THE SARATOGA ADVANTAGE TRUST

STATEMENT OF ADDITIONAL INFORMATION

DATED DECEMBER 29, 2023

 

Fund Name:   Class A   Class I   Class C
Asset Allocation Portfolios:            
Conservative Balanced Allocation Portfolio   SCAAX   LUNAX   SUMCX
Moderately Conservative Balanced Allocation Portfolio   SMACX   SMICX   SBCCX
Moderate Balanced Allocation Portfolio   SMPAX   SBMIX   SBMCX
Moderately Aggressive Balanced Allocation Portfolio   SAMAX   SAMIX   SAMCX
Aggressive Balanced Allocation Portfolio   SABAX   SABIX   SABCX
             
Income Portfolios:            
U.S. Government Money Market Portfolio   SGAAX   SGMXX   SZCXX
Investment Quality Bond Portfolio   SQBAX   SIBPX   SQBCX
Municipal Bond Portfolio   SMBAX   SMBPX   SMBCX
             
Equity Portfolios:            
Large Capitalization Value Portfolio   SLVYX   SLCVX   SLVCX
Large Capitalization Growth Portfolio   SLGYX   SLCGX   SLGCX
Mid Capitalization Portfolio   SPMAX   SMIPX   SPMCX
Small Capitalization Portfolio   SSCYX   SSCPX   SSCCX
International Equity Portfolio   SIEYX   SIEPX   SIECX
Health & Biotechnology Portfolio   SHPAX   SBHIX   SHPCX
Technology & Communications Portfolio   STPAX   STPIX   STPCX
Financial Services Portfolio   SFPAX   SFPIX   SFPCX
Energy & Basic Materials Portfolio   SBMBX   SEPIX   SEPCX

 

(each a “Portfolio” and collectively the “Portfolios”)

 

This STATEMENT OF ADDITIONAL INFORMATION (“SAI”) is not a PROSPECTUS. Investors should understand that this SAI should be read in conjunction with the Saratoga Advantage Trust’s (the “Trust”) Class I PROSPECTUS, Class A PROSPECTUS and Class C PROSPECTUS, each dated December 29, 2023, with respect to the Conservative Balanced Allocation Portfolio, Moderately Conservative Balanced Allocation Portfolio, Moderate Balanced Allocation Portfolio, Moderately Aggressive Balanced Allocation Portfolio, Aggressive Balanced Allocation Portfolio (collectively, the “Asset Allocation Portfolios”), and the U.S. Government Money Market, Investment Quality Bond, Municipal Bond, Large Capitalization Value, Large Capitalization Growth, Mid Capitalization, Small Capitalization, International Equity, Health & Biotechnology, Technology & Communications, Financial Services and Energy & Basic Materials Portfolios (collectively, the “Initial Portfolios” and, together with the Asset Allocation Portfolios, the “Portfolios”). A copy of each PROSPECTUS may be obtained by written request to Saratoga Capital Management, LLC at the address or phone number listed below.

 

The Trust’s audited financial statements for the fiscal year ended August 31, 2023, including notes thereto and the report of Tait, Weller & Baker LLP, independent registered public accountants, are herein incorporated by reference from the Trust’s annual reports.

 

To obtain copies of any of the Trust’s Prospectuses and/or Annual or Semi-Annual Shareholder Reports free of charge, please write Saratoga Capital Management, LLC, 12725 W. Indian School Road, Suite E-101, Avondale, Arizona 85392 or call toll free at 1-800-807-FUND (1-800-807-3863).

 

 

 

 

TABLE OF CONTENTS

 

    PAGE
TRUST HISTORY   1
INVESTMENT OF THE TRUST’S ASSETS AND RELATED RISKS   1
INVESTMENT RESTRICTIONS   32
PORTFOLIO HOLDINGS DISCLOSURE   35
PRINCIPAL HOLDERS OF SECURITIES AND CONTROL PERSONS OF THE PORTFOLIOS   36
TRUSTEES AND OFFICERS   54
MANAGEMENT AND OTHER SERVICES   59
DETERMINATION OF NET ASSET VALUE   77
CERTAIN TAX CONSIDERATIONS   80
ADDITIONAL INFORMATION   92
FINANCIAL STATEMENTS   94
APPENDIX A – RATINGS   95
APPENDIX B – PROXY VOTING POLICIES AND PROCEDURES   103

 

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TRUST HISTORY

 

The Trust was organized as an unincorporated business trust under the laws of Delaware on April 8, 1994 and is a trust fund commonly known as a “business trust.” The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.

 

The Initial Portfolios, except for the Investment Quality Bond Portfolio, Municipal Bond Portfolio and U.S. Government Money Market Portfolio, are advised by investment advisers, also referred to herein as Advisers, managed and supervised by Saratoga Capital Management, LLC (“SCM”). The Asset Allocation Portfolios, Investment Quality Bond Portfolio, Municipal Bond Portfolio and U.S. Government Money Market Portfolio are managed directly by SCM.

 

SCM, with respect to the Initial Portfolios and the Asset Allocation Portfolios, may be referred to herein as the “Manager.”

 

INVESTMENT OF THE TRUST’S ASSETS AND RELATED RISKS

 

The Portfolios discussed in this SAI are diversified funds within the meaning of the 1940 Act.

 

The investment objective and policies of each Portfolio are described in the PROSPECTUSES. A further description of each Portfolio’s investments and investment methods appears below. Principal investments of each Portfolio are described in each PROSPECTUS.

 

The Asset Allocation Portfolios and the Investment Quality Bond Portfolio, Municipal Bond Portfolio and U.S. Government Money Market Portfolio are “funds of funds” that invest their assets in a combination of Saratoga Advantage Trust mutual funds (the “Saratoga Funds”) and/or unaffiliated registered investment companies and exchange-traded funds (“ETFs”) (together with the Saratoga Funds, the “Underlying Funds”). The Prospectus lists the Saratoga Funds that each Portfolio may utilize as of the date of the Prospectus. The Portfolios may invest in additional Underlying Funds that are not listed in the Prospectus from time to time in the future.

 

Equity Securities. An equity security (such as a stock, partnership interest or other beneficial interest in an issuer) represents a proportionate share of the ownership of a company. Its value is based on the success of the company’s business, any income paid to stockholders, the value of its assets and general market conditions. Common stocks and preferred stocks are examples of equity securities. A preferred stock is a blend of the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be limited.

 

Preferred stocks are equity securities that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preferred stocks may be convertible into common stock. Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer.

 

Convertible securities are securities (such as debt securities or preferred stock) that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula.

 

The risks of investing in companies in general include business failure and reliance on erroneous reports. To the extent an Underlying Fund and/or a Portfolio is invested in the equity securities of small- or medium-size companies, it will be exposed to the risks of smaller sized companies. Small- and medium-size companies, directly or indirectly, often have narrower markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines or services, markets or financial resources, or are dependent on a small management group. In addition, because these securities are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, can decrease the value and liquidity of securities held by an Underlying Fund and/or a Portfolio. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Portfolio’s holdings.

 

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CONVERTIBLE SECURITIES. Certain Underlying Funds and/or Portfolios may invest in fixed-income securities, which are convertible into common stock. Convertible securities rank senior to common stocks in a corporation’s capital structure and, therefore, entail less risk than the corporation’s common stock. The value of a convertible security is a function of its “investment value” (its value as if it did not have a conversion privilege), and its “conversion value” (the security’s worth if it were to be exchanged for the underlying security, at market value, pursuant to its conversion privilege).

 

To the extent that a convertible security’s investment value is greater than its conversion value, its price will be primarily a reflection of such investment value and its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security (the credit standing of the issuer and other factors may also have an effect on the convertible security’s value). If the conversion value exceeds the investment value, the price of the convertible security will rise above its investment value and, in addition, the convertible security will sell at some premium over its conversion value. (This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion privilege.) At such times, the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. Convertible securities may be purchased by the Underlying Funds and/or Portfolios at varying price levels above their investment values and/or their conversion values in keeping with the Underlying Funds’ and/or Portfolios’ objectives.

 

WARRANTS. Certain Underlying Funds and/or Portfolios may invest in warrants. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed coupon or dividend.

 

Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of an Underlying Fund’s and/or a Portfolio’s entire investment therein).

 

Other Investment Companies. Certain Underlying Funds and/or Portfolios may invest up to 100% of their net assets in shares of affiliated and unaffiliated investment companies, including money market mutual funds, other mutual funds or ETFs. A Portfolio’s and/or an Underlying Fund’s investments in money market mutual funds may be used for cash management purposes and to maintain liquidity in order to satisfy redemption requests or pay unanticipated expenses. The return on a Portfolio’s and/or an Underlying Fund’s investments in investment companies will be reduced by the operating expenses, including investment advisory and administrative fees, of such companies, unless waived. A Portfolio’s and/or an Underlying Fund’s investment in an investment company may require the payment of a premium above the net asset value (“NAV”) of the investment company’s shares, and the market price of the investment company’s assets. A Portfolio will not invest in any investment company or trust unless it is believed that the potential benefits of such investment are sufficient to warrant the payment of any such premium. A Portfolio limits its investments in securities issued by other investment companies in accordance with the 1940 Act or with certain terms and conditions of applicable exemptive orders or rules issued by the U.S. Securities and Exchange Commission (“SEC”) and approved by the Board of Trustees. Section 12(d)(1) of the 1940 Act precludes a Portfolio from acquiring (i) more than 3% of the total outstanding shares of another investment company; (ii) shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Portfolio; or (iii) shares of another registered investment company and all other investment companies having an aggregate value in excess of 10% of the value of the total assets of the Portfolio.

 

However, Section 12(d)(1)(F) of the 1940 Act provides that the provisions of Section 12(d)(1) shall not apply to securities purchased or otherwise acquired by a Portfolio if (i) immediately after such purchase or acquisition not more than 3% of the total outstanding shares of such investment company is owned by the Portfolio and all affiliated persons of the Portfolio; and (ii) the Portfolio has not offered or sold, and is not proposing to offer or sell its shares through a principal underwriter or otherwise at a public or offering price that includes a sales load of more than 1½%. SEC Rule 12d1-3 under the 1940 Act provides, however, that a Portfolio may rely on the Section 12(d)(1)(F) exemption and charge a sales load in excess of 1½% provided the sales load and any service fee charged does not exceed limits set forth in applicable Financial Industry Regulatory Authority, Inc. (“FINRA”) rules.

