there is a default, the credit event is settled based on that names weight
in the index. The composition of the indices changes periodically, usually every six months, and for most indices, each name has an equal weight in the index. Traders may use credit default swaps on indices to speculate on changes in credit quality.
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Credit default swaps could result in losses if the Fund does not correctly evaluate the creditworthiness of
the company or companies on which the credit default swap is based. Credit default swap agreements may involve greater risks than if the Fund had invested in the reference obligation directly since, in addition to risks relating to the reference
obligation, credit default swaps are subject to illiquidity risk and Counterparty risk. The Fund will generally incur a greater degree of risk when it sells a credit default swap than when it purchases a credit default swap. As a buyer of a credit
default swap, the Fund may lose its investment and recover nothing should a credit event fail to occur and the swap is held to its termination date. As seller of a credit default swap, if a credit event were to occur, the value of any deliverable
obligation received by the Fund, coupled with the upfront or periodic payments previously received, may be less than what it pays to the buyer, resulting in a loss of value to the Fund.
If the creditworthiness of the Funds swap Counterparty declines, the risk that the Counterparty may not perform could increase, potentially resulting in a loss to the Fund. To limit the Counterparty
risk involved in swap agreements, the Fund will only enter into swap agreements with Counterparties that meet certain standards of creditworthiness. Although there can be no assurance that the Fund will be able to do so, the Fund may be able to
reduce or eliminate its exposure under a swap agreement either by assignment or other disposition, or by entering into an offsetting swap agreement with the same party or another creditworthy party. The Fund may have limited ability to eliminate
their exposure under a credit default swap if the credit of the reference entity or underlying asset has declined.
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. If a money manager using this technique is incorrect in its forecast of market
values, interest rates and other applicable factors, the investment performance of the Fund might diminish compared to what it would have been if this investment technique were not used.
Interest rate swaps do not involve the delivery of securities or 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 Fund is contractually obligated to make. If the other party to an interest rate swap defaults, the Funds risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to
receive. Since interest rate swaps are individually negotiated, the Fund expects to achieve an acceptable degree of correlation between their rights to receive interest on their portfolio securities and their rights and obligations to receive and
pay interest pursuant to interest rate swaps.
The Fund may enter into a swaption (an option on a swap). In a swaption, in exchange for an
option, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date. The writer of the contract receives the premium and bears the risk of unfavorable changes in the preset
rate on the underlying interest rate swap. Unrealized gains/losses on swaptions are reflected in investment assets and investment liabilities in the Funds statement of financial condition.
Index Swap Agreements
. The Fund may enter into index swap agreements to expose cash reserves to markets or to effect investment transactions
consistent with the Funds investment objective and strategies. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap
transaction, the two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular investments or instruments. The returns to be exchanged between the parties are calculated with respect to a
notional amount (i.e., a specified dollar amount that is hypothetically invested in a basket of securities representing a particular index).
Under most swap agreements entered into by the Fund, the parties obligations are determined on a net basis. Consequently, the Funds obligations or rights under a swap agreement
will generally be equal only to a net amount based on the relative values of the positions held by each party. The Funds obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued
but unpaid net amounts owed to a swap Counterparty will be covered by segregating cash or other liquid assets to avoid any potential leveraging of the Funds portfolio. The Fund will not enter into a swap agreement with any single party if the
net amount owed or to be received under existing contracts with that party would exceed 5% of the Funds net assets.
Structured
Notes.
The Fund may invest in structured notes. Structured notes are derivative debt instruments, the interest rate or principal of which is determined by an unrelated indicator (for example, a currency, security, commodity or index thereof).
The terms of the instrument may be structured by the purchaser and the borrower issuing the note. The terms of structured notes may provide that in certain circumstances no principal is due at maturity, which may result in a loss of
invested capital. Structured notes may be positively or negatively indexed, so that appreciation of the unrelated indicator may produce an increase or a decrease in the interest rate or the value of the structured note at maturity may be calculated
as a specified multiple of the change in the value of the unrelated indicator. Structured notes may entail a greater degree of market risk than other types of debt securities because the investor bears the risk of the unrelated indicator. Further,
the change in the principal amount payable with respect to, or the interest rate of, a structured note may be a multiple of the percentage change (positive or negative) in the value
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of the underlying reference instrument(s). Therefore, structured notes may be more volatile, less liquid and more difficult to accurately price than less complex securities and instruments or
more traditional debt securities. To the extent the Fund invests in these notes and securities, however, these notes are analyzed in the overall assessment of the effective duration of the Funds holdings in an effort to monitor the Funds
interest rate risk.
Commodity-linked notes are a type of structured note. Commodity-linked notes are privately negotiated structured debt
securities indexed to the return of an index such as the DJ-UBS Index, which is representative of the commodities market. They are available from a limited number of approved issuers, and all invested amounts are exposed to the issuers credit
risk. Commodity linked notes may be leveraged. For example, if a fund invests $100 in a three-times leveraged commodity-linked note, it will exchange $100 principal with the dealer to obtain $300 exposure to the commodities market because the value
of the note will change by a magnitude of three for every percentage change (positive or negative) in the value of the underlying index. This means a $100 note would be worth $70 if the commodity index decreased by 10 percent. Structured notes also
are subject to credit risk of the dealer.
Uncovered Options Transactions.
The Fund may write options that are not covered (or so
called naked options). When the Fund sells an uncovered call option, it does not simultaneously have a long position in the underlying security. When the Fund sells an uncovered put option, it does not simultaneously have a short
position in the underlying security. Uncovered options are riskier than covered options because there is no underlying security held by the Fund that can act as a partial hedge. Uncovered calls have speculative characteristics and the potential for
loss is unlimited. There is also a risk, especially with less liquid preferred and debt securities, that the securities may not be available for purchase. Uncovered put options have speculative characteristics and the potential loss is substantial.
Forward Commitments.
The Fund may contract to purchase securities for a fixed price at a future date beyond customary
settlement time (a forward commitment or whenissued transaction) so long as such transactions are consistent with the Funds ability to manage its investment portfolio and meet redemption requests. The Fund may
dispose of a forward commitment or whenissued transaction prior to settlement if it is appropriate to do so and realize shortterm profits or losses upon such sale. When effecting such transactions, liquid assets of the Fund in a dollar
amount sufficient to make payment for the portfolio securities to be purchased will be segregated on the Funds records at the trade date and maintained until the transaction is settled. Forward commitments and whenissued transactions
involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or the other party to the transaction fails to complete the transaction.
Additionally, under certain circumstances, the Fund may occasionally engage in free trade transactions in which delivery of securities sold by the Fund is made prior to the Funds receipt
of cash payment therefor or the Funds payment of cash for portfolio securities occurs prior to the Funds receipt of those securities. Cash payment in such instances generally occurs on the next business day in the local market.
Free trade transactions involve the risk of loss to the Fund if the other party to the free trade transaction fails to complete the transaction after a Fund has tendered cash payment or securities, as the case may be.
Stand-By Commitment Agreements
.
The Fund may invest in stand-by commitments with respect to securities held in its
portfolio. Under a stand-by commitment, a dealer agrees to purchase at the Funds option specified securities at a specified price. The Funds right to exercise stand-by commitments is unconditional and unqualified. Stand-by commitments
acquired by the Fund may also be referred to as put options. A stand-by commitment is not transferable by the Fund, although the Fund can sell the underlying securities to a third party at any time. The principal risk of stand-by
commitments is that the writer of a commitment may default on its obligation to repurchase the securities acquired with it. When investing in stand-by commitments, the Fund will seek to enter into stand-by commitments only with brokers, dealers and
banks that, in the opinion of the money manager, present minimal credit risks. In evaluating the creditworthiness of the issuer of a stand-by commitment, the money manager will periodically review relevant financial information concerning the
issuers assets, liabilities and contingent claims. The Fund acquires stand-by commitments only in order to facilitate portfolio liquidity and does not expect to exercise its rights under stand-by commitments for trading purposes.
The amount payable to the Fund upon its exercise of a stand-by commitment is normally (i) the Funds acquisition cost of the securities
(excluding any accrued interest which the Fund paid on their acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period. The Fund expects that stand-by commitments will generally be available without the payment of any direct or indirect consideration. However, if necessary or advisable, the
Fund may pay for a stand-by commitment either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the commitment (thus reducing the yield-to-maturity otherwise available for the same securities). The
total amount paid in either manner for outstanding stand-by commitments held in the Funds portfolio will not exceed 1/2 of 1% of the value of the Funds total assets calculated immediately after each stand-by commitment is acquired.
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The Fund would acquire stand-by commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes. The acquisition of a stand-by commitment would not affect the valuation or assumed maturity of the underlying securities. Stand-by commitments acquired by the Fund would be valued at zero in
determining net asset value. Where the Fund paid any consideration directly or indirectly for a stand-by commitment, its cost would be reflected as unrealized depreciation for the period during which the commitment was held by the Fund.
The Fund will at all times maintain a segregated account with its custodian consisting of cash or liquid securities in an aggregate amount equal to the
purchase price of the securities underlying the commitment. The assets contained in the segregated account will be marked-to-market daily and additional assets will be placed in such account on any day in which assets fall below the amount of the
purchase price. The Funds liquidity and ability to manage its assets might be affected when it sets aside cash or portfolio securities to cover such commitments.
The Internal Revenue Service (IRS) has issued a revenue ruling to the effect that a regulated investment company will be treated for federal income tax purposes as the owner of the municipal
obligations acquired subject to a stand-by commitment and the interest on the municipal obligations will be tax-exempt to the Fund.
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TAXES
Tax Information for the Fund
Distributions of Net Investment Income
.