 

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If a Portfolio invests in investment companies, including ETFs, pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Portfolio exercises voting rights, by proxy or otherwise, with respect to investment companies owned by the Portfolio, the Portfolio will either seek instruction from the Portfolio’s shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by the Portfolio in the same proportion as the vote of all other holders of such security. In addition, an investment company purchased by a Portfolio pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment company’s total outstanding shares in any period of less than thirty days. In addition to the advisory and operational fees the Portfolio bears directly in connection with its own operation, the Portfolio also bears its pro rata portion of the advisory and operational expenses incurred indirectly through investments in other investment companies.

 

Other rules under the 1940 Act on which the Portfolios may rely further relax the limits of Section 12(d)(1) of the 1940 Act, such as Rule 12d1-4 under the 1940 Act. To the extent a Portfolio serves as an acquired fund in a fund of funds arrangement in reliance on Rule 12d1-4 under the 1949 Act, the Portfolio would be prohibited from purchasing or otherwise acquiring the securities of an investment company or private fund if, after such purchase or acquisition, the aggregate value of the Portfolio’s investments in such investment companies and private funds would exceed 10% of the value of the Portfolio’s total assets, subject to limited exceptions (including for investments in money market funds).

 

Exchange-Traded Funds. An ETF generally is an open-end investment company, unit investment trust or a portfolio of securities deposited with a depository in exchange for depository receipts. ETFs provide investors the opportunity to buy or sell throughout the day an entire portfolio of securities in a single security. Investments in ETFs are subject to a variety of risks, including risks of a direct investment in the underlying securities that the ETF holds. For example, the general level of stock prices may decline, thereby adversely affecting the value of the underlying investments of the ETF and, consequently, the value of the ETF. In addition, the market value of the ETF shares may differ from their NAV because the supply and demand in the market for ETF shares at any point is not always identical to the supply and demand in the market for the underlying securities. Also, ETFs that track particular indices typically will be unable to match the performance of the index exactly due to, among other things, the ETF’s operating expenses and transaction costs.

 

Certain Portfolios may also invest in inverse ETFs, including double inverse (or ultra-short) ETFs. Inverse ETFs seek to negatively correlate to the performance of the particular index that they track by using various forms of derivative transactions, including by short-selling the underlying index. Ultra-short ETFs seek to multiply the negative return of the tracked index (e.g., twice the inverse return). As a result, an investment in an inverse ETF will decrease in value when the value of the underlying index rises.

 

By investing in ultra-short ETFs and gaining magnified short exposure to a particular index, the Portfolio can commit less assets to the investment in the securities represented on the index than would otherwise be required. ETFs that seek to multiply the negative return on the tracked index are subject to a special form of correlation risk which is the risk that for periods greater than one day, the use of leverage tends to cause the performance of the ETF to be either greater than or less than the index performance times the stated multiple in the ETFs investment objective.

 

Certain Portfolios also intend to invest in commodity-based ETF shares which are not registered as an investment company under the 1940 Act. The main purpose of investing in ETFs of non-registered investment companies is to reduce risk and incur significant returns over the fiscal year.

 

ETFs typically incur fees that are separate from those fees incurred directly by a Portfolio. Therefore, as a shareholder in an ETF (as with other investment companies), a Portfolio would bear its ratable share of that entity’s expenses. At the same time, a Portfolio would continue to pay its own investment management fees and other expenses. As a result, a Portfolio and its shareholders, in effect, will be absorbing duplicate levels of fees with respect to investments in ETFs. The Portfolio may also realize capital gains when ETF shares are sold, and the purchase and sale of the ETF shares may include a brokerage commission that may result in costs.

 

Although mutual funds are similar to ETFs, they are generally sold and redeemed only once per day at market close. ETFs may seek to track a particular index or be actively managed. The ETFs in which a Portfolio invests may be subject to liquidity risk. Liquidity risk exists when particular investments are difficult to purchase or sell, possibly preventing the sale of the security at an advantageous time or price. To the extent that the ETFs in which a Portfolio invests hold securities of companies with smaller market capitalizations or securities with substantial market risk, they will have a greater exposure to liquidity risk. In addition, ETFs are subject to the following risks that do not apply to conventional mutual funds: (1) the market price of the ETF’s shares may trade at a discount to their NAV; (2) an active trading market for an ETF’s shares may not develop or be maintained; and (3) trading of an ETF’s shares may be halted if (i) the listing exchange deems such action appropriate, (ii) the shares are de-listed from the exchange, or (iii) upon the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) that halt stock trading generally.

 

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EXCHANGE-TRADED NOTES. Certain Underlying Funds and/or Portfolios may invest in exchange-traded notes. Exchange-traded notes (“ETNs”) are senior, unsecured, unsubordinated debt securities whose returns are linked to the performance of a particular market benchmark or strategy, minus applicable fees. ETNs are traded on an exchange (e.g., the New York Stock Exchange) during normal trading hours; however, investors can also hold the ETN until maturity. At maturity, the issuer pays to the investor a cash amount equal to the principal amount, subject to the day’s market benchmark or strategy factor. ETNs do not make periodic coupon payments or provide principal protection. ETNs are subject to credit risk, including the credit risk of the issuer, and the value of the ETN may drop due to a downgrade in the issuer’s credit rating, despite the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset.

 

When an Underlying Fund and/or Portfolio invests in ETNs it will bear its proportionate share of any fees and expenses borne by the ETN. A decision to sell ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not be required to maintain the listing, and there can be no assurance that a secondary market will exist for an ETN.

 

An ETN that is tied to a specific market benchmark or strategy may not be able to replicate and maintain exactly the composition and relative weighting of securities, commodities or other components in the applicable market benchmark or strategy. Some ETNs that use leverage can, at times, be relatively illiquid, and thus they may be difficult to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk as other instruments that use leverage in any form.

 

ADJUSTABLE RATE SECURITIES. Certain Underlying Funds and/or Portfolios may invest in adjustable rate securities (i.e., variable rate and floating rate instruments), which are securities that have interest rates that are adjusted periodically, according to a set formula. The maturity of some adjustable rate securities may be shortened under certain special conditions described more fully below.

 

Variable rate instruments are obligations that provide for the adjustment of their interest rates on predetermined dates or whenever a specific interest rate changes. A variable rate instrument whose principal amount is scheduled to be paid in 397 days or less is considered to have a maturity equal to the period remaining until the next readjustment of the interest rate. Many variable rate instruments are subject to demand features, which entitle the purchaser to resell such securities to the issuer or another designated party, either (1) at any time upon notice of usually 397 days or less, or (2) at specified intervals, not exceeding 397 days, and upon 30 days’ notice.

 

A variable rate instrument subject to a demand feature is considered to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand, if final maturity exceeds 397 days or the shorter of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand if final maturity is within 397 days.

 

Floating rate instruments have interest rate reset provisions similar to those for variable rate instruments and may be subject to demand features like those for variable rate instruments. The interest rate is adjusted, periodically (e.g., daily, monthly, semi-annually), to the prevailing interest rate in the marketplace. The interest rate on floating rate instruments is ordinarily determined by reference to the 90-day U.S. Treasury bill rate, the rate of return on commercial paper or bank certificates of deposit or an index of short-term interest rates. The maturity of a floating rate instrument is considered to be the period remaining until the principal amount can be recovered through demand.

 

U.S. GOVERNMENT SECURITIES. U.S. government securities are high-quality debt securities issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the full faith and credit of, or guaranteed by the United States Treasury. For example, securities issued by the Farm Credit Banks or by the Federal National Mortgage Association are supported by the instrumentality’s right to borrow money from the U.S. Treasury under certain circumstances. Moreover, securities issued by other agencies or instrumentalities are supported only by the credit of the entity that issued them.

 

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ZERO-COUPON SECURITIES. Certain Underlying Funds and/or Portfolios may invest in zero-coupon securities which make no periodic interest payments, but are sold at a deep discount from their face value. The buyer recognizes a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The discount varies depending on the time remaining until maturity, as well as market interest rates, liquidity of the security and the issuer’s perceived credit quality. If the issuer defaults, the holder may not receive any return on its investment. Because zero-coupon securities bear no interest and compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon bondholders do not receive interest payments, when interest rates rise, zero-coupon securities fall more dramatically in value than bonds paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the bonds reflect a fixed rate of return. An investment in zero-coupon and delayed interest securities may cause an Underlying Fund and/or a Portfolio to recognize income and make distributions to shareholders, such as a Portfolio, before it receives any cash payments on its investment.

 

INTEREST RATE RISK. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise; conversely, bond prices generally rise as interest rates fall. The Portfolio may face a heightened level of interest rate risk due to certain changes in monetary policy, such as certain types of interest rate changes by the Federal Reserve. Specific bonds differ in their sensitivity to changes in interest rates depending on their individual characteristics. One measure of this sensitivity is called duration. The longer the duration of a particular bond, the greater is its price sensitivity to interest rates. Similarly, a longer duration portfolio of securities has greater price sensitivity. In addition, changes in monetary policy may exacerbate the risks associated with changing interest rates. An increase in interest rates will generally cause the value of securities held by a Portfolio or Underlying Fund to decline, may lead to heightened volatility in the fixed-income markets and may adversely affect the liquidity of certain fixed-income investments, including those held by a Portfolio or Underlying Fund.

 

Falling interest rates may also prompt some issuers to refinance existing debt, which could affect an Underlying Fund’s performance. During periods when interest rates are low or there are negative interest rates, the Portfolio’s yield (and total return) also may be low or otherwise adversely affected or the Portfolio may be unable to maintain positive returns. Certain countries have experienced negative interest rates on certain debt securities. Negative or very low interest rates could magnify the risks associated with changes in interest rates. In general, changing interest rates, including rates that fall below zero, could have unpredictable effects on markets and may expose debt and related markets to heightened volatility and may detract from Portfolio performance to the extent the Portfolio is exposed to such interest rates and/or volatility.

 

Governmental authorities and regulators may enact significant fiscal and monetary policy changes, including providing direct capital infusions into companies, creating new monetary programs and lowering interest rates considerably. These actions present heightened risks to debt instruments, and such risks could be even further heightened if these actions are unexpectedly or suddenly reversed or are ineffective in achieving their desired outcomes.

 

For the U.S. Government Money Market Portfolio, which seeks to maintain a stable $1.00 price per share, a low or negative interest rate environment could impact the Portfolio’s ability to maintain a stable $1.00 share price. During a low or negative interest rate environment, the Portfolio may reduce the number of shares outstanding on a pro rata basis through reverse stock splits, negative dividends or other mechanisms to seek to maintain a stable $1.00 price per share, to the extent permissible by applicable law and its organizational documents. Alternatively, the Portfolio may discontinue using the amortized cost method of valuation to maintain a stable $1.00 price per share and establish a fluctuating NAV per share rounded to four decimal places by using available market quotations or equivalents.

 

BELOW INVESTMENT GRADE DEBT SECURITIES. Certain Underlying Funds and/or Portfolios may invest in debt securities that are rated below “investment grade” by Standard and Poor’s Corporation (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”) or Fitch, Inc. (“Fitch”) or, if unrated, are deemed by the Advisers or SCM to be of comparable quality. Securities rated less than Baa by Moody’s or BBB by S&P are classified as below investment grade securities and are commonly referred to as “junk bonds” or high yield, high risk securities. Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca, C is regarded by S&P and Moody’s, respectively, on balance, as predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. For S&P, BB indicates the lowest degree of speculation and C the highest degree of speculation for below investment grade securities. For Moody’s, Ba indicates the lowest degree of speculation and C the highest degree of speculation for below investment grade securities. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Similarly, debt rated Ba or BB and below is regarded by the relevant rating agency as speculative. Debt rated C by Moody’s or S&P is the lowest rated debt that is not in default as to principal or interest, and such issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

 

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Such securities are also generally considered to be subject to greater risk than securities with higher ratings with regard to a deterioration of general economic conditions. Excerpts from S&P’s, Moody’s, and Fitch’s descriptions of their bond ratings are contained in Appendix A to this SAI.

 

Ratings of debt securities represent the rating agency’s 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, since rating agencies may fail to make timely changes in credit ratings in response to subsequent events, the Advisers or SCM continuously monitor the issuers of high yield bonds to determine if the issuers will have sufficient cash flows and profits to meet required principal and interest payments. The achievement of an Underlying Fund’s and/or a Portfolio’s investment objective may be more dependent on an Adviser’s or SCM’s own credit analysis than might be the case for a fund which invests in higher quality bonds. An Underlying Fund and/or a Portfolio may retain a security whose rating has been changed.

 

The market values of lower quality debt securities tend to reflect individual developments of the issuer to a greater extent than do higher quality securities, which react primarily to fluctuations in the general level of interest rates. In addition, lower quality debt securities tend to be more sensitive to economic conditions and generally have more volatile prices than higher quality securities. Issuers of lower quality securities are often highly leveraged and may not have available to them more traditional methods of financing. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower quality securities may experience financial stress. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer’s ability to service debt obligations may also be adversely affected by specific developments affecting the issuer, such as the issuer’s inability to meet specific projected business forecasts or the unavailability of additional financing. Similarly, certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank and may not be able or willing to make principal and/or interest repayments as they come due. The risk of loss due to default by the issuer is significantly greater for the holders of lower quality securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer.

 

Lower quality debt securities frequently have call or buy-back features, which would permit an issuer to call or repurchase the security from an Underlying Fund and/or a Portfolio. In addition, an Underlying Fund and/or a Portfolio may have difficulty disposing of lower quality securities because they may have a thin trading market. There may be no established retail secondary market for many of these securities, and each Portfolio anticipates that such securities could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market also may have an adverse impact on market prices of such instruments and may make it more difficult for an Underlying Fund and/or a Portfolio to obtain accurate market quotations for purposes of valuing the Underlying Fund’s and/or the Portfolio’s holdings. An Underlying Fund and/or a Portfolio may also acquire lower quality debt securities during an initial underwriting or which are sold without registration under applicable securities laws. Such securities involve special considerations and risks.

 

In addition to the foregoing, factors that could have an adverse effect on the market value of lower quality debt securities in which the Underlying Fund and/or the Portfolios may invest include: (i) potential adverse publicity, (ii) heightened sensitivity to general economic or political conditions and (iii) the likely adverse impact of a major economic recession. An Underlying Fund and/or a Portfolio may also incur additional expenses to the extent the Underlying Fund and/or the Portfolio is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings, and the Portfolio may have limited legal recourse in the event of a default. Debt securities issued by governments in emerging markets can differ from debt obligations issued by private entities in that remedies for defaults generally must be pursued in the courts of the defaulting government, and legal recourse is therefore somewhat diminished. Political conditions, in terms of a government’s willingness to meet the terms of its debt obligations, also are of considerable significance. There can be no assurance that the holders of commercial bank debt may not contest payments to the holders of debt securities issued by governments in emerging markets in the event of default by the governments under commercial bank loan agreements. The Advisers or SCM attempt to minimize the speculative risks associated with investments in lower quality securities through credit analysis and by carefully monitoring current trends in interest rates, political developments and other factors. Nonetheless, investors should carefully review the investment objective and policies of the Portfolio and consider their ability to assume the investment risks involved before making an investment. Certain Underlying Funds and/or Portfolios may also invest in unrated debt securities. Unrated debt securities, while not necessarily of lower quality than rated securities, may not have as broad a market. Because of the size and perceived demand for an issue, among other factors, certain issuers may decide not to pay the cost of obtaining a rating for their bonds. An Adviser or SCM will analyze the creditworthiness of the issuer of an unrated security, as well as any financial institution or other party responsible for payments on the security.

 

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Bank Loans. Bank loans, also referred to as leveraged loans, generally are negotiated between a borrower and several financial institutional lenders represented by one or more lenders acting as agent of all the lenders. The agent is responsible for negotiating the loan agreement that establishes the terms and conditions of the loan and the rights of the borrower and the lenders, monitoring any collateral, and collecting principal and interest on the loan. By investing in a loan, an Underlying Fund and/or a Portfolio becomes a member of a syndicate of lenders. Certain bank loans are illiquid, meaning an Underlying Fund and/or a Portfolio may not be able to sell them quickly at a fair price. Illiquid securities are also difficult to value. To the extent a bank loan has been deemed illiquid, it will be subject to an Underlying Fund’s and/or a Portfolio’s restrictions on investment in illiquid securities. The secondary market for bank loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods.

 

Bank loans are subject to the risk of default. Default in the payment of interest or principal on a loan will result in a reduction of income to the Underlying Fund and/or the Portfolio, a reduction in the value of the loan, and a potential decrease in an Underlying Fund and/or a Portfolio’s NAV. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates.

 

Bank loans are subject to the risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments. However, because bank loans reside higher in the capital structure than high yield bonds, default losses have been historically lower in the bank loan market. Bank loans that are rated below investment grade share the same risks of other below investment grade securities.

 

INFLATION-INDEXED BONDS. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Department of the Treasury (the “Treasury”) and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the consumer price index (“CPI”) accruals as part of a semiannual coupon.

 

Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. Other inflation-related bonds may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

 

The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds.

 

While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.

 

CERTIFICATES OF DEPOSIT AND BANKERS’ ACCEPTANCES. Certain Underlying Funds and/or Portfolios may invest in certificates of deposit and bankers’ acceptances, which are considered to be short-term money market instruments. Certificates of deposit are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers’ acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then “accepted” by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less.

 

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COLLATERALIZED MORTGAGE OBLIGATIONS. Certain Underlying Funds and/or Portfolios may invest in collateralized mortgage obligations (“CMOs”), which are mortgage-backed securities (“MBS”) that are collateralized by mortgage loans or mortgage pass-through securities, and multi-class pass-through securities, which are equity interests in a trust composed of mortgage loans or other MBS. Unless the context indicates otherwise, the discussion of CMOs below also applies to multi-class pass through securities.

 

CMOs may be issued by governmental or government-related entities or by private entities, such as banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market traders. CMOs are issued in multiple classes, often referred to as “tranches,” with each tranche having a specific fixed or floating coupon rate and stated maturity or final distribution date. Under the traditional CMO structure, the cash flows generated by the mortgages or mortgage pass-through securities in the collateral pool are used to first pay interest and then pay principal to the holders of the CMOs. Subject to the various provisions of individual CMO issues, the cash flow generated by the underlying collateral (to the extent it exceeds the amount required to pay the stated interest) is used to retire the bonds.

 

Although the obligations are recourse obligations to the issuer, the issuer typically has no significant assets, other than assets pledged as collateral for the obligations, and the market value of the collateral, which is sensitive to interest rate movements, may affect the market value of the obligations. A public market for a particular CMO may or may not develop and thus, there can be no guarantee of liquidity of an investment in such obligations.

 

Principal prepayments on the underlying mortgage assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Because of the uncertainty of the cash flows on these tranches, the market prices and yields of these tranches are more volatile and may increase or decrease in value substantially with changes in interest rates and/or the rates of prepayment. Due to the possibility that prepayments will alter the cash flow on CMOs, it is not possible to determine in advance the final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. In addition, if the collateral securing CMOs or any third-party guarantees is insufficient to make payments, the Portfolio could sustain a loss. The prices of certain CMOs, depending on their structure and the rate of prepayments, can be volatile. Some CMOs may also not be as liquid as other types of mortgage securities. As a result, it may be difficult or impossible to sell the securities at an advantageous time or price.

 

Privately issued CMOs are arrangements in which the underlying mortgages are held by the issuer, which then issues debt collateralized by the underlying mortgage assets. Such securities may be backed by mortgage insurance, letters of credit, or other credit enhancing features. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. Government or its agencies and instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. Government, its agencies and instrumentalities or any other person or entity. Privately issued CMOs are subject to prepayment risk due to the possibility that prepayments on the underlying assets will alter the cash flow. Yields on privately issued CMOs have been historically higher than the yields on CMOs backed by mortgages guaranteed by U.S. Government agencies and instrumentalities. The risk of loss due to default on privately issued CMOs, however, is historically higher since the U.S. government has not guaranteed them.

 

New types of CMO tranches have evolved. These include floating rate CMOs, planned amortization classes, accrual bonds and CMO residuals. These newer structures affect the amount and timing of principal and interest received by each tranche from the underlying collateral. For example, an inverse interest-only class CMO entitles holders to receive no payments of principal and to receive interest at a rate that will vary inversely with a specified index or a multiple thereof. Under certain of these newer structures, given classes of CMOs have priority over others with respect to the receipt of prepayments on the mortgages. Therefore, depending on the type of CMOs in which an Underlying Fund and/or a Portfolio invests, the investment may be subject to a greater or lesser risk of prepayment than other types of MBS. CMOs may include real estate investment conduits (“REMICs”). REMICs, which were authorized under the Tax Reform Act of 1986, are private entities formed for the purpose of holding a fixed pool of mortgages secured by an interest in real property. A REMIC is a CMO that qualifies for special tax treatment under the Internal Revenue Code of 1986, as amended (the “Code”) and invests in certain mortgages principally secured by interests in real property.

 

COMMERCIAL PAPER. The Underlying Funds and/or the Portfolios may purchase commercial paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations.