The Fund receives income generally in the form of dividends and interest on its investments. This
income, less expenses incurred in the operation of the Fund, constitutes the Funds net investment income from which dividends may be paid to you. If you are a taxable investor, any distributions by the Fund from such income (other than certain
qualified dividend income, described below) will be taxable to you as ordinary income, whether you receive them in cash or in additional shares.
If you are an individual investor, a portion of the dividends you receive from the Fund may be treated as qualified dividend income which is taxable to individuals at the same rates that are
applicable to long-term capital gains through 2012. A Fund distribution is treated as qualified dividend income to the extent that the Fund receives dividend income from taxable domestic corporations and certain qualified foreign corporations,
provided that certain holding period and other requirements are met. Fund distributions generally will not qualify as qualified dividend income to the extent attributable to interest, capital gains, REIT distributions and, in many cases,
distributions from non-U.S. corporations. For individual and other non-corporate taxpayers, the maximum rate applicable to qualified dividend income is currently 15%. It is not expected that any portion of the Funds distributions will be
eligible to be treated as qualified dividend income.
Distributions of Capital Gain
.
The Fund may realize a capital gain or loss
in connection with sales or other dispositions of its portfolio securities. Distributions from net short-term capital gain will be taxable to you as ordinary income. Distributions from net long-term capital gain will be taxable to you as long-term
capital gain, regardless of how long you have held your shares in the Fund. Any net capital gain realized by the Fund generally will be distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise
or income taxes on the Fund. The maximum rate applicable to long-term capital gains is 15% through 2012. After 2012, this maximum rate applicable to long-term capital gains currently is scheduled to increase to 20%.
Medicare Tax
. For taxable years beginning after December 31, 2012, an additional 3.8% Medicare tax will be imposed on certain net
investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund Shares) of U.S. individuals, estates and trusts to the extent that such
persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceeds a threshold amount.
Effect of Foreign Investments on Distributions
.
Most foreign exchange gain realized by the Fund on the sale of debt securities is treated as ordinary income. Similarly, foreign exchange loss
realized on the sale of debt securities generally is treated as ordinary loss. This gain when distributed will be taxable to you as ordinary income, and any loss will reduce the Funds ordinary income otherwise available for distribution to
you. This treatment could increase or decrease the Funds ordinary income distributions to you, and may cause some or all of the Funds previously distributed income to be classified as a return of capital. A return of capital generally is
not taxable to you, but reduces the Funds tax basis of your shares in the Fund. Any return of capital in excess of your tax basis is taxable as a capital gain.
The Fund may invest in foreign securities and may be subject to foreign withholding taxes on income from these securities. This, in turn, could reduce ordinary income distributions to you. If more than
50% of the Funds total assets at the end of the fiscal year is invested in foreign securities, the Fund may elect to pass through to you your pro rata share of foreign taxes paid by the Fund. If this election is made, the year-end statement
you receive from the Fund will show more taxable income than was actually distributed to you. In that case, you will be entitled either to deduct your share of these taxes in computing your taxable income or to claim a foreign tax credit for these
taxes against your U.S. federal income tax (subject to limitations for certain shareholders). The Fund will provide you with the information necessary to complete your personal income tax return if it makes this election.
Information on the Amount and Tax Character of Distributions
.
The Fund will inform you of the amount of your ordinary income and
capital gain dividends at the time they are paid, and will advise you of its tax status for federal income tax purposes shortly after the end of each calendar year. If you have not held Fund shares for a full year, the Fund may report and distribute
to you, as ordinary income or capital gain, a percentage of income that may not be equal to the actual amount of this type of income earned during the period of your investment in the Fund. Taxable distributions declared by the Fund in October,
November or December to shareholders of record in such a month but paid in January are taxable to you as if they were paid in December.
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Election to be Taxed as a Regulated Investment Company
.
The Fund intends to elect or has
elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (the Code). As a regulated investment company, the Fund generally pays no federal income tax on the income and gain it distributes to
you. The Board of Trustees reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines such a course of action to be beneficial to shareholders. In such a case, the Fund would be subject to
federal, and possibly state, corporate taxes on its taxable income and gain, and distributions to you would be taxed as ordinary dividend income to the extent of the Funds earnings and profits.
Excise Tax Distribution Requirements
.
To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary income earned during the calendar year; 98.2% of its capital gain net income earned during the twelve-month period ending October 31; and 100% of any undistributed
amounts from the prior year. The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December) but can give no assurances that its distributions will be
sufficient to eliminate all taxes.
Redemption of Fund Shares
.
Redemptions (including redemptions in kind) and exchanges of Fund
shares are taxable transactions for federal and state income tax purposes. If you redeem your Fund shares, or exchange them for shares of a different RIC Fund, the IRS will require that you report any gain or loss on your redemption or exchange. If
you held your shares as a capital asset, the gain or loss that you realize will be capital gain or loss and will be long-term or short-term, generally depending on how long you held your shares.
Redemptions at a Loss Within Six Months of Purchase
.
Any loss incurred on a redemption or exchange of shares held for six months or less
will be treated as long-term capital loss to the extent of any long-term capital gain distributed to you by the Fund on those shares.
Wash Sales
.
All or a portion of any loss that you realize on a redemption of your Fund shares is disallowed to the extent that you buy
other shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your share redemption. Any loss disallowed under these rules is added to your tax basis in the new shares.
U.S. Government Securities
. The income earned on certain U.S. government securities is generally exempt from state and local personal
income taxes if earned directly by you. States also grant tax-free status to dividends paid to you from interest earned on these securities, subject in some states to minimum investment or reporting requirements that must be met by the Fund. The
income on Fund investments in certain securities, such as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Government National Mortgage Association (GNMA) or Federal National Mortgage Association (FNMA)
securities), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations.
Dividends-Received Deduction for Corporations
.
If you are a corporate shareholder, a percentage of the dividends paid by the Fund for the
most recent fiscal year may have qualified for the dividends-received deduction. You may be allowed to deduct a portion of these qualified dividends, thereby reducing the tax that you would otherwise be required to pay on these dividends, if certain
holding period and other requirements are met. The dividends-received deduction will be available only with respect to dividends designated by the Fund as eligible for such treatment. All dividends (including the deducted portion) must be included
in your alternative minimum taxable income calculation. If the Funds income is derived primarily from either investments in foreign rather than domestic securities or interest rather than dividends, generally none of its distributions are
expected to qualify for the corporate dividends-received deduction. None of the Funds distributions are expected to qualify for the corporate dividends-received deduction.
Investment in Complex Securities
.
The Fund may invest in complex securities that may be subject to numerous special and complex tax rules. These rules could affect whether gain or loss
recognized by the Fund is treated as ordinary or capital, or as interest or dividend income. These rules could also accelerate the recognition of income to the Fund (possibly causing the Fund to sell securities to raise the cash for necessary
distributions). These rules could defer the Funds ability to recognize a loss, and, in limited cases, subject the Fund to U.S. federal income tax on income from certain foreign securities. These rules could, therefore, affect the amount,
timing, or character of the income distributed to you by the Fund.
Non-U.S. Investors
. Non-U.S. investors are generally subject
to U.S. withholding tax and may be subject to U.S. estate taxes, and are subject to special U.S. tax certification requirements. For Fund taxable years beginning after 2004 and before 2012 (or a later date if extended by Congress), a portion of Fund
distributions received by a non-U.S. investor may, however, be exempt from U.S. withholding tax to the extent attributable to U.S. source interest income and short-term capital gains if properly reported by the Fund. Also, for that same period, U.S.
estate taxes may not apply to that portion of Shares held by a non-U.S. investor that is attributable to Fund assets consisting of certain debt obligations or other property treated as not within the
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United States for U.S. estate tax purposes. If a non-U.S. investor were to hold an interest of more than 5% in the Fund that were deemed to be a U.S. real property holding company by
reason of holding significant interests (other than as a creditor) in other U.S. real property holding companies (including REITs) or U.S. real property, certain Fund distributions could be taxable to such investor and require the
investor to file U.S. tax returns and may also be subject to withholding taxes. Non-U.S. investors holding an interest of 5% or less in the Fund may be subject to withholding tax with respect to certain Fund distributions that are attributable to
U.S. real property gains.
Effective January 1, 2014, the Fund will be required to withhold U.S. tax (at a 30% rate) on payments of
dividends and redemption proceeds made to certain non-U.S. entities that fail to comply with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts.
Shareholders may be requested to provide additional information to the Fund to enable it to determine whether withholding is required. You should consult your tax adviser about the federal, state, local or foreign tax consequences of your investment
in the Fund.
Backup Withholding
.
By law, the Fund must withhold a portion of your taxable distributions and redemption proceeds
unless you provide your correct social security or taxpayer identification number, certify that this number is correct, certify that you are not subject to backup withholding, and certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the rate is 28% for calendar year 2012 and is expected to be 31% thereafter.
Tax Treatment of Commodity-Linked Swaps and Structured Notes
.
The IRS has issued rulings that provide that in order for the Fund to qualify as a regulated investment company
under the Code, the income derived from commodity-linked swaps must be limited to a maximum of 10% of the Funds gross income.
The IRS
has also issued private letter rulings to other taxpayers in which the IRS specifically concluded that income from certain commodity index-linked notes is qualifying income and that income derived from a wholly-owned subsidiary will also constitute
qualifying income, even if the subsidiary itself owns commodity-linked notes and swaps, commodity options, futures and options on futures. Although those private letter rulings can be relied on only by the taxpayers to whom they were issued, based
on the reasoning in such rulings, the Fund will seek to gain exposure to the commodity markets primarily through investments in commodity index-linked notes and swaps and, through investments in the Subsidiary, futures contracts on individual
commodities or a subset of commodities and options on them. The IRS currently has suspended the issuance of such rulings pending further internal review. There can be no assurance that the IRS will not change its position that income derived from
commodity-linked notes and wholly-owned subsidiaries is qualifying income. Furthermore, the tax treatment of commodity-linked notes, other commodity-linked derivatives and the Funds investments in the Subsidiary may otherwise be adversely
affected by future legislation, Treasury Regulations and/or guidance issued by the IRS that could affect the character, timing and/or amount of the Funds taxable income or any gains and distributions made by the Fund.
The Subsidiary is not expected to be subject to U.S. federal income tax. It will, however, be considered a controlled foreign corporation, and the Fund
will be required to include as ordinary income annually amounts earned by the Subsidiary during that year. Furthermore, the Fund, as a regulated investment company, will be required to distribute the Subsidiarys income as a regulated
investment company, whether or not the Subsidiary makes a distribution to the Fund during the taxable year. Any losses of the Subsidiary will generally only be available to offset any income of the Subsidiary in the same year.
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MONEY MANAGER INFORMATION
RUSSELL MULTI-STRATEGY ALTERNATIVE FUND
[To be updated by amendment.]
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CREDIT RATING DEFINITIONS
MOODYS INVESTORS SERVICE, INC. (MOODYS):
Long-Term Obligation Ratings
Aaa Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to very low
credit risk.
A Obligations rated A are considered upper- medium grade- and are subject
to low credit risk.
Baa Obligations rated Baa are subject to moderate credit risk. They
are considered as mediumgrade and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are subject to substantial
credit risk.
B Obligations rated B are considered speculative and are subject to high
credit risk.
Caa Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and
are likely in, or very near, default, with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated class and are typically in default, with little prospect
for recovery of principal or interest.
Moodys appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
STANDARD & POORS RATINGS GROUP (S&P):
Long-Term Issue Credit Ratings
AAA An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated AA differs from the
highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated
categories. However, the obligors capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, C
Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the
highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
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B An obligation rated B is more
vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors
capacity or willingness to meet its financial commitment on the obligation.
CCC An
obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial,
or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C A C rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the
documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the C rating may be assigned to subordinated debt, preferred stock or other
obligations on which cash payments have been suspended in accordance with the instruments terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash
or replaced by other instruments having a total value that is less than par.
D An
obligation rated D is in payment default. The D rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not
expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an
obligation are jeopardized. An obligations rating is lowered to D upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having
a total value that is less than par.
Plus (+) or minus (-)
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories.
NR This indicates that no rating has been requested,
that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter of policy.
FITCH INVESTORS SERVICE, INC. (FITCH):
Long-Term Ratings
Scales
AAA Highest credit quality. AAA ratings denote the lowest expectation of
default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote expectations of very low default risk. They
indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A High credit quality. A ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBBGood credit quality. BBB ratings indicate that expectations of default risk are currently low.
The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB Speculative. BB ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however,
business or financial flexibility exists which supports the servicing of financial commitments.
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BHighly speculative. B ratings indicate that
material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
CCC Substantial credit risk. Default is a real possibility.
CC Very high levels of credit risk. Default of some kind appears probable.
CExceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill.
Conditions that are indicative of a C category rating for an issuer include:
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the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
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the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
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Fitch Ratings otherwise believes a condition of RD or D to be imminent or inevitable, including through the formal announcement
of a coercive debt exchange.
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RD Restricted default
RD ratings indicate an issuer that in Fitch Ratings opinion has experienced an uncured payment default
on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business. This would
include:
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the selective payment default on a specific class or currency of debt;
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the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital
markets security or other material financial obligation;
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the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in
parallel; and
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execution of a coercive debt exchange on one or more material financial obligations.
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D Default. D ratings indicate an issuer that in Fitch Ratings opinion has entered into
bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be
considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a coercive debt exchange.
Imminent default typically refers to the occasion where a payment default has been intimated by the issuer,
and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally
announced a coercive debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.
In all cases, the assignment of a default rating reflects the agencys opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the
definition of default under the terms of an issuers financial obligations or local commercial practice.
Note to
Long-Term Ratings:
The modifiers + or - may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the AAA Long-Term IDR category, or to Long-Term IDR categories below B.
SECTOR SPECIFIC CREDIT RATING SERVICES
U.S, Municipal Short-Term Debt and
Demand Obligation Ratings
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MOODYS:
Short-Term Obligation Ratings
There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are divided into three
levels MIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the obligation.
MIG1 This designation denotes superior credit quality. Excellent protection is afforded by established
cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG2 This designation denotes strong credit quality. Margins of protection are ample although not so
large as in the preceding group.
MIG3 This designation denotes acceptable credit quality.
Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
SG This designation denotes speculative credit quality. Debt instruments in this category may lack margins of protection.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned; a long or short-term debt rating and a demand
obligation rating. The first element represents Moodys evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moodys evaluation of the degree of risk associated with the
ability to receive purchase price upon demand (demand feature), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
VMIG rating expirations are a function of each issues specific structural or credit features.
VMIG 1This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal
protections that ensure the timely payment of purchase price upon demand.
VMIG 2This designation
denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 3This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory
short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
SGThis designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term
rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
S&P:
A Standard & Poors U.S. municipal note rating
reflects Standard & Poors opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years
will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, Standard & Poors analysis will review the following considerations:
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Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
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Note rating symbols are as follows:
SP1 Strong capacity to pay principal and interest. An issue determined to possess very strong capacity
to pay debt service is given a plus (+) designation.
-66-
SP2 Satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and economic changes over the term of the notes.
SP3
Speculative capacity to pay principal and interest.
SHORT-TERM RATINGS
MOODYS:
Prime 1 Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
Prime 2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term
debt obligations.
Prime 3 Issuers (or supporting institutions) rated Prime-3 have an
acceptable ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated
Not Prime do not fall within any of the Prime rating categories.
S&P:
A1 A short-term obligation rated A1 is the highest category by
Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity
to meet its financial commitments is extremely strong.
A2 A short-term obligation rated
A2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligors capacity to meet its financial commitment on the
obligation is satisfactory.
A3 A short-term obligation rated A3
exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B A short-term obligation rated B is regarded as d has significant speculative
characteristics. Ratings of B-1, B-2,and B-3 may be assigned to indicate finer distinctions within the B category. The obligor currently has the capacity to meet its financial commitments; however, it
faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitments on obligation.
B-1 A short-term obligation rated B-1 is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial
commitments over the short-term compared to other speculative-grade obligors.
B-2 A short-term
obligation rated B-2 is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade
obligors.
B-3 A short-term obligation rated B-3 is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
C obligor short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for it to meet its financial commitments on the obligation.
D obligor short-term obligation rated D is in payment default. The D rating category is used when payments on an obligation, including a regulatory capital
instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
-67-
N.R. An issuer designated N.R. is not rated.
FITCH:
Short Term Ratings
F1 Highest short-term credit
quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
F2 Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3 Fair short-term credit quality. The intrinsic capacity for timely payment of financial
commitments is adequate.
B Speculative short-term credit quality. Minimal capacity for timely
payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C High short-term default risk. Default is a real possibility.
RDRestricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity
ratings only.
D: Default. Indicates a broad-based default event for an entity, or the default of a specific
short-term obligation.
-68-
FINANCIAL STATEMENTS
Because the Fund has not yet commenced operations, financial information is not available.
-69-
APPENDIX
Because the Fund is new, there were no shares outstanding as of the date of this SAI, and thus, no shareholders could be deemed to control
the Fund due to owning more than 25% of the voting Shares of the Fund. In addition, no shareholders owned 5% or more of any Class of either of the Funds shares.