 

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INFORMATION ON TIME DEPOSITS AND VARIABLE RATE NOTES. The Underlying Funds and/or the Portfolios may invest in fixed time deposits, whether or not subject to withdrawal penalties; however, investment in such deposits, which are subject to withdrawal penalties, other than overnight deposits, are subject to the 15% (5% with respect to the U.S. Government Money Market Portfolio) limit on illiquid investments for each Portfolio.

 

The Underlying Funds and/or the Portfolios may purchase commercial paper obligations that are unsecured and may include variable rate notes. The nature and terms of a variable rate note (i.e., a “Master Note”) permit an Underlying Fund and/or a Portfolio to invest fluctuating amounts at varying rates of interest pursuant to a direct arrangement between an Underlying Fund and/or a Portfolio as lender, and the issuer, as borrower. It permits daily changes in the amounts borrowed. An Underlying Fund and/or a Portfolio has the right at any time to increase, up to the full amount stated in the note agreement, or to decrease the amount outstanding under the note.

 

The issuer may prepay at any time and without penalty any part of or the full amount of the note. The note may or may not be backed by one or more bank letters of credit. Because these notes are direct lending arrangements between the Underlying Fund and the issuer, or the Portfolio and the issuer, it is not generally contemplated that they will be traded; moreover, there is currently no secondary market for them. Except as specifically provided in the Prospectuses, there is no limitation on the type of issuer from whom these notes will be purchased; however, in connection with such purchase and on an ongoing basis, an Underlying Fund’s and/or a Portfolio’s Adviser or Manager will consider the earning power, cash flow and other liquidity ratios of the issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes made demand simultaneously. Variable rate notes are subject to the Underlying Fund’s and/or the Portfolio’s investment restriction on illiquid securities unless such notes can be put back to the issuer on demand within seven days.

 

CASH AND CASH EQUIVALENTS. The Portfolios may hold cash or invest in cash equivalents. Cash equivalents include money market funds, commercial paper (for example, short-term notes with maturities typically up to 12 months in length issued by corporations, governmental bodies, or bank/corporation sponsored conduits (asset-backed commercial paper)); short-term bank obligations (for example, certificates of deposit, bankers’ acceptances (time drafts on a commercial bank where the bank accepts an irrevocable obligation to pay at maturity)); or bank notes; savings association and saving bank obligations (for example, bank notes and certificates of deposit issued by savings banks or savings associations); securities of the U.S. government, its agencies, or instrumentalities that mature, or may be redeemed, in one year or less, and; corporate bonds and notes that mature, or that may be redeemed, in one year or less.

 

ILLIQUID OR RESTRICTED SECURITIES. The Underlying Funds and/or the Portfolios may invest in illiquid or restricted securities in accordance with the investment restrictions described under “Investment Restrictions.” Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933, as amended (the “1933 Act”). Where registration is required, a Portfolio and/or an Underlying Fund may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Portfolio and/or Underlying Fund may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the Portfolio and/or Underlying Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities with respect to a Portfolio will be priced at fair value as determined in accordance with procedures prescribed by the Board of Trustees of the Trust. If through the appreciation of illiquid securities or the depreciation of liquid securities, a Portfolio should be in a position where more than 15% (5% with respect to the U.S. Government Money Market Portfolio) of the value of its net assets are invested in illiquid assets, including restricted securities, the Portfolio will take appropriate steps to protect liquidity. Such steps may include refraining from purchasing illiquid securities or selling or exchanging a portion of the illiquid securities for more liquid securities.

 

An illiquid investment is any investment that a Portfolio reasonably expects cannot be sold in seven calendar days or less without significantly changing the market value of the investment. The liquidity of a security will be determined based on relevant market, trading and investment specific considerations as set out in the Trust’s liquidity risk management program (the “Liquidity Program”) as required by Rule 22e-4 under the 1940 Act (the “Liquidity Rule”). In October 2016, the SEC adopted the Liquidity Rule requiring open-end funds to establish a liquidity risk management program and enhance disclosures regarding fund liquidity. The Trust has implemented the Liquidity Program by which a Portfolio’s liquidity risk is assessed, managed and periodically reviewed. The SEC has recently proposed amendments to the Liquidity Rule that, if adopted, would result in changes to a Portfolio’s liquidity classification framework and could potentially increase the percentage of a Portfolio’s investments classified as illiquid. In addition, a Portfolio’s operations and investment strategies may be adversely impacted if the proposed amendments are adopted.

 

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UNREGISTERED SECURITIES. Notwithstanding the above, the Portfolios and the Underlying Funds each may purchase securities, which are not registered under the 1933 Act but which can be sold to “qualified institutional buyers” in accordance with Rule 144A under the 1933 Act. This rule permits certain qualified institutional buyers to trade in privately placed securities even though such securities are not registered under the 1933 Act. Each Adviser or Manager, under the supervision of the Board of Trustees of the Trust, acting under guidelines approved and monitored by the Board, will consider whether securities purchased under Rule 144A are illiquid and thus subject to a Portfolio’s restriction of investing no more than 15% (5% with respect to the U.S. Government Money Market Portfolio) of its net assets in illiquid securities. A determination of whether a Rule 144A security is liquid or not is a question of fact. In making this determination, the Adviser or Manager will consider the trading markets for the specific security taking into account the unregistered nature of a Rule 144A security.

 

In addition, the Adviser or Manager could consider (1) the frequency of trades and quotes, (2) the number of dealers and potential purchases, (3) any dealer undertakings to make a market and (4) the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A securities would be monitored, and if as a result of changed conditions it is determined that a Rule 144A security is no longer liquid, a Portfolio’s holdings of illiquid securities would be reviewed to determine what, if any, steps are required to assure that the Portfolio does not invest more than 15% (5% with respect to the U.S. Government Money Market Portfolio) of its net assets in illiquid securities. Investing in Rule 144A securities could have the effect of increasing the amount of a Portfolio’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase such securities.

 

INSURED BANK OBLIGATIONS. Certain Portfolios and Underlying Funds may invest in insured bank obligations. The Federal Deposit Insurance Corporation (“FDIC”) insures the deposits of federally insured banks and savings and loan associations (collectively referred to as “banks”). A Portfolio and/or Underlying Fund may, within the limits set forth in its Prospectus, purchase bank obligations which are fully insured as to principal by the FDIC. Currently, to remain fully insured as to principal, these investments must be limited to $250,000 per bank; if the principal amount and accrued interest together exceed $250,000, the excess principal and accrued interest will not be insured.

 

Insured bank obligations may have limited marketability. Unless the Board of Trustees determines that a readily available market exists for such obligations, a Portfolio will treat such obligations as subject to the 15% (5% with respect to the U.S. Government Money Market Portfolio) limit for illiquid investments set forth in the section “Illiquid or Restricted Securities” above unless such obligations are payable at principal amount plus accrued interest on demand or within seven days after demand.

 

Borrowing. The Portfolios and Underlying Funds may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in a Portfolio’s and/or Underlying Fund’s NAV and on the Portfolio’s and/or Underlying Fund’s investments.

 

Although the principal of such borrowings will be fixed, the Portfolio’s and/or Underlying Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for a Portfolio and/or an Underlying Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Portfolio and/or an Underlying Fund will have to pay, the Portfolio’s and/or Underlying Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of the Portfolio and/or Underlying Fund will be less than it would be if leverage were not used, and therefore the amount available for distribution to shareholders as dividends will be reduced. The use of derivatives in connection with leverage creates the potential for significant loss.

 

A Portfolio and/or an Underlying Fund may also borrow funds to meet redemptions or for emergency purposes. Such borrowings may be on a secured or unsecured basis at fixed or variable rates of interest. The 1940 Act requires each Portfolio and Underlying Fund to maintain continuous asset coverage of not less than 300% with respect to all borrowings. If such asset coverage should decline to less than 300% due to market fluctuations or other reasons, the Portfolio and/or Underlying Fund may be required to dispose of some of its portfolio holdings within three days in order to reduce the Portfolio’s and/or Underlying Fund’s debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to dispose of assets at that time.

 

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A Portfolio also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit. Either of these requirements would increase the cost of borrowing over the stated interest rate.

 

Borrowing by a Portfolio creates an opportunity for increased net income, but at the same time, creates special risk considerations. For example, leveraging may exaggerate the effect on NAV of any increase or decrease in the market value of a Portfolio.

 

LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping to meet its operating expenses, each Portfolio other than the U.S. Government Money Market Portfolio may lend securities to brokers, dealers and other financial organizations. These loans, if and when made, may not exceed 33 1/3% of a Portfolio’s assets taken at value. A Portfolio’s loans of securities will be collateralized by cash, letters of credit or U.S. government securities.

 

The cash or instruments collateralizing a Portfolio’s loans of securities will be maintained at all times in a segregated account with the Portfolio’s custodian, or with a designated sub-custodian, in an amount at least equal to the current market value of the loaned securities. In lending securities to brokers, dealers and other financial organizations, a Portfolio is subject to risks, which, like those associated with other extensions of credit, include delays in recovery and possible loss of rights in the collateral should the borrower fail financially. The Trust’s custodian bank (the “Custodian”) arranges for each Portfolio’s securities loans and manages collateral received in connection with these loans. The Portfolios bear the entire risk of loss with respect to reinvested collateral. A portion of the profits generated from lending portfolio securities is paid to the Portfolio’s collateral reinvestment agent. Any costs of lending are not included in the Portfolios’ fee tables contained in the Prospectuses. A Portfolio is obligated to recall loaned securities so that they may exercise voting rights on loaned securities according to the Portfolio’s proxy voting policies if the Portfolio has knowledge that a vote concerning a material event regarding the securities will occur. Certain Underlying Funds may also engage in securities lending.

 

Securities Lending Activities

 

Pursuant to an agreement between the Portfolios and BNY Mellon Corp. (“BNYMC”) a Portfolio may lend its securities through BNYMC as securities lending agent to certain qualified borrowers. As securities lending agent of the Portfolios, BNYM administers the Portfolios’ securities lending program. These services include arranging the loans of securities with approved borrowers and their return to a Portfolio upon loan termination, negotiating the terms of such loans, selecting the securities to be loaned and monitoring dividend activity relating to loaned securities.

 

BNYMC also marks to market daily the value of loaned securities and collateral and may require additional collateral as necessary from borrowers. BNYMC may also, in its capacity as securities lending agent, invest cash received as collateral in pre-approved investments in accordance with the Securities Lending Authorization Agreement. BNYMC maintains records of loans made and income derived therefrom and makes available such records that the Portfolios deem necessary to monitor the securities lending program.