-70-
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RUSSELL INVESTMENT COMPANY
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File No. 2-71299 and 811-03153
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1933 Act Post-Effective
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Amendment No. 168
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1940 Act Amendment No. 174
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PART C
OTHER INFORMATION
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(a)
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1.1
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Second Amended and Restated Master Trust Agreement dated October 1, 2008 (incorporated by reference to Post-Effective Amendment No. 120 dated December 4,
2008)
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1.2
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Amendment No. 1 to Second Amended and Restated Master Trust Agreement dated October 24, 2008 (incorporated by reference to Post-Effective Amendment No. 120 dated December 4,
2008)
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1.3
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Form of Amendment No. 2 to Second Amended and Restated Master Trust Agreement dated October 12, 2009 (incorporated by reference to Post-Effective Amendment No. 128 dated December
1, 2009)
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1.4
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Form of Amendment No. 3 to Second Amended and Restated Master Trust Agreement dated December 8, 2009 (incorporated by reference to Post-Effective Amendment No. 129 dated December
23, 2009)
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1.5
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Amendment No. 4 to Second Amended and Restated Master Trust Agreement dated March 2, 2010 (incorporated by reference to Post-Effective Amendment No. 141 dated June 29,
2010)
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1.6
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Amendment No. 5 to Second Amended and Restated Master Trust Agreement dated May 25, 2010 (incorporated by reference to Post-Effective Amendment No. 141 dated June 29,
2010)
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1.7
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Amendment No. 6 to Second Amended and Restated Master Trust Agreement dated August 31, 2010 (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
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1.8
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Amendment No. 7 to Second Amended and Restated Master Trust Agreement dated August 31, 2010 (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
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1.9
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Amendment No. 8 to Second Amended and Restated Master Trust Agreement dated December 7, 2010 (incorporated by reference to Post-Effective Amendment No. 150 dated March 18,
2011)
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1.10
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Amendment No. 9 to Second Amended and Restated Master Trust Agreement dated December 7, 2010 (incorporated by reference to Post-Effective Amendment No. 150 dated
March 18, 2011)
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1.11
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Amendment No. 10 to Second Amended and Restated Master Trust Agreement dated August 31, 2010 (incorporated by reference to Post-Effective Amendment No. 150 dated March 18,
2011)
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1.12
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Amendment No. 11 to Second Amended and Restated Master Trust Agreement dated March 1, 2011 (incorporated by reference to Post-Effective Amendment No. 159 dated July 29,
2011)
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1.13
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Amendment No. 12 to Second Amended and Restated Master Trust Agreement dated January 1, 2012 (incorporated by reference to Post-Effective Amendment No. 163 dated January 17,
2012)
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1.14
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Form of Amendment No. 13 to Second Amended and Restated Master Trust Agreement (incorporated by reference to Post-Effective Amendment No. 163 dated January 17,
2012)
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1.15
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Form of Amendment No. 14 to Second Amended and Restated Master Trust Agreement (filed herewith)
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(b)
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1.1
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By-Laws of Russell Investment Company dated February 28, 2012 (filed herewith)
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(c)
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1.1
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Form of Shares of Beneficial Interest for the Equity I, Equity II, Equity III, Fixed Income I, Fixed Income II, International and Money Market Funds (incorporated by reference to
Item 24(b)(4)(a) filed under Post-Effective Amendment No. 39 dated April 28, 1998)
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1.2
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Form of Shares of Beneficial Interest for the Diversified Equity, Special Growth, Equity Income, Diversified Bond, Volatility Constrained Bond, International Securities, Limited
Volatility Tax Free and U.S. Government Money Market Funds (incorporated by reference to Item 24(b)(4)(b) filed under Post-Effective Amendment No. 39 dated April 28, 1998)
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1.3
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Form of Shares of Beneficial Interest for the Quantitative Equity, Equity Q and Tax Free Money Market Funds (incorporated by reference to Item 24(b)(4)(c) filed under
Post-Effective Amendment No. 39 dated April 28, 1998)
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1.4
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Form of Shares of Beneficial Interest for the Real Estate Securities Fund (incorporated by reference to Item 24(b)(4)(d) filed under Post-Effective Amendment No. 39 dated April
28, 1998)
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(d)
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1.1
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Advisory Agreement with Frank Russell Investment Management Company dated January 1, 1999 (incorporated by reference to Item 23(4)(a)(1) filed under Post-Effective
Amendment No. 42 dated February 28, 1999)
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1.2
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Form of Letter Agreement adding Tax-Managed Equity Aggressive Strategy (later renamed Tax-Managed Global Equity), Tax-Managed Aggressive Strategy, Tax-Managed Moderate Strategy,
Tax-Managed Conservative Strategy and Tax-Managed Small Cap Funds to the Advisory Agreement (incorporated by reference to Item 23(4)(a)(2) filed under Post-Effective Amendment No. 44 dated September 2, 1999)
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1.3
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Form of Letter Agreement adding Select Growth Fund and Select Value Fund to the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 49 dated October 30,
2000)
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1.4
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Form of Letter Agreement adding the Russell Multi-Manager Principal Protected Fund to the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 61 dated
December 16, 2002)
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1.5
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Form of Letter Agreement adding the 2010 Strategy Fund, 2020 Strategy Fund, 2030 Strategy Fund and 2040 Strategy Fund to the Advisory Agreement (incorporated by reference to
Post-Effective Amendment No. 73 dated December 3, 2004)
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1.6
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Amendment to Advisory Agreement dated January 1, 2005 (incorporated by reference to Post-Effective Amendment No. 83 dated February 28, 2006)
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1.7
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Amendment to the Advisory Agreement dated May 1, 2006 (incorporated by reference to Post-Effective Amendment No. 84 dated August 24, 2006)
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1.8
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Form of Letter Agreement to the Advisory Agreement adding the Retirement Distribution Fund I A Shares, Accelerated Distribution Fund I A Shares, Extended
Distribution Fund I A Shares, Retirement Distribution Fund I S Shares, Accelerated Distribution Fund I S Shares and Extended Distribution Fund I S Shares (incorporated by reference to Post-Effective Amendment No. 104
dated August 24, 2007)
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1.9
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Form of Letter Agreement adding the Global Equity Fund to the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 86 dated November 13,
2006)
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1.10
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Form of Letter Agreement adding the 2015 Strategy Fund, 2025 Strategy Fund, 2035 Strategy Fund, 2045 Strategy Fund, 2050 Strategy Fund and the In Retirement Fund to the Advisory
Agreement (incorporated by reference to Post-Effective Amendment No. 113 dated January 7, 2008)
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1.11
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Letter Agreement amending and restating Section 6.A of the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 123 dated April 30,
2009)
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1.12
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Form of Letter Agreement adding the Russell Commodity Strategies Fund to the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 129 dated
December 23, 2009)
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1.13
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Form of Letter Agreement adding the Russell Global Credit Strategies Fund and the Russell Global Infrastructure Fund to the Advisory Agreement (incorporated by reference to
Post-Effective Amendment No. 141 dated June 29, 2010)
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1.14
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Form of Letter Agreement adding the 2055 Strategy Fund to the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 142 dated September 3,
2010)
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1.15
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Letter Agreement amending and restating Section 6.A of the Advisory Agreement (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
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1.16
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Form of Letter Agreement adding the 2020 Retirement Distribution Fund A Shares and 2020 Retirement Distribution Fund S Shares to the Advisory Agreement (incorporated
by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
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1.17
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Form of Letter Agreement adding the Russell U.S. Large Cap Equity Fund and the Russell U.S. Mid Cap Equity Fund to the Advisory Agreement (incorporated by reference to
Post-Effective Amendment No. 163 dated January 17, 2012)
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1.18
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Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Advisory Agreement (filed herewith)
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2.1
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Service Agreement with Frank Russell Company and Frank Russell Investment Management Company dated May 1, 1987 (incorporated by reference to Item 24(b)(5)(b)(1) filed under
Post-Effective Amendment No. 38 dated February 24, 1998)
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2.2
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Letter Agreement with Frank Russell Company and Frank Russell Investment Management Company dated May 1, 1989 adding Real Estate Securities Fund to the Service Agreement
(incorporated by reference to Item 24(b)(5)(b)(2) filed under Post-Effective Amendment No. 38 dated February 24, 1998)
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2.3