 

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For the fiscal year ended August 31, 2023, the Portfolios earned income and incurred the following costs and expenses as a result of its securities lending activities:

 

Portfolio

Gross

Income1

Revenue

Split2

Cash

Collateral

Management

Fees3

Administrative

Fees4

Indemnification

Fees5

Rebates to (from)

Borrowers

Other

Fees

Total Costs

of the Securities Lending Activities

Net Income

from the Securities Lending Activities

Large Capitalization Value Portfolio $8,548.88 $560.28 $6,680.38 $7,240.66 $1,308.22

Health & Biotechnology Portfolio

$499.23 $53.87 $319.56 $373.43 $125.80
International Equity Portfolio $3,244.01 $128.81 $2,814.00 $2,942.81 $301.20
Large Capitalization Growth Portfolio $632.24 $184.02 $18.19 $202.21 $430.03
Mid Capitalization Portfolio $51.87 $11.35 $13.95 $25.30 $26.57
Small Capitalization Portfolio $5,400.35 $299.31 $4,398.87 $4,698.18 $702.17
Technology & Communications Portfolio $1,713.49 $513.98 $513.98 $1,199.51

 

1) Gross income includes income from the reinvestment of cash collateral.
2) Revenue split represents the share of revenue generated by the securities lending program and paid to BNYMC.
3) Cash collateral management fees include fees deducted from a pooled cash collateral reinvestment vehicle that are not included in the revenue split.
4) These administrative fees are not included in the revenue split.
5) These indemnification fees are not included in the revenue split.

 

WHEN-ISSUED SECURITIES. The Underlying Funds and/or the Portfolios may take advantage of offerings of eligible portfolio securities on a “when-issued” basis, i.e., delivery of and payment for such securities take place sometime after the transaction date on terms established on such date. Normally, settlement on U.S. Government securities takes place within ten days. An Underlying Fund and/or a Portfolio only will make when-issued commitments on eligible securities with the intention of actually acquiring the securities. If an Underlying Fund and/or a Portfolio chooses to dispose of the right to acquire a when-issued security (prior to its acquisition), it could, as with the disposition of any other Underlying Fund and/or a Portfolio obligation, incur a gain or loss due to market fluctuation. No when-issued commitments will be made if, as a result, more than 15% (5% in the case of the U.S. Government Money Market Portfolio) of the net assets of an Underlying Fund and/or a Portfolio would be so committed. This type of transaction may give rise to a form of leverage. The use of leverage may cause an Underlying Fund and/or a Portfolio to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations. Leveraging may cause an Underlying Fund and/or a Portfolio to be more volatile than if the Underlying Fund and/or a Portfolio had not been leveraged. This is because leveraging tends to exaggerate the effect of any increase or decrease in the value of an Underlying Fund’s and/or a Portfolio’s securities.

 

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MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage pass-through securities differ from other forms of debt securities (which normally provide periodic payments of interest in fixed amounts and the payment of principal in a lump sum at maturity or on specified call dates). Instead, mortgage pass-through securities provide monthly payments consisting of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on the underlying residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Unscheduled payments of principal may be made if the underlying mortgage loans are repaid or refinanced or the underlying properties are foreclosed, thereby shortening the securities’ weighted average life. Some mortgage pass-through securities (such as securities guaranteed by Government National Mortgage Association (“Ginnie Mae”)) are described as “modified pass-through securities.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, on the scheduled payment dates regardless of whether the mortgagor actually makes the payment.

 

The principal governmental guarantor of mortgage pass-through securities is Ginnie Mae. Ginnie Mae is authorized to guarantee, with the full faith and credit of the United States, the timely payment of principal and interest on securities issued by lending institutions approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers) and is backed by pools of mortgage loans. These mortgage loans are either insured by the Federal Housing Administration or guaranteed by the Veterans Administration. A “pool” or group of such mortgage loans is assembled and after being approved by Ginnie Mae, is offered to investors through securities dealers.

 

Government-related guarantors of mortgage pass-through securities (i.e., not backed by the full faith and credit of the United States) include Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Association (“Freddie Mac”). Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved sellers/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Mortgage pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae but are not backed by the full faith and credit of the United States.

 

Freddie Mac was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a U.S. government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. Freddie Mac issues Participation Certificates (“PCs”), which represent interests in conventional mortgages from Freddie Mac’s national portfolio. Freddie Mac guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac each may borrow from the Treasury to meet its obligations, but the Treasury is under no obligation to lend to Fannie Mae or Freddie Mac. In September 2008, the Treasury announced that the government would be taking over Fannie Mae and Freddie Mac and placing the companies into a conservatorship. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage pass-through securities. The Portfolios do not purchase interests in pools created by such non-governmental issuers.

 

HEDGING. Certain Portfolios and certain Underlying Funds may use certain instruments to hedge the Portfolios’ and/or the Underlying Funds’ positions (“Hedging Instruments”). To engage in short hedging, a Portfolio and/or an Underlying Fund may, for example, (i) sell financial futures, (ii) purchase puts on such futures or on individual securities held by it (“Portfolio securities”) or securities indexes, or (iii) write calls on Portfolio securities or on financial futures or securities indexes. To engage in long hedging, a Portfolio and/or an Underlying Fund would, for example, (i) purchase financial futures, (ii) purchase calls, or (iii) write puts on such futures or on Portfolio securities or securities indexes. Additional information about the Hedging Instruments that a Portfolio and/or an Underlying Fund may use is provided below.

 

FINANCIAL FUTURES. Futures contracts are exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. U.S. futures contracts are designed by exchanges that have been designated “contract markets” by the CFTC and must be executed through a futures commission merchant (“FCM”), which is a brokerage firm that is a member of the relevant contract market. No price is paid or received upon the purchase of a financial futures contract. Upon entering into a futures contract, a Portfolio and/or an Underlying Fund will be required to deposit an initial margin payment equal to a specified percentage of the contract value. Initial margin payments will be deposited with the FCM. As the future is marked to market to reflect changes in its market value, subsequent payments, called variation margin, will be made to or from the FCM on a daily basis.

 

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Prior to expiration of the future, if a Portfolio and/or an Underlying Fund elects to close out its position by taking an opposite position, a final determination of variation margin is made, additional cash may be required to be paid by or released to the Portfolio and/or Underlying Fund, and any loss or gain is realized for tax purposes. Although certain financial futures by their terms call for the actual delivery or acquisition of the specified debt security, in most cases the obligation is fulfilled by closing the position or entering into an offsetting position.

 

A Portfolio and/or an Underlying Fund may elect to close out some or all of its futures positions at any time prior to their expiration. The Portfolio and/or Underlying Fund might do so to reduce exposure represented by long futures positions or short futures positions. The Portfolio and/or an Underlying Fund may close out its positions by taking opposite positions, which would operate to terminate its position in the futures contracts. Final determinations of variation margin would then be made, additional cash would be required to be paid by or released to the Portfolio and/or an Underlying Fund, and the Portfolio and/or an Underlying Fund, would realize a loss or a gain. Futures contracts may be closed out only on the exchange or board of trade where the contracts were initially traded. Although each Portfolio intends to purchase or sell futures contracts only on exchanges or boards of trade where there appears to be an active market, there is no assurance that a liquid market on an exchange or board of trade will exist for any particular contract at any particular time. In the event that a liquid market does not exist, it might not be possible to close out a futures contract, and in the event of adverse price movements, the Portfolio and/or Underlying Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts have been used to hedge the underlying instruments, the Portfolio and/or Underlying Fund would continue to hold the underlying instruments subject to the hedge until the futures contracts could be terminated. In such circumstances, an increase in the price of underlying instruments, if any, might partially or completely offset losses on the futures contract.

 

However, as described below, there is no guarantee that the price of the underlying instruments will, in fact, negatively correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract.

 

There is also a risk of loss by a Portfolio and/or an Underlying Fund of the initial and variation margin deposits in the event of bankruptcy of the FCM with which the Portfolio has an open position in a futures contract or the bankruptcy of the central counterparty. The assets of a Portfolio and/or an Underlying Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Portfolio and/or Underlying Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s or central counterparty’s customers. If the FCM does not provide accurate reporting, a Portfolio and/or an Underlying Fund is also subject to the risk that the FCM could use the Portfolio’s and/or an Underlying Fund’s assets, which are held in an omnibus account with assets belonging to the Portfolio’s and/or Underlying Fund’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to a central counterparty.

 

The CFTC and the various exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short position that any person, such as a Portfolio and/or an Underlying Fund, may hold or control in a particular futures contract. Trading limits are also imposed on the maximum 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 limits and it may impose other sanctions or restrictions. The regulation of futures, as well as other derivatives, is a rapidly changing area of law.

 

Futures exchanges may also limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price. 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 does not limit potential losses because the limit may 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.

 

Common types of futures contracts include:

 

Commodity Futures: A commodity futures contract is an exchange-traded contract to buy or sell a particular commodity at a specified price at some time in the future. Commodity futures contracts are highly volatile; therefore, the prices of Portfolio and/or Underlying Fund shares may be subject to greater volatility to the extent it invests in commodity futures.

 

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Currency Futures: A currency futures contract is an exchange-traded contract to buy or sell a particular currency at a specified price on a future date (commonly three months or more). Currency futures contracts may be highly volatile and thus result in substantial gains or losses to a Portfolio and/or an Underlying Fund.

 

Index Futures: A stock index futures contract is an exchange-traded contract that provides for the delivery, at a designated date, time and place, of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of trading on the date specified in the contract and the price agreed upon in the futures contract. No physical delivery of stocks comprising the index is made.

 

Interest Rate Futures: An interest-rate futures contract is an exchange-traded contract in which the specified underlying security is either an interest-bearing fixed income security or an inter-bank deposit. Two examples of common interest rate futures contracts are U.S. Treasury futures and Eurodollar futures contracts. The specified security for U.S. Treasury futures is a U.S. Treasury security. The specified rate for Eurodollar futures has been the London Interbank Offered Rate (“LIBOR”), which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market. As discussed below, the use of certain LIBOR tenors was generally phased out by the end of 2021. However, it is expected that the most widely used tenors of U.S. LIBOR may continue to be provided on a representative basis until mid-2023.

 

Security Futures: A security futures contract is an exchange-traded contract to purchase or sell, in the future, a specified quantity of a security (other than a Treasury security, or a narrow-based securities index) at a certain price.