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Amendment No. 1 to Service Agreement dated July 1, 1992 with Frank Russell Company and Frank Russell Investment Management Company changing services and fees (incorporated by
reference to Item 24(b)(5)(b)(3) filed under Post-Effective Amendment No. 38 dated February 24, 1998)
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2.4
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Letter Agreement dated August 24, 1992 adding Fixed Income III, Multistrategy Bond and Emerging Markets Funds to the Service Agreement (incorporated by reference to Item
24(b)(5)(b)(4) filed under Post-Effective Amendment No. 38 dated February 24, 1998)
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2.5
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Amendment No. 2 to the Service Agreement dated August 1995 with Frank Russell Company and Frank Russell Investment Management Company (incorporated by reference to
Item 24(b)(5)(b)(5) filed under Post-Effective Amendment No. 32 dated May 1, 1996)
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2.6
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Letter Agreement dated March 14, 1996 with State Street Bank and Trust Company for development of a Tax Accounting System (incorporated by reference to Item 24(b)(5)(b)(7) filed
under Post-Effective Amendment No. 32 dated May 1, 1996)
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3.1
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Form of Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company (incorporated by reference to Post-Effective Amendment No. 84 dated
August 24, 2006)
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3.2
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Retirement Distribution Fund I A
Shares, Accelerated Distribution Fund I A Shares, Extended Distribution Fund I A Shares, Retirement Distribution Fund I S Shares, Accelerated Distribution Fund I S Shares and Extended Distribution Fund I S Shares
(incorporated by reference to Post-Effective Amendment No. 104 dated August 24, 2007)
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3.3
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Class A Shares to the Real Estate
Securities Fund, Short Duration Bond Fund and Multistrategy Bond Fund (incorporated by reference to Post-Effective Amendment No. 96 dated February 28, 2007)
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3.4
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Class C and S Shares to the Fixed Income
I Fund (incorporated by reference to Post-Effective Amendment No. 103 dated July 24, 2007)
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3.5
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding 2015 Strategy Fund, 2025 Strategy Fund,
2035 Strategy Fund, 2045 Strategy Fund, 2050 Strategy Fund and In Retirement Fund (incorporated by reference to Post-Effective Amendment No. 113 dated January 7, 2008)
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3.6
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Class Y Shares to the Real Estate
Securities Fund, Emerging Markets Fund, Short Duration Bond Fund, Global Equity Fund and Money Market Fund (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
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3.7
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Class A, Class C and Class S Shares to
the Equity I Fund, Equity Q Fund, Equity II Fund, International Fund and Fixed Income III Fund (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
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3.8
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding Class A Shares to the Russell Investment
Grade Bond Fund, Russell Tax Exempt Bond Fund and In Retirement Fund (incorporated by reference to Post-Effective Amendment No. 133 dated March 24, 2010)
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3.9
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding the Russell Global Credit Strategies
Fund and the Russell Global Infrastructure Fund (incorporated by reference to Post-Effective Amendment No. 135 dated April 1, 2010)
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3.10
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding the 2055 Strategy Fund (incorporated by
reference to Post-Effective Amendment No. 142 dated September 3, 2010)
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3.11
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding the 2020 Retirement Distribution Fund
A Shares and the 2020 Retirement Distribution Fund S Shares (incorporated by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
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3.12
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding the Russell U.S. Large Cap Equity Fund
and the Russell U.S. Mid Cap Equity Fund (incorporated by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
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3.13
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Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust Company adding the Russell Multi-Strategy Alternative
Fund (filed herewith)
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4.1
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Form of Portfolio Management Contract with Money Managers and Russell Investment Management Company (incorporated by reference to Post-Effective Amendment No. 163 dated January
17, 2012)
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5.1
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Amended and Restated Administrative Agreement with Russell Fund Services Company dated January 1, 2008 (incorporated by reference to Post-Effective Amendment No. 115 dated
February 29, 2008)
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5.2
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Letter Agreement amending and restating Section 6.A of the Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 123 dated April 30,
2009)
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5.3
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Form of Letter Agreement adding the Russell Commodity Strategies Fund to the Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 129 dated
December 23, 2009)
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5.4
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Letter Agreement adding the Russell Global Credit Strategies Fund and Russell Global Infrastructure Fund to the Amended and Restated Administrative Agreement (incorporated by
reference to Post-Effective Amendment No. 135 dated April 1, 2010)
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5.5
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Form of Letter Agreement adding the 2055 Strategy Fund to the Amended and Restated Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 142 dated
September 3, 2010)
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5.6
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Letter Agreement amending and restating Section 6.A of the Amended and Restated Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 149 dated
February 28, 2011)
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5.7
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Form of Letter Agreement adding the 2020 Retirement Distribution Fund A Shares and the 2020 Retirement Distribution Fund Shares to the Amended and Restated
Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
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5.8
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Form of Letter Agreement adding the Russell U.S. Large Cap Equity Fund and the Russell U.S. Mid Cap Equity Fund to the Amended and Restated Administrative Agreement (incorporated
by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
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5.9
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Letter Agreement amending and restating Section 6.A of the Amended and Restated Administrative Agreement (incorporated by reference to Post-Effective Amendment No. 166 dated
February 10, 2012)
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5.10
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Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Amended and Restated Administrative Agreement (filed herewith)
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(e)
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1.1
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Amended and Restated Distribution Agreement with Russell Financial Services, Inc. dated April 21, 2009 (incorporated by reference to Post-Effective Amendment No. 123 dated April
30, 2009)
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1.2
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Form of Letter Agreement adding the Russell Commodity Strategies Fund to the Amended and Restated Distribution Agreement (incorporated by reference to Post-Effective Amendment
No. 129 dated December 23, 2009)
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1.3
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Letter Agreement adding Class A Shares to the Russell Tax-Managed U.S. Large Cap Fund, Russell Tax-Managed U.S. Mid & Small Cap Fund, Russell Investment Grade Bond Fund,
Russell Tax Exempt Bond Fund and In Retirement Fund to the Amended and Restated Distribution Agreement (incorporated by reference to Post-Effective Amendment No. 133 dated March 24, 2010)
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1.4
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Letter Agreement adding the Russell Global Credit Strategies Fund and the Russell Global Infrastructure Fund to the Amended and Restated Distribution Agreement (incorporated by
reference to Post-Effective Amendment No. 135 dated April 1, 2010)
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1.5
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Form of Letter Agreement adding the 2055 Strategy Fund to the Amended and Restated Distribution Agreement (incorporated by reference to Post-Effective Amendment No. 142 dated
September 3, 2010)
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1.6
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Form of Letter Agreement adding the 2020 Retirement Distribution Fund A Shares and the 2020 Retirement Distribution Fund S Shares to the Amended and Restated
Distribution Agreement (incorporated by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
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1.7
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Form of Letter Agreement adding the Russell U.S. Large Cap Equity Fund and the Russell U.S. Mid Cap Equity Fund to the Amended and Restated Distribution Agreement (incorporated
by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
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1.8
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Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Amended and Restated Distribution Agreement (filed herewith)
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(f)
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1.1
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Bonus or Profit Sharing Plans (none)
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|
|
|
(g)
|
|
1.1
|
|
Master Custodian Contract with State Street Bank and Trust Company dated August 25, 2009 (incorporated by reference to Post-Effective Amendment No. 128 dated December 1,
2009)
|
|
|
|
|
|
1.2
|
|
Form of Custodian Contract Fee Schedule dated as of January 1, 2009 (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
1.3
|
|
Form of Letter Agreement adding the Russell Commodity Strategies Fund to the Master Custodian Contract (incorporated by reference to Post-Effective Amendment No. 129 dated
December 23, 2009)
|
|
|
|
|
|
1.4
|
|
Form of Letter Agreement adding the Russell Global Credit Strategies Fund and Russell Global Infrastructure Fund to the Master Custodian Contract (incorporated by reference to
Post-Effective Amendment No. 135 dated April 1, 2010)
|
|
|
|
|
|
1.6
|
|
Form of Letter Agreement adding the 2055 Strategy Fund to the Master Custodian Contract (incorporated by reference to Post-Effective Amendment No. 142 dated September 3,
2010)
|
|
|
|
|
|
1.7
|
|
Form of Letter Agreement adding the 2020 Retirement Distribution Fund A Shares and the 2020 Retirement Distribution Fund S Shares to the Master Custodian Contract
(incorporated by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
|
|
|
|
|
|
1.8
|
|
Form of Letter Agreement adding the Russell U.S. Large Cap Equity Fund and the Russell U.S. Mid Cap Equity Fund to the Master Custodian Contract (incorporated by reference to
Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
|
|
|
|
|
|
|
1.9
|
|
Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Master Custodian Contract (filed herewith)
|
|
|
|
(h)
|
|
1.1
|
|
Transfer Agency and Service Agreement dated January 1, 2008 with Russell Investment Company and Russell Fund Services Company (incorporated by reference to Post-Effective
Amendment No. 115 dated February 29, 2008)
|
|
|
|
|
|
1.2
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding Class A, Class C and Class S
Shares to the Equity I Fund, Equity Q Fund, Equity II Fund, International Fund and Fixed Income III Fund (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
|
|
|
|
|
|
1.3
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding Class Y Shares to the Real
Estate Securities Fund, Global Equity Fund, Emerging Markets Fund, Short Duration Bond Fund and Money Market Fund (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
|
|
|
|
|
|
1.4
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the Russell Commodity Strategies
Fund (incorporated by reference to Post-Effective Amendment No. 129 dated December 23, 2009)
|
|
|
|
|
|
1.5
|
|
Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding Class A Shares to the Russell
Tax-Managed U.S. Large Cap Fund, Russell Tax-Managed U.S. Mid & Small Cap Fund, Russell Investment Grade Bond Fund, Russell Tax Exempt Bond Fund and In Retirement Fund (incorporated by reference to Post-Effective Amendment No. 133 dated March
24, 2010)
|
|
|
|
|
|
1.6
|
|
Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the Russell Global Credit Strategies
Fund and the Russell Global Infrastructure Fund (incorporated by reference to Post-Effective Amendment No. 135 dated April 1, 2010)
|
|
|
|
|
|
1.7
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the 2055 Strategy Fund
(incorporated by reference to Post-Effective Amendment No. 142 dated September 3, 2010)
|
|
|
|
|
|
1.9
|
|
Amendment No. 1 to Amended and Restated Transfer Agency and Service Agreement (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
|
|
|
|
|
|
1.10
|
|
Amendment No. 2 to Amended and Restated Transfer Agency and Service Agreement (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
|
|
|
|
|
|
|
|
|
|
|
1.11
|
|
Amendment No. 3 to the Amended and Restated Transfer Agency and Service Agreement (incorporated by reference to Post-Effective Amendment No. 149 dated February 28,
2011)
|
|
|
|
|
|
1.12
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the 2020 Retirement Distribution
Fund A Shares and the 2020 Retirement Distribution Fund S Shares (incorporated by reference to Post-Effective Amendment No. 150 dated March 18, 2011)
|
|
|
|
|
|
1.13
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the Russell U.S Large Cap Equity
Fund and the Russell U.S. Mid Cap Equity Fund (incorporated by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
|
|
1.14
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund Services Company adding the Russell Multi-Strategy
Alternative Fund (filed herewith)
|
|
|
|
|
|
2.1
|
|
General forms of Frank Russell Investment Management Companys Asset Management Services Agreements with Bank Trust Departments and with other clients (incorporated by
reference to Item 24(b)(9)(b) filed under Post-Effective Amendment No. 38 dated February 24, 1998)
|
|
|
|
|
|
2.2
|
|
General forms of Frank Russell Investment Management Companys Asset Management Services Agreement with its clients (incorporated by reference to Item 24(b)(9)(c) filed under
Post-Effective Amendment No. 38 dated February 24, 1998)
|
|
|
|
|
|
2.3
|
|
General form of Frank Russell Investment Management Companys Asset Management Services Agreement with Private Investment Consulting clients of Frank Russell Company
(incorporated by reference to Item 24(b)(9)(c) filed under Post-Effective Amendment No. 38 dated February 24, 1998)
|
|
|
|
|
|
2.4
|
|
General Form of Frank Russell Investment Management Company Asset Management Services Agreement with non-compete clause customers (incorporated by reference to Item 24(b)(9)(f)
filed under Post-Effective Amendment No. 38 dated February 24, 1998)
|
|
|
|
|
|
3.1
|
|
Form of Letter Agreements regarding fee waivers and waivers and reimbursements (incorporated by reference to Post-Effective Amendment No. 167 dated February 28,
2012)
|
|
|
|
|
|
3.2
|
|
Form of Letter Agreements regarding fee waivers and waivers and reimbursements for the Target Distribution Strategies Funds (incorporated by reference to Post-Effective Amendment
No. 153 dated April 28, 2011)
|
|
|
|
|
|
3.3
|
|
Letter Agreement regarding expense assumption for the Target Date Series Funds (incorporated by reference to Post-Effective Amendment No. 144 dated December 3,
2010)
|
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Letter Agreement regarding fee waivers and waivers and reimbursement for the 2021 Retirement Distribution Fund A Shares and the 2021 Retirement Distribution Fund S
Shares (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
3.5
|
|
Letter Agreement regarding fee waivers and reimbursement for the 2017 Accelerated Distribution Fund A Shares and the 2027 Extended Distribution Fund A Shares
(incorporated by reference to Post-Effective Amendment No. 162 dated December 7, 2011)
|
|
|
|
|
|
3.6
|
|
Form of Letter Agreement regarding fee waivers and reimbursement for the Russell U.S. Large Cap Equity Fund and the Russell U.S. Mid Cap Equity Fund (incorporated by reference to
Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
|
|
4.1
|
|
Form of Shareholder Services Plan (filed herewith)
|
|
|
|
|
|
4.2
|
|
Form of Russell Multi-Manager Principal Protected Fund Shareholder Services Plan (incorporated by reference to Post-Effective Amendment No. 61 dated December 16,
2002)
|
|
|
|
|
|
6.1
|
|
Second Amended and Restated Joint Insurance Agreement dated November 29, 2006 (incorporated by reference to Post-Effective Amendment No. 89 dated December 8, 2006)
|
|
|
|
|
|
7.1
|
|
Amended and Restated Securities Lending Authorization Agreement (incorporated by reference to Post-Effective Amendment No. 131 dated February 5, 2010)
|
|
|
|
|
|
7.2
|
|
Amended Schedule B to the Amended and Restated Securities Lending Authorization Agreement (incorporated by reference to Post-Effective Amendment No. 148 dated February 10,
2011)
|
|
|
|
|
|
7.3
|
|
Amendment to Amended and Restated Securities Lending Authorization Agreement (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
7.4
|
|
Form of Second Amendment to the Amended and Restated Securities Lending Authorization Agreement (filed herewith)
|
|
|
|
|
|
7.5
|
|
Form of Russell Cayman Commodity Strategies Fund Ltd. Appointment of Agent For Service of Process (incorporated by reference to Post Effective Amendment No. 134 dated March 31,
2010)
|
|
|
|
|
|
8.1
|
|
Agreement and Plan of Reorganization of the Diversified Equity Fund (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
|
|
|
|
|
8.2
|
|
Agreement and Plan of Reorganization of the Special Growth Fund (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
8.3
|
|
Agreement and Plan of Reorganization of the Quantitative Equity Fund (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
8.4
|
|
Agreement and Plan of Reorganization of the International Securities Fund (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
8.5
|
|
Agreement and Plan of Reorganization of the Multistrategy Bond Fund (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
8.6
|
|
Agreement and Plan of Reorganization of the 2010 Strategy Fund (incorporated by reference to Post-Effective Amendment No. 149 dated February 28, 2011)
|
|
|
|
|
|
8.7
|
|
Guarantee Agreement (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
8.8
|
|
Guarantee Agreement Extension Notice (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
8.9
|
|
Form of Guarantee Agreement Extension Notice (incorporated by reference to Post-Effective Amendment No. 123 dated April 30, 2009)
|
|
|
|
|
|
8.10
|
|
Plan of Liquidation and Dissolution of Sub-Trust of the Russell Flex Equity Fund (Incorporated by reference to Post-Effective Amendment No. 120 dated December 4,
2008)
|
|
|
|
|
|
8.11
|
|
Plan of Liquidation and Dissolution of Sub-Trust of the Russell Tax-Managed Global Equity Fund (incorporated by reference to Post-Effective Amendment No. 128 dated December 1,
2009)
|
|
|
|
|
|
8.12
|
|
Plan of Liquidation and Dissolution of Sub Trust of the 2017 Accelerated Distribution Fund A Shares, 2027 Extended Distribution Fund A Shares, 2017 Accelerated
Distribution Fund S Shares and 2027 Extended Distribution Fund S Shares (incorporated by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
(i)
|
|
1.1
|
|
Opinion and Consent of Counsel (to be filed by amendment)
|
|
|
|
(j)
|
|
1.1
|
|
Other Opinions PricewaterhouseCoopers, independent auditors of the Registrant (none)
|
|
|
|
(k)
|
|
1.1
|
|
Financial Statements omitted from Item 22 (none)
|
|
|
|
|
|
|
|
|
(l)
|
|
1.1
|
|
Agreement dated October 5, 1981 related to Initial Capital provided by Frank Russell Company (incorporated by reference to Item 24(b)(13) filed under Post-Effective
Amendment No. 38 dated February 24, 1998)
|
|
|
|
(m)
|
|
1.1
|
|
Form of Rule 12b-1 Distribution Plan (filed herewith)
|
|
|
|
|
|
1.2
|
|
Form of Rule 12b-1 Distribution Plan for the Russell Multi-Manager Principal Protected Fund (incorporated by reference to Post-Effective Amendment No. 61 dated December 16,
2002)
|
|
|
|
(n)
|
|
1.1
|
|
Multiple Class Plan Pursuant to Rule 18f-3 (filed herewith)
|
|
|
(p)
|
|
Codes of Ethics of the following information advisors and sub-advisors:
|
|
|
|
|
|
1.1
|
|
AEW Capital Management, L.P. (incorporated by reference to Post-Effective Amendment No. 113 dated January 7, 2008)
|
|
|
|
|
|
1.2
|
|
AQR Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.3
|
|
AllianceBernstein L.P. (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.4
|
|
Altrinsic Global Advisors, LLC (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
|
|
|
|
|
|
1.5
|
|
Arbor Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 162 dayed January 17, 2012)
|
|
|
|
|
|
1.6
|
|
Ark Asset Management Co., Inc. (incorporated by reference to Post-Effective Amendment No. 89 dated December 8, 2006)
|
|
|
|
|
|
1.7
|
|
Armstrong Shaw Associates Inc. (incorporated by reference to Post-Effective Amendment No. 104 dated August 24, 2007)
|
|
|
|
|
|
1.8
|
|
Arnhold and S. Bleichroeder Advisers, LLC (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.9
|
|
Aronson+Johnson+Ortiz, LP (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.10
|
|
Arrowstreet Capital, Limited Partnership (incorporated by reference to Post-Effective Amendment No. 162 dated December 7, 2011)
|
|
|
|
|
|
1.11
|
|
Axiom International Investors LLC (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.12
|
|
Barclays Global Fund Advisors N.A. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.13
|
|
Bear Stearns Asset Management Inc. (incorporated by reference to Post-Effective Amendment No. 81 dated December 7, 2005)
|
|
|
|
|
|
1.14
|
|
Berkeley Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 104 dated August 24, 2007)
|
|
|
|
|
|
1.15
|
|
Blackrock Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.16
|
|
BlackRock Financial Management (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.17
|
|
The Boston Company Asset Management (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
|
|
|
|
|
1.18
|
|
Brandywine Asset Management, Inc. (incorporated by reference to Post-Effective Amendment No. 62 dated December 16, 2002)
|
|
|
|
|
|
1.19
|
|
Brookfield Investment Management, Inc.(incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.20
|
|
Capital International, Inc. (incorporated by reference to Post-Effective Amendment No. 69 dated March 1, 2004)
|
|
|
|
|
|
1.21
|
|
CapitalWorks International Partners (incorporated by reference to Post-Effective Amendment No. 81 dated December 7, 2005)
|
|
|
|
|
|
1.22
|
|
Ceredex Value Advisors LLC (incorporated by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
|
|
1.23
|
|
Chartwell Investment Partners (incorporated by reference to Post-Effective Amendment No. 113 dated January 7, 2008)
|
|
|
|
|
|
1.24
|
|
ClariVest Asset Management LLC (incorporated by reference to Post-Effective Amendment No. 148 dated February 11, 2011)
|
|
|
|
|
|
1.25
|
|
Cohen & Steers (incorporated by reference to Post-Effective Amendment No. 133 dated March 22, 2010)
|
|
|
|
|
|
1.26
|
|
Columbus Circle Investors (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
1.27
|
|
Cornerstone Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.28
|
|
Credit Suisse Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 134 dated March 31, 2010)
|
|
|
|
|
|
1.29
|
|
David J. Greene & Company, LLC (incorporated by reference from Post-Effective Amendment No. 48 dated October 19, 2000)