 

PUTS AND CALLS. When a Portfolio and/or an Underlying Fund writes an American call, it receives a premium and agrees to sell the callable securities to a purchaser of a corresponding call during the call period (usually not more than nine months), or, if a European call, upon the option expiration date, at a fixed exercise price (which may differ from the market price of the underlying securities) regardless of market price changes during the call period. If the call is exercised, the Portfolio and/or Underlying Fund forgoes any possible profit from an increase in market price over the exercise price. A Portfolio and/or Underlying Fund may, in the case of listed options, purchase calls in “closing purchase transactions” to terminate a call obligation. A profit or loss will be realized, depending upon whether the net of the amount of option transaction costs and the premium received on the call written is more or less than the price of the call subsequently purchased. A profit may be realized if the call lapses unexercised, because the Portfolio and/or Underlying Fund retains the underlying security and the premium received. With respect to certain listed options, sixty percent of any such profits are considered long-term gains and forty percent are considered short-term gains for federal tax purposes. If, due to a lack of a market, a Portfolio and/or an Underlying Fund could not effect a closing purchase transaction, it would have to hold the callable securities until the call lapsed or was exercised. A Portfolio’s Custodian, or a securities depository acting for the Custodian, will act as the Portfolio’s escrow agent, through the facilities of the Options Clearing Corporation (“OCC”) in connection with listed calls, as to the securities on which the Portfolio has written calls, or as to other acceptable escrow securities, so that no margin will be required for such transactions. OCC will release the securities on the expiration of the calls or upon the Portfolio’s entering into a closing purchase transaction.

 

When a Portfolio and/or an Underlying Fund purchases an American call option (other than in a closing purchase transaction), it pays a premium and has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period (or on a certain date for European call options) at a fixed exercise price. A Portfolio and/or an Underlying Fund benefits only if the call is sold at a profit or if, during the call period, the market price of the underlying investment is above the call price plus the transaction costs and the premium paid for the call and the call is exercised or sold. If a call is not exercised or sold (whether or not at a profit), it will become worthless at its expiration date and the Portfolio and/or Underlying Fund will lose its premium payment and the right to purchase the underlying investment.

 

With over-the-counter (“OTC”) options, such variables as expiration date, exercise price and premium will be agreed upon between the Portfolio and/or Underlying Fund. If a counterparty fails to make delivery on the securities underlying an option it has written, in accordance with the terms of that option as written a Portfolio and/or Underlying Fund could lose the premium paid for the option as well as any anticipated benefit of the transaction. In the event that any OTC option transaction is not subject to a forward price at which the Portfolio and/or Underlying Fund has the absolute right to repurchase the OTC option which it has sold, the value of the OTC option purchased and, if applicable, of the Portfolio assets and/or Underlying Fund used to “cover” the OTC option will be considered “illiquid securities” and will be subject to the Portfolio’s limit on illiquid securities. The “formula” on which the forward price will be based may vary among contracts with different primary dealers, but it will be based on a multiple of the premium received by the Portfolio and/or Underlying Fund for writing the option plus the amount, if any, of the option’s intrinsic value, i.e., current market value of the underlying securities minus the option’s exercise price.

 

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An American put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period (or on a certain date for European call options). The investment characteristics of writing a put covered by earmarked liquid assets equal to the exercise price of the put are similar to those of writing a covered call. The premium paid on a put written by a Portfolio and/or an Underlying Fund represents a profit, as long as the price of the underlying investment remains above the exercise price.

 

However, a Portfolio and/or an Underlying Fund has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even though the value of the investment may fall below the exercise price. If the put expires unexercised, the Portfolio and/or an Underlying Fund (as writer) realizes a gain in the amount of the premium. If the put is exercised, the Portfolio and/or an Underlying Fund must fulfill its obligation to purchase the underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, the Portfolio may incur a loss upon disposition, equal to the sum of the sale price of the underlying investment and the premium received minus the sum of the exercise price and any transaction costs incurred.

 

When writing put options, to secure its obligation to pay for the underlying security, a Portfolio may (1) direct the Custodian to earmark cash or liquid assets with a value equal to at least the exercise price of the option (less any margin or deposit), (2) own an offsetting (“covered”) position in securities or other option, or 3) some combination of earmarking liquid assets and owning an offsetting position. To the extent the Portfolio and/or an Underlying Fund secures its obligation by earmarking liquid assets, the Portfolio and/or an Underlying Fund forgoes the opportunity of trading the earmarked assets or writing calls against those assets. As long as the Portfolio’s and/or an Underlying Fund’s obligation as a put writer of an American put continues, the Portfolio and/or an Underlying Fund may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring the Portfolio and/or an Underlying Fund to purchase the underlying security at the exercise price. A Portfolio and/or an Underlying Fund has no control over when it may be required to purchase the underlying security for an American put option, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This obligation terminates upon the earlier of the expiration of the put, or the consummation by the Portfolio and/or an Underlying Fund of a closing purchase transaction by purchasing a put of the same series as that previously sold. Once a Portfolio and/or an Underlying Fund has been assigned an exercise notice, it is thereafter not allowed to effect a closing purchase transaction.

 

A Portfolio and/or an Underlying Fund may effect a closing purchase transaction to realize a profit on an outstanding put option it has written or to prevent an underlying security from being put to it. Furthermore, effecting such a closing purchase transaction will permit the Portfolio and/or an Underlying Fund to write another put option to the extent that the exercise price thereof is secured by the deposited assets, or to utilize the proceeds from the sale of such assets for other investments by the Portfolio and/or an Underlying Fund. The Portfolio and/or an Underlying Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from writing the option.

 

When a Portfolio and/or an Underlying Fund purchases a put, it pays a premium and has the right to sell the underlying investment at a fixed exercise price to a seller of a corresponding put on the same investment during the put period if it is an American put option (or on a certain date if it is a European put option). Buying a put on securities or futures held by it permits a Portfolio and/or an Underlying Fund to attempt to protect itself during the put period against a decline in the value of the underlying investment below the exercise price. In the event of a decline in the market, the Portfolio and/or an Underlying Fund could exercise, or sell the put option at a profit that would offset some or all of its loss on the Portfolio and/or an Underlying Fund securities. If the market price of the underlying investment is above the exercise price and as a result, the put is not exercised, the put will become worthless at its expiration date and the purchasing Portfolio and/or an Underlying Fund will lose the premium paid and the right to sell the underlying securities; the put may, however, be sold prior to expiration (whether or not at a profit).

 

Purchasing a put on futures or securities not held by it permits a Portfolio and/or an Underlying Fund to protect its Portfolio securities against a decline in the market to the extent that the prices of the future or securities underlying the put move in a similar pattern to the prices of the securities in the Portfolio and/or an Underlying Fund.

 

An option position may be closed out only on a market which provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for any particular option. A Portfolio’s and/or an Underlying Fund’s option activities may affect its turnover rate and brokerage commissions. The exercise of calls written by a Portfolio and/or an Underlying Fund may cause the Portfolio and/or an Underlying Fund to sell from its Portfolio securities to cover the call, thus increasing its turnover rate. The exercise of puts on securities or futures will increase portfolio turnover. Although such exercise is within the Portfolio’s and/or an Underlying Fund’s control, holding a put might cause a Portfolio and/or an Underlying Fund to sell the underlying investment for reasons which would not exist in the absence of the put. A Portfolio and/or an Underlying Fund will pay a brokerage commission every time it purchases or sells a put or a call or purchases or sells a related investment in connection with the exercise of a put or a call.

 

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The Staff of the SEC has taken the position that purchased dealer options (OTC) and the assets used to secure written dealer options are illiquid securities. A Portfolio and/or an Underlying Fund may treat the cover used for written OTC options as liquid if the dealer agrees that the Portfolio and/or an Underlying Fund may repurchase the OTC option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the OTC option would be considered illiquid only to the extent the maximum repurchase price under the formula exceeds the intrinsic value of the option.

 

Accordingly, a Portfolio will treat OTC options as subject to the Portfolio’s limitation on illiquid securities. If the Staff of the SEC or the SEC changes this position on the liquidity of dealer options, a Portfolio would change its treatment of such instrument accordingly.

 

REGULATORY ASPECTS OF HEDGING INSTRUMENTS. Transactions in options by a Portfolio and/or an Underlying Fund are subject to limitations established (and changed from time to time) by each of the exchanges governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or on different exchanges, or are held in one or more accounts, or through one or more different exchanges, or through one or more brokers. Thus, the number of options which a Portfolio and/or an Underlying Fund may write or hold may be affected by options written or held by other investment companies and discretionary accounts of the Portfolio’s Adviser and/or an Underlying Fund’s adviser or sub-adviser, including other investment companies having the same or an affiliated investment adviser. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions, which could have an adverse effect on a Portfolio and/or an Underlying Fund.

 

COMMODITIES. Certain Portfolios also will invest in Underlying Funds that hold a portfolio of commodities. Commodities are physical substances, such as metals, that investors buy or sell on the market, usually through futures contracts. The price of a commodity is subject to supply and demand. Commodity risk refers to the uncertainties of future market values and the size of future income, caused by fluctuation in the price of a commodity. An investment in commodities contends with the following types of risks: price risk; adverse movements in world prices; exchange rates and the basis between local and world prices; quantity risk; cost risk; input price risk; and political risk (i.e., how political conditions can affect supply, demand and the price of commodities).

 

Certain ETFs and ETNs may not produce qualifying income for purposes of the 90% test (as described below under “Investment Company Taxation”) which must be met for the Portfolio to maintain its status as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”). If one or more ETFs or ETNs generates more non-qualifying income for purposes of the 90% test than the Portfolio’s portfolio management expects, it could cause the Portfolio to inadvertently fail the 90% test.

 

COMMODITY EXCHANGE ACT EXCLUSION. SCM has filed with the National Futures Association, a notice claiming an exclusion from the definition of the term “commodity pool operator” under the CEA, as amended, and the rules of the CFTC promulgated thereunder, with respect to the Portfolios’ operations.

 

POSSIBLE RISK FACTORS IN HEDGING. In addition to the risks with respect to futures and options discussed in the Prospectuses and above, there is a risk in selling futures that the prices of futures will correlate imperfectly with the behavior of the cash (i.e., market value) prices of a Portfolio’s and/or an Underlying Fund’s securities. The ordinary spreads between prices in the cash and future markets are subject to distortions due to differences in the natures of those markets. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close out futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.

 

When a Portfolio and/or an Underlying Fund uses Hedging Instruments, to establish a position in the market as a temporary substitute for the purchase of individual securities (long hedging) by buying futures and/or calls on such futures or on a particular security, it is possible that the market may decline. If the Portfolio and/or an Underlying Fund then concludes not to invest in such securities at that time because of concerns as to possible further market decline or for other reasons, it will realize a loss on the Hedging Instruments that is not offset by a reduction in the price of the securities purchased.