|
|
|
|
|
|
1.30
|
|
Delaware International Advisors Limited (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.31
|
|
Delaware Management Company (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
1.32
|
|
Delphi Management, Inc. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.33
|
|
del Rey Global Investors, LLC (incorporated by reference to Post-Effective Amendment No. 144 dated December 3, 2010)
|
|
|
|
|
|
1.34
|
|
DePrince, Race & Zollo, Inc. (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.35
|
|
DDJ Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 145 dated December 10, 2010)
|
|
|
|
|
|
1.36
|
|
Drake Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.37
|
|
Driehaus Capital Management LLC. (incorporated by reference to Post-Effective Amendment No. 161 dated November 1, 2011)
|
|
|
|
|
|
1.38
|
|
EAM Investors, LLC (incorporated by reference to Post-Effective Amendment No. 166 dated February 10, 2012)
|
|
|
|
|
|
1.39
|
|
Equinox Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.40
|
|
FAF Advisors (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.41
|
|
Falcon Point Capital, LLC (incorporated by reference to Post-Effective Amendment No. 166 dated February 10, 2012)
|
|
|
|
|
|
|
|
|
|
|
1.42
|
|
Fidelity International Limited (incorporated by reference to Post-Effective Amendment No. 52 dated March 1, 2001)
|
|
|
|
|
|
1.43
|
|
Fidelity Management and Research Company (incorporated by reference to Post-Effective Amendment No. 81 dated December 7, 2005)
|
|
|
|
|
|
1.44
|
|
Foreign & Colonial Emerging Markets Limited (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.45
|
|
Franklin Portfolio Associates LLC (incorporated by reference to Post-Effective Amendment No. 104 dated August 24, 2007)
|
|
|
|
|
|
1.46
|
|
Fuller & Thaler Asset Management, Inc. (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
1.47
|
|
Gartmore Global Partners (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.48
|
|
Geewax, Terker & Company (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.49
|
|
Genesis Asset Managers, Ltd. (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.50
|
|
GLG Inc. (incorporated by reference to Post-Effective Amendment No. 144 dated December 3, 2010)
|
|
|
|
|
|
1.51
|
|
GlobeFlex Capital, L.P. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.52
|
|
Goldman Sachs Asset Management (incorporated by reference to Post-Effective Amendment No. 162 dated December 7, 2011)
|
|
|
|
|
|
1.53
|
|
Gould Investment Partners LLC (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
1.54
|
|
Harding, Loevner Management, L.P. (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.55
|
|
Harris Associates, L.P. (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.56
|
|
Heitman Real Estate Securities LLC (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
1.57
|
|
HSBC Global Asset Management (USA), Inc. (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.58
|
|
Huber Capital Management LLC (incorporated by reference to Post-Effective Amendment No. 166 dated February 10, 2012)
|
|
|
|
|
|
1.59
|
|
Institutional Capital LLC (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.60
|
|
INTECH Investment Management LLC (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.61
|
|
Iridian Asset Management LLC (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.62
|
|
INVESCO Realty Advisors, a division of INVESCO Institutional (N.A.), Inc. (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.63
|
|
Jacobs Levy Equity Management, Inc. (incorporated by reference to Post-Effective Amendment No. 89 dated December 8, 2006)
|
|
|
|
|
|
1.64
|
|
Jefferies Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
|
|
|
|
|
1.65
|
|
J.P. Morgan Investment Management, Inc. (incorporated by reference to Post-Effective Amendment No. 163 dated January 17, 2012)
|
|
|
|
|
|
1.66
|
|
JS Asset Management (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
1.67
|
|
Kayne Anderson Rudnick Investment Management, LLC (incorporated by reference to Post-Effective Amendment No. 77 dated February 28, 2005)
|
|
|
|
|
|
1.68
|
|
Lazard Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.69
|
|
Lehman Brothers Asset Management LLC (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.70
|
|
John A. Levin & Co., Inc. (incorporated by reference to Post-Effective Amendment No. 69 dated March 1, 2004)
|
|
|
|
|
|
1.71
|
|
Lincoln Capital Fixed Income Management Company (incorporated by reference to Post-Effective Amendment No. 69 dated March 1, 2004)
|
|
|
|
|
|
1.72
|
|
Logan Circle Partners, L.P. (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.73
|
|
Lord, Abbett &Co. (incorporated by reference to Post-Effective Amendment No. 61 dated December 16, 2002)
|
|
|
|
|
|
1.74
|
|
Macquarie Capital Investment Management LLC (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.75
|
|
Marsico Capital Management, LLC (incorporated by reference to Post-Effective amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.76
|
|
Marvin & Palmer Associates, Inc. (Amended) (incorporated by reference to Post-Effective Amendment No. 77 dated February 28, 2005)
|
|
|
|
|
|
1.77
|
|
Mastholm Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.78
|
|
Merganser Capital Management LP (incorporated by reference to Post-Effective Amendment No. 50 dated January 12, 2001)
|
|
|
|
|
|
1.79
|
|
Metropolitan West Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 123 dated April 30, 2009)
|
|
|
|
|
|
1.80
|
|
MFS Institutional Advisors, Inc. (incorporated by reference to Post-Effective Amendment No. 142 dated September 3, 2010)
|
|
|
|
|
|
1.81
|
|
Miller, Anderson & Sherrerd, LLP (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.82
|
|
Mondrian Investment Partners Limited (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.83
|
|
Montag & Caldwell, Inc. (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.84
|
|
Montgomery Asset Management LLC (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.85
|
|
Morgan Stanley Investments, LP (incorporated by reference to Post-Effective Amendment No. 103 dated July 24, 2007)
|
|
|
|
|
|
1.86
|
|
Netols Asset Management, Inc. ( incorporated by reference to Post-Effective Amendment No. 115 dated February 29, 2008)
|
|
|
|
|
|
1.87
|
|
Neuberger Berman Management Inc (incorporated by reference to Post-Effective Amendment No. 129 dated December 23, 2009)
|
|
|
|
|
|
1.88
|
|
Next Century Growth Investors, LLC (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
|
|
|
|
|
1.89
|
|
Nicholas-Applegate Capital Management LLC (incorporated by reference to Post-Effective Amendment No. 89 dated December 8, 2006)
|
|
|
|
|
|
1.90
|
|
Numeric Investors, LLC (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.91
|
|
Nuveen Asset Management, LLC (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.92
|
|
NWQ Investment Management Company, LLC (incorporated by reference to Post-Effective Amendment No. 166 dated February 10, 2012)
|
|
|
|
|
|
1.93
|
|
Oaktree Capital Management, L.P. (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.94
|
|
Oechsle International Advisors, LLC (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.95
|
|
Pacific Investment Management Company (incorporated by reference to Post-Effective Amendment No. 129 dated December 23, 2009)
|
|
|
|
|
|
1.96
|
|
Palisades Investment Partners, LLC (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
1.97
|
|
PanAgora Asset Management, Inc. (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.98
|
|
Parametric Portfolio Associates (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
1.99
|
|
Peachtree Asset Management (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.100
|
|
PENN Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 166 dated February 10, 2012)
|
|
|
|
|
|
1.101
|
|
Pzena Investment Management, LLC (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.102
|
|
Ranger Investment Management, L.P. (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.103
|
|
Roxbury Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 69 dated March 1, 2004)
|
|
|
|
|
|
1.104
|
|
RREEF America L.L.C. (incorporated by reference to Post-Effective Amendment No. 115 dated February 29, 2008)
|
|
|
|
|
|
1.105
|
|
Russell Investment Group (filed herewith)
|
|
|
|
|
|
1.106
|
|
Sands Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.107
|
|
Sanders Capital, LLC (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.108
|
|
Schneider Capital Management Corporation (incorporated by reference to Post-Effective Amendment No. 89 dated December 8, 2006)
|
|
|
|
|
|
1.109
|
|
Schroders Capital Management International Limited (incorporated by reference to Post-Effective Amendment No. 55 dated December 21, 2001)
|
|
|
|
|
|
1.110
|
|
Security Capital Global Capital Management Group (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.111
|
|
Signia Capital Management, LLC (incorporated by reference to Post-Effective Amendment No. 128 dated December 1, 2009)
|
|
|
|
|
|
1.112
|
|
Sirach Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 56 dated March 1, 2002)
|
|
|
|
|
|
|
|
|
|
|
1.113
|
|
Snow Capital Management L.P. (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.114
|
|
Standish Mellon Asset Management Company LLC (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
1.115
|
|
Stone Harbor Investment Partners LP (incorporated by reference to Post-Effective Amendment No. 145 dated December 10, 2010)
|
|
|
|
|
|
1.116
|
|
STW Fixed Income Management Ltd. (incorporated by reference to Post-Effective Amendment No. 115 dated February 29, 2008)
|
|
|
|
|
|
1.117
|
|
Strong Capital Management (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.118
|
|
Suffolk Capital Management Ltd. (incorporated by reference to Post-Effective Amendment No. 133 dated March 22, 2010)
|
|
|
|
|
|
1.119
|
|
Summit Creek Advisors, LLC (incorporated by reference to Post-Effective Amendment No. 141 dated June 29, 2010)
|
|
|
|
|
|
1.120
|
|
Sustainable Growth Advisers, LP (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.121
|
|
Systematic Financial Management, L.P. (incorporated by reference to Post-Effective Amendment No. 148 dated February 10, 2011)
|
|
|
|
|
|
1.122
|
|
TCW Asset Management Co. (incorporated by reference to Post-Effective Amendment No. 50 dated January 12, 2001)
|
|
|
|
|
|
1.123
|
|
TimesSquare Capital Management, Inc. (incorporated by reference to Post-Effective Amendment No. 47 dated October 19, 2000)
|
|
|
|
|
|
1.124
|
|
Tradewinds Global Investors, LLC (incorporated by reference to Post-Effective Amendment No. 119 dated June 2, 2008)
|
|
|
|
|
|
1.125
|
|
Transamerica Investment Management, LLC (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
1.126
|
|
T. Rowe Price Group, Inc. (incorporated by reference to Post-Effective Amendment No. 122 dated March 1, 2009)
|
|
|
|
|
|
1.127
|
|
Turner Investment Partners (incorporated by reference to Post-Effective Amendment No. 81 dated December 7, 2005)
|
|
|
|
|
|
1.128
|
|
Tygh Capital Management (incorporated by reference to Post-Effective Amendment No. 112 dated December 3, 2007)
|
|
|
|
|
|
1.129
|
|
UBS Global Asset Management Americas (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
|
|
|
|
|
1.130
|
|
Victoria 1522 Investment, LP (incorporated by reference to Post-Effective Amendment No. 159 dated July 29, 2011)
|
|
|
|
|
|
1.131
|
|
Weiss, Peck & Greer, L.L.C. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.132
|
|
Wellington Management Company, LLP (incorporated by reference to Post-Effective Amendment No. 120 dated December 4, 2008)
|
|
|
|
|
|
1.133
|
|
Wells Capital Management Incorporated (incorporated by reference to Post-Effective Amendment No. 77 dated February 28, 2005)
|
|
|
|
|
|
1.134
|
|
Westcap Investors (incorporated by reference to Post-Effective Amendment No. 77 dated February 28, 2005)
|
|
|
|
|
|
1.135
|
|
Western Asset Management Company (incorporated by reference to Post-Effective Amendment No. 119 dated August 1, 2008)
|
|
|
|
|
|
1.136
|
|
Westpeak Investment Advisors, L.P. (incorporated by reference to Post-Effective Amendment No. 46 dated April 27, 2000)
|
|
|
|
|
|
1.137
|
|
William Blair & Company, LLC (incorporated by reference to Post-Effective Amendment No. 124 dated July 24, 2009)
|
Item 29.
|
Persons Controlled by or Under Common Control with Registrant
|
None
Item 30.
|
Indemnification
(incorporated by reference to Post-Effective Amendment No. 113 dated January 7, 2008)
|
Item 31.
|
Business and Other Connections of Investment Advisor
|
See Registrants prospectus sections Management of the Funds and The Money Managers, and the Statement of Additional Information sections Structure and
GovernanceTrustees and Officers, and Operation of RIC.