 

Transactions in Hedging Instruments may also result in certain federal income tax consequences described below under the heading “Certain Tax Considerations.”

 

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Swap Agreements. Certain Portfolios and/or an Underlying Funds may enter into swap agreements for purposes of attempting to gain exposure to equity or debt securities, interest rates, currencies, commodities or other assets, reference rates or indices without actually purchasing those underlying assets, rates or indices, or to hedge a position. Generally, swap agreements are contracts between a Portfolio and/or an Underlying Fund and another party (the swap counterparty) involving the exchange of payments on specified terms over periods ranging from a few days to multiple years. A swap agreement may be negotiated bilaterally and traded OTC between the two parties (for an uncleared swap) or, in some instances, must be transacted through an FCM and cleared through a clearinghouse that serves as a central counterparty (for a cleared swap). The notional amount is the set dollar or other value selected by the parties to use as the basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The parties typically do not actually exchange the notional amount. Instead they agree to exchange the returns that would be earned or realized if the notional amount were invested in given instruments.

 

When a Portfolio and/or an Underlying Fund enters into a cleared swap, the Portfolio and/or the Underlying Fund must deliver to the central counterparty (via the FCM) an amount referred to as “initial margin.” Initial margin requirements are determined by the central counterparty, but an FCM may require additional initial margin above the amount required by the central counterparty. During the term of the swap agreement, a “variation margin” amount may also be required to be paid by the Portfolio and/or the Underlying Fund or may be received by the Portfolio and/or the Underlying Fund in accordance with margin controls set for such accounts, depending upon changes in the price of the underlying reference instrument subject to the swap agreement. At the conclusion of the term of the swap agreement, if the Portfolio and/or the Underlying Fund has a loss equal to or greater than the margin amount, then the margin amount is paid to the FCM along with any loss in excess of the margin amount. If the Portfolio and/or the Underlying Fund has a loss of less than the margin amount, then the excess margin is returned to the Portfolio and/or the Underlying Fund. If the Portfolio and/or the Underlying Fund has a gain, then the full margin amount and the amount of the gain are paid to the Portfolio and/or the Underlying Fund.

 

With cleared swaps, a Portfolio and/or an Underlying Fund may not be able to obtain as favorable terms as it would be able to negotiate for a bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms of its agreement with a Portfolio and/or an Underlying Fund, which may include the imposition of position limits or additional margin requirements with respect to the Portfolio’s and/or an Underlying Fund’s investment in certain types of swaps. Central counterparties and FCMs can require termination of existing cleared swap transactions upon the occurrence of certain events, and can also require increases in margin above the margin that is required at the initiation of the swap agreement. Additionally, depending on a number of factors, the margin required under the rules of the clearinghouse and FCM may be in excess of the collateral required to be posted by a Portfolio and/or an Underlying Fund to support its obligations under a similar uncleared swap.

 

Most swap agreements entered into by a Portfolio and/or an Underlying Fund calculate the obligations of the parties to the agreement on a “net basis.” Consequently, a Portfolio’s and/or an Underlying Fund’s current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Payments may be made at the conclusion of a swap agreement or periodically during its term. The counterparty may be required to pledge cash or other assets to cover its obligations to a Portfolio and/or an Underlying Fund. However, the amount pledged may not always be equal to or more than the amount due to the other party. Therefore, if a counterparty defaults in its obligations to a Portfolio and/or an Underlying Fund, the amount pledged by the counterparty and available to the Portfolio and/or the Underlying Fund may not be sufficient to cover all the amounts due to the Portfolio and/or the Underlying Fund and the Portfolio and/or the Underlying Fund may sustain a loss.

 

If a swap is entered into on a net basis and if the other party to a swap agreement defaults, a Portfolio’s and/or an Underlying Fund’s risk of loss consists of the net amount of payments that the Portfolio and/or the Underlying Fund is contractually entitled to receive, if any. The mandated clearing of standardized swaps is intended, in part, to reduce the risk of counterparty defaults.

 

Because OTC swap agreements are two-party contracts and because they may have terms of greater than seven days, OTC swap agreements may be considered to be illiquid for a Portfolio’s and/or an Underlying Fund’s illiquid investment limitations.

 

A Portfolio and/or an Underlying Fund will not enter into any OTC swap agreement unless the Manager and/or Adviser believes that the other party to the transaction is creditworthy. The Portfolio and/or the Underlying Fund bears the risk of loss of the amount expected to be received under an OTC swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.

 

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Cleared swaps will be entered into through a futures broker, and the Portfolio will similarly not enter into a swap clearing relationship unless the Manager and/or Adviser believes the futures broker is creditworthy.

 

A Portfolio and/or an Underlying Fund may enter into a swap agreement in circumstances where the Manager and/or Adviser believes that it may be more cost effective or practical than buying the securities represented by such index or a futures contract or an option on such index. The counterparty to any OTC swap agreement entered into by a Portfolio and/or an Underlying Fund will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay the Portfolio and/or the Underlying Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks represented in the index, plus the dividends that would have been received on those stocks. The Portfolio and/or the Underlying Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Portfolio and/or the Underlying Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Portfolio and/or the Underlying Fund on the notional amount.

 

Certain standardized swaps are subject to mandatory central clearing and exchange-trading. The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (the “Dodd-Frank Act”), and related regulatory developments require the clearing and exchange-trading of certain OTC derivative instruments, including certain types of interest rate swaps and credit default index swaps. Mandatory exchange-trading and clearing has taken place on a phased-in basis based on the type of market participant, CFTC approval of contracts for central clearing and public trading facilities making such cleared swaps available to trade. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central clearing does not eliminate these risks and may involve additional costs and risks not involved with uncleared swaps. The Manager will continue to monitor developments in this area, particularly to the extent regulatory changes affect the Portfolios’ ability directly, or indirectly through the Underlying Funds, to enter into swap contracts.

 

Commonly used swap agreements include:

 

Credit Default Swaps (“CDS”): Typically, an OTC agreement between two parties where the first party agrees to make one or more payments to the second party, while the second party assumes the risk of certain defaults, generally a failure to pay or bankruptcy of the issuer on a referenced debt obligation. CDS transactions are often individually negotiated and structured. A Portfolio and/or an Underlying Fund may enter into a CDS to, for example, create long or short exposure to domestic or foreign corporate debt securities or sovereign debt securities. As noted above, certain CDSs are now subject to mandatory clearing under the Dodd-Frank Act and applicable CFTC regulation.

 

A Portfolio and/or an Underlying Fund may buy a CDS (buy credit protection). In this type of transaction, the Portfolio and/or the Underlying Fund makes a stream of payments based on a fixed interest rate (the premium) over the life of the swap in exchange for a counterparty (the seller) taking on the risk of default of a referenced debt obligation (the Reference Obligation). If a credit event occurs with respect to the Reference Obligation, the Portfolio and/or the Underlying Fund would cease making premium payments and, if it is a physically-settled CDS, it would deliver defaulted bonds to the seller.

 

In return, the seller would generally pay the par value of the Reference Obligation to the Portfolio and/or the Underlying Fund. Alternatively, the two counterparties may agree to cash settlement in which the seller delivers to the Portfolio and/or the Underlying Fund (buyer) the difference between the market value and the par value of the Reference Obligation. If no event of default occurs, the Portfolio and/or the Underlying Fund pays the fixed premium to the seller for the life of the contract, and no other exchange occurs.

 

Alternatively, a Portfolio and/or an Underlying Fund may sell a CDS (sell credit protection). In this type of transaction, the Portfolio and/or the Underlying Fund will receive premium payments from the buyer in exchange for taking the risk of default of the Reference Obligation. If a credit event occurs with respect to the Reference Obligation, the buyer would cease to make premium payments to the Portfolio and/or the Underlying Fund and, if physically settled CDS, deliver the Reference Obligation to the Portfolio and/or the Underlying Fund. In return, the Portfolio and/or the Underlying Fund would pay the par value of the Reference Obligation to the buyer.

 

Alternatively, the two counterparties may agree to cash settlement in which the Portfolio and/or the Underlying Fund would pay the buyer the difference between the market value and the par value of the Reference Obligation. If no event of default occurs, the Portfolio and/or the Underlying Fund receives the premium payments over the life of the contract, and no other exchange occurs.

 

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Credit Default Index (“CDX”): A CDX is a CDS referencing an index of Reference Obligations. Many types of CDX are now subject to mandatory clearing. A CDX allows an investor to attempt to manage credit risk or to take a position on a basket of credit entities in a more efficient manner than transacting in single-name CDS. If a credit event occurs with respect to one of the Reference Obligations, the protection may be paid out via the delivery of the defaulted bond by the buyer of protection in return for payment of the par value of the defaulted bond by the seller of protection, or it may be settled through a cash settlement between the two parties. The underlying company is then removed from the index. New series of CDX are issued on a regular basis.

 

Currency Swap: An agreement between two parties pursuant to which the parties exchange a U.S. dollar-denominated payment for a payment denominated in a different currency.

 

Interest Rate Swap: An agreement between two parties pursuant to which the parties exchange a floating rate payment for a fixed rate payment based on a specified notional amount. In other words, Party A agrees to make periodic payments to Party B based on a fixed interest rate and in return Party B agrees to make periodic payments to Party A based on a variable interest rate. As noted above, certain interest rate swaps are now subject to mandatory clearing under the Dodd-Frank Act and applicable CFTC regulation.

 

Total Return Swap: An agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains.

 

Swaps Regulation. The Dodd-Frank Act and related regulatory developments impose comprehensive regulatory requirements on swaps and swap market participants. These regulations include: (1) registration and regulation of swap dealers and major swap participants; (2) requiring central clearing and execution of standardized swaps; (3) imposing margin requirements on swap transactions; (4) regulating and monitoring swap transactions through position limits and large trader reporting requirements; and (5) imposing record keeping and public reporting requirements, on an anonymous basis, for most swaps.

 

The CFTC is responsible for the regulation of most swaps, and has completed most of its rules implementing the Dodd-Frank Act swap regulations. The SEC has jurisdiction over a small segment of the market referred to as “security-based swaps,” which includes swaps on single securities or credits, or narrow-based indices of securities or credits, but has not yet completed its rulemaking.

 

Risks of Swaps. A Portfolio’s and/or an Underlying Funds’ use of swaps is subject to the risks associated with derivative instruments generally. In addition, because uncleared swaps are typically executed bilaterally with a swap dealer rather than traded on exchanges, uncleared swap participants may not be as protected as participants on organized exchanges. Performance of an uncleared swap agreement is the responsibility only of the swap counterparty and not of any exchange or clearinghouse. As a result, a Portfolio and/or an Underlying Fund is subject to the risk that a counterparty will be unable or will refuse to perform under such agreement, including because of the counterparty’s bankruptcy or insolvency.