Item 32.
|
Principal Underwriters
|
|
(a)
|
Russell Investment Funds
|
|
(b)
|
Russell Financial Services, Inc. is the principal underwriter of the Registrant. The directors and officers of Russell Financial Services, Inc., their
principal business address in each case is 1301 Second Avenue, 18
th
Floor, Seattle, Washington 98101, and positions and offices with the Registrant and Russell Financial Services, Inc. are set forth below:
|
|
|
|
|
|
Name
|
|
Positions and
Offices with
Registrant
|
|
Position and
Offices with
Underwriter
|
Carla L. Anderson
|
|
None
|
|
Assistant Secretary
|
Sandra Cavanaugh
|
|
Trustee, President and Chief Executive Officer
|
|
Co-President, Chief Executive Officer and Chairman
|
Greg Gilbert
|
|
None
|
|
Co-President and Chief Executive Officer
|
Brian Golob
|
|
None
|
|
Director
|
Mary Killgrove
|
|
None
|
|
Assistant Secretary
|
Gerry Lillis
|
|
None
|
|
Director, Relationship Management
|
Peter G. Moroni
|
|
None
|
|
Regional Director
|
Matthew Moss
|
|
None
|
|
Chief Financial Officer
|
Debra Ramsey
|
|
None
|
|
Chief Operating Officer, Private Client Services
|
Mary Beth Rhoden
|
|
Secretary and Chief Legal Officer
|
|
Secretary
|
Lisa Schneider
|
|
None
|
|
Director, Client Service
|
Mark E. Swanson
|
|
Treasurer, Chief Accounting Officer and CFO
|
|
Director
|
Christy Watanabe
|
|
None
|
|
Chief Compliance and
Anti-Money Laundering Officer
|
Jean Webber
|
|
None
|
|
Treasurer
|
Item 33.
|
Location of Accounts and Records
|
All accounts and records required to be maintained by section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained in the following locations:
|
|
|
RIC
|
|
RIMCo
|
Russell Investment Company
|
|
Russell Investment
|
1301 Second Avenue,
|
|
Management Company
|
18
th
Floor
|
|
1301 Second Avenue
|
Seattle, Washington 98101
|
|
18
th
Floor
|
|
|
Seattle, Washington 98101
|
|
RFSC
|
Russell Fund Services Company
|
1301 Second Avenue
|
18
th
Floor
|
Seattle, Washington 98101
|
|
|
|
SS
|
|
MM
|
State Street Bank & Trust Company
|
|
Money Managers
|
Josiah Quincy Building
|
|
See
, Prospectus Section
|
200 Newport Avenue
|
|
Money Manager Information
|
North Quincy, Massachusetts 02171
|
|
for Names and Addresses
|
|
|
|
|
|
|
|
Rule 31a-1
|
|
|
|
(a)
|
|
|
|
Records forming basis for financial statements - at principal offices of SS, RIC, RIMCo, and MM for each entity
|
|
|
|
(b)
|
|
|
|
RIC Records:
|
|
|
|
|
|
|
(1)
|
|
|
|
SS - Journals, etc.
|
|
|
|
|
|
|
(2)
|
|
|
|
SS - Ledgers, etc.
|
|
|
|
|
|
|
(3)
|
|
|
|
Inapplicable
|
|
|
|
|
|
|
(4)
|
|
|
|
RIC - Corporate charter, etc.
|
|
|
|
|
|
|
(5)
|
|
|
|
MM and RIMCo - Brokerage orders
|
|
|
|
|
|
|
(6)
|
|
|
|
MM and RIMCo - Other portfolio purchase orders
|
|
|
|
|
|
|
(7)
|
|
|
|
SS - Contractual commitments
|
|
|
|
|
|
|
(8)
|
|
|
|
SS and RIC - Trial balances
|
|
|
|
|
|
|
(9)
|
|
|
|
MM and RIMCo - Reasons for brokerage allocations
|
|
|
|
|
|
|
(10)
|
|
|
|
MM and RIMCo - Persons authorizing purchases and sales
|
|
|
|
|
|
|
(11)
|
|
|
|
RIC and MM - Files of advisory material
|
|
|
|
|
|
|
(12)
|
|
|
|
|
|
|
|
(c)
|
|
|
|
Inapplicable
|
|
|
|
(d)
|
|
|
|
RIMCo - Broker-dealer records, to the extent applicable
|
|
|
|
(e)
|
|
|
|
Inapplicable
|
|
|
|
(f)
|
|
|
|
RIMCo and MM - Investment adviser records
|
Item 34.
|
Management Services
|
None
except as described in Parts A and B.
The Cayman
subsidiary should designate an agent in the U.S. for service of process in any suit, action, or proceeding before the Commission, or any appropriate court and consents to the jurisdiction of the U.S. courts and the Commission over it.
The Fund will not in any way use the Cayman subsidiary to evade the provisions of the Investment Company Act of 1940 or Advisers Act.
The Cayman subsidiary will maintain a set of its books and records at an office located within the U.S., and the Commission
and its staff will have access to the books and records consistent with the requirements of Section 31 of Investment Company Act and the rules thereunder.
The Cayman subsidiary will designate its custodian as agent in the U.S. for service of process for any suit, action or proceeding before the commission or any appropriate court and the Cayman subsidiary
will consent to the jurisdiction of the U.S. courts and the Commission over it.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Russell Investment Company, has duly caused this Post Effective Amendment No. 168 to
its Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Seattle, and State of Washington, on this 15th day of March, 2012.
|
|
|
RUSSELL INVESTMENT COMPANY
|
|
|
Registrant
|
|
|
By:
|
|
/s/ Sandra Cavanaugh
|
|
|
Sandra Cavanaugh, President
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by
the following persons in the capacities indicated on March 15, 2012
|
|
|
Signatures
|
|
Signatures
|
|
|
/s/ Sandra Cavanaugh
Sandra Cavanaugh, Trustee, President
And Chief Executive Officer
|
|
/s/ Mark E. Swanson
Mark E. Swanson, Treasurer and
Chief Accounting Officer
|
|
|
/s/ Thaddas L. Alston
Thaddas L. Alston, Trustee
|
|
/s/ Kristianne Blake
Kristianne Blake, Trustee
|
|
|
/s/ Daniel P. Connealy
Daniel P. Connealy, Trustee
|
|
/s/ Jonathan Fine
Jonathan Fine, Trustee
|
|
|
/s/ Raymond P. Tennison, Jr.
Raymond P. Tennison, Jr., Trustee
|
|
/s/ Jack R. Thompson
Jack R. Thompson, Trustee
|
|
|
/s/ Julie W. Weston
Julie W. Weston, Trustee
|
|
|
RUSSELL INVESTMENT COMPANY
FILE NO. 2-71299
FILE NO. 811-03153
EXHIBITS
Listed in Part C, Item 28
To Post-Effective Amendment No. 168
and Amendment No. 174
to
Registration Statement on Form N-1A
Under
Securities Act of 1933
and
Investment
Company Act of 1940
EXHIBIT INDEX
|
|
|
Name of Exhibit
|
|
Exhibit Number
|
|
|
Form of Amendment No. 14 to Second Amended and Restated Master Trust Agreement
|
|
(a)1.15
|
|
|
By-Laws of Russell Investment Company dated February 28, 2012
|
|
(b)1.1
|
|
|
Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Advisory Agreement
|
|
(d)1.18
|
|
|
Form of Letter Agreement to the Amended and Restated Yield Calculation Services Agreement with State Street Bank and Trust
Company adding the Russell Multi-Strategy Alternative Fund
|
|
(d)3.13
|
|
|
Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Amended and Restated Administrative
Agreement
|
|
(d)5.10
|
|
|
Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Amended and Restated Distribution
Agreement
|
|
(e)1.8
|
|
|
Form of Letter Agreement adding the Russell Multi-Strategy Alternative Fund to the Master Custodian Contract
|
|
(g)1.9
|
|
|
Form of Letter Agreement to the Transfer Agency and Service Agreement between Russell Investment Company and Russell Fund
Services Company adding the Russell Multi-Strategy Alternative Fund
|
|
(h)1.14
|
|
|
Form of Shareholder Services Plan
|
|
(h)4.1
|
|
|
Form of Second Amendment to the Amended and Restated Securities Lending Authorization Agreement
|
|
(h)7.4
|
|
|
Form of Rule 12b-1 Distribution Plan
|
|
(m)1.1
|
|
|
Multiple Class Plan Pursuant to Rule 18f-3
|
|
(n)1.1
|
|
|
Russell Investment Group Code of Ethics
|
|
(p)1.105
|