 

As noted above, under recent financial reforms, certain types of swaps are, and others eventually are expected to be, required to be cleared through a central counterparty, which may affect counterparty risk and other risks faced by the Portfolios and/or an Underlying Funds. Central clearing is designed to reduce counterparty credit risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap, but it does not eliminate those risks completely. A Portfolio and/or an Underlying Fund is also subject to the risk that, after entering into a cleared swap with an executing broker, no FCM or central counterparty is willing or able to clear the transaction. In such an event, the Portfolio and/or the Underlying Fund may be required to break the trade and make an early termination payment to the executing broker.

 

With respect to cleared swaps, there is also a risk of loss by a Portfolio and/or an Underlying Fund of its initial and variation margin deposits in the event of bankruptcy of the FCM with which the Portfolio and/or the Underlying Fund has an open position, or the central counterparty in a swap contract. The assets of a Portfolio and/or an Underlying Fund may not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the Portfolio and/or the Underlying Fund might be limited to recovering only a pro rata share of all available funds and margin segregated on behalf of an FCM’s or central counterparty’s customers.

 

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If the FCM does not provide accurate reporting, a Portfolio and/or an Underlying Fund is also subject to the risk that the FCM could use the Portfolio’s and/or the Underlying Fund’s assets, which are held in an omnibus account with assets belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations of another customer to the central counterparty. Credit risk of cleared swap participants is concentrated in a few clearinghouses, and the consequences of insolvency of a clearinghouse are not clear.

 

The use by the Portfolios and/or an Underlying Funds of derivatives may involve certain risks, including the risk that the counterparty under a derivatives agreement will not fulfill its obligations, including because of the counterparty’s bankruptcy or insolvency. Certain agreements may not contemplate delivery of collateral to support fully a counterparty’s contractual obligation; therefore, a Portfolio and/or an Underlying Fund might need to rely on contractual remedies to satisfy the counterparty’s full obligation. As with any contractual remedy, there is no guarantee that a Portfolio and/or an Underlying Fund will be successful in pursuing such remedies, particularly in the event of the counterparty’s bankruptcy. The agreement may allow for netting of the counterparty’s obligations with respect to a specific transaction, in which case a Portfolio’s and/or an Underlying Fund’s obligation or right will be the net amount owed to or by the counterparty. A Portfolio and/or an Underlying Fund will not enter into a derivative transaction with any counterparty that the Manager believes does not have the financial resources to honor its obligations under the transaction. If a counterparty’s creditworthiness declines, the value of the derivative would also likely decline, potentially resulting in losses to a Portfolio and/or an Underlying Fund, and thus a Portfolio.

 

EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and securities issued by U.S. entities with substantial foreign operations may involve significant risks in addition to the risks inherent in U.S. investments. The value of securities denominated in foreign currencies, and of dividends and interest paid with respect to such securities will fluctuate based on the relative strength of the U.S. dollar.

 

There may be less publicly available information about foreign securities and issuers than is available about domestic securities and issuers. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic companies. Securities of some foreign companies are less liquid and their prices may be more volatile than securities of comparable domestic companies. A Portfolio’s interest and dividends from foreign issuers may be subject to non-U.S. withholding taxes, thereby reducing the Portfolio’s net investment income.

 

Currency exchange rates may fluctuate significantly over short periods and can be subject to unpredictable change based on such factors as political developments and currency controls by foreign governments. Because certain Portfolios and/or an Underlying Funds may invest in securities denominated in foreign currencies, they may seek to hedge foreign currency risks by engaging in foreign currency exchange transactions. These may include buying or selling foreign currencies on a spot basis, entering into foreign currency forward contracts, and buying and selling foreign currency options, foreign currency futures, and options on foreign currency futures. Many of these activities constitute “derivatives” transactions.

 

Certain Portfolios and/or an Underlying Funds may invest in issuers domiciled in “emerging markets,” those countries determined by the Advisers or SCM to have developing or emerging economies and markets. Emerging market investing involves risks in addition to those risks involved in foreign investing. For example, many emerging market countries have experienced substantial, and in some periods extremely high, rates of inflation for many years.

 

In addition, economies in emerging markets generally are dependent heavily upon international trade and, accordingly, have been and continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. The securities markets of emerging countries are substantially smaller, less developed, less liquid and more volatile than the securities markets of the United States and other more developed countries. Brokerage commissions, custodial services and other costs relating to investment in foreign markets generally are more expensive than in the United States, particularly with respect to emerging markets. In addition, some emerging market countries impose transfer taxes or fees on a capital market transaction. Foreign investments involve a risk of local political, economic, or social instability, military action or unrest, or adverse diplomatic developments, and may be affected by actions of foreign governments adverse to the interests of U.S. investors. Such actions may include the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars, or other government intervention. Geopolitical developments resulting in the imposition of sanctions may have an effect on the sanctioned country and related economies. The severity of sanctions and related measures, such as retaliatory actions, vary in scope and are unpredictable. The imposition of sanctions could, for instance, cause a decline in the value and/or liquidity of securities issued by the sanctioned country or companies located in or economically tied to the sanctioned country. Market volatility could result, as well as disruption in the sanctioned country and throughout the world. Sanctions and related measures could limit or prevent a Portfolio from buying and selling securities (in the sanctioned country and other markets), significantly delay or prevent the settlement of securities transactions, and significantly impact a Portfolio’s liquidity and performance.

 

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In recent years, the occurrence of events in emerging market countries, such as the aftermath of the war in Iraq, instability in Venezuela, Afghanistan, Pakistan, Egypt, Libya, Syria, North Korea, Russia, Ukraine and the Middle East and the Israel-Palestine conflict, among other countries and regions, terrorist attacks, natural disasters, social and political discord or debt crises and downgrades, among others, have resulted in market volatility and may have long term effects on the investments affected by these events. Russia’s invasion of Ukraine in February 2022 has resulted in disruptions to the market that include financing restrictions, sanctions, boycotts, changes in consumer/purchaser preferences, tariffs and sanctions. These consequences stem from a variety of developments, including military action and cyberattacks on Russian individuals, companies or the Russian government, which may impact Russia’s economy and Russian issuers of securities.

 

There is no assurance that the Advisers or SCM will be able to anticipate these potential events or counter their effects. These risks are magnified for investments in developing countries, which may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities.

 

Economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. Foreign markets may offer less protection to investors than U.S. markets. It is anticipated that in most cases the best available market for foreign securities will be on an exchange or in OTC markets located outside the United States. Foreign stock markets, while growing in volume and sophistication, are generally not as developed as those in the United States, and securities of some foreign issuers (particularly those located in developing countries) may be less liquid and more volatile than securities of comparable U.S. issuers. Foreign security trading practices, including those involving securities settlement where Portfolio’s and/or an Underlying Fund’s assets may be released prior to receipt of payment, may result in increased risk in the event of a failed trade or the insolvency of a foreign broker-dealer, and may involve substantial delays.

 

In addition, the costs of foreign investing, including withholding taxes, brokerage commissions and custodial costs, are generally higher than for U.S. investors. In general, there is less overall governmental supervision and regulation of securities exchanges, brokers, and listed companies than in the United States. It may also be difficult to enforce legal rights in foreign countries. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to U.S. issuers.

 

Some foreign securities impose restrictions on transfer within the United States or to U.S. persons. Although securities subject to such transfer restrictions may be marketable abroad, they may be less liquid than foreign securities of the same class that are not subject to such restrictions. American Depositary Receipts (“ADRs”), as well as other “hybrid” forms of ADRs, including European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”), are certificates evidencing ownership of shares of a foreign issuer. These certificates are issued by depository banks and generally trade on an established market in the United States or elsewhere. The underlying shares are held in trust by a custodian bank or similar financial institution in the issuer’s home country. The depository bank may not have physical custody of the underlying securities at all times and may charge fees for various services, including forwarding dividends and interest and corporate actions. ADRs are alternatives to directly purchasing the underlying foreign securities in their national markets and currencies. However, ADRs continue to be subject to many of the risks associated with investing directly in foreign securities. These risks include foreign exchange risk as well as the political and economic risks of the underlying issuer’s country. In addition, the issuers of Depositary Receipts may withdraw existing Depositary Receipts at their time of choosing, resulting in costs and delays in the distribution of the underlying assets to a Portfolio and may negatively impact the Portfolio’s performance.

 

Certain Portfolios and/or an Underlying Funds may also invest in ADRs, GDRs, EDRs, foreign securities traded on a national securities market and may purchase and sell foreign currency on a spot basis and enter into forward currency contracts.

 

Generally, ADRs and GDRs in registered form are U.S. dollar denominated securities designed for use in the U.S. securities markets which represent and may be converted into the underlying foreign security. EDRs are typically issued in bearer form and are designed for use in the European securities markets. Issuers of the stock of ADRs not sponsored by such underlying issuers are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the market value of such ADRs. To the extent a Portfolio and/or an Underlying Fund invests in securities in bearer form, such as EDRs, it may be more difficult to recover securities in the event such securities are lost or stolen.

 

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PARTICIPATION NOTES (“P-Notes”). P-Notes are issued by banks or broker-dealers and are designed to offer a return linked to the performance of a particular underlying equity security or market. P-Notes can have the characteristics or take the form of various instruments, including, but not limited to, certificates or warrants. The holder of a P-Note that is linked to a particular underlying security is entitled to receive any dividends paid in connection with the underlying security. However, the holder of a P-Note generally does not receive voting rights as it would if it directly owned the underlying security.

 

P-Notes constitute direct, general and unsecured contractual obligations of the banks or broker-dealers that issue them, subjecting a Portfolio and/or an Underlying Fund to counterparty risk. Investments in P-Notes involve certain risks in addition to those associated with a direct investment in the underlying foreign companies or foreign securities markets whose return they seek to replicate. For instance, there can be no assurance that the trading price of a P-Note will equal the underlying value of the foreign company or foreign securities market that it seeks to replicate. As the purchaser of a P-Note, a Portfolio and/or an Underlying Fund is relying on the creditworthiness of the counterparty issuing the P-Note and has no rights under a P-Note against the issuer of the underlying security. Therefore, if such counterparty were to become insolvent, the Portfolio and/or the Underlying Fund would lose its investment.

 

The risk that a Portfolio and/or an Underlying Fund may lose its investments due to the insolvency of a single counterparty may be amplified to the extent the Portfolio and/or the Underlying Fund purchases P-Notes issued by one issuer or a small number of issuers. P-Notes also include transaction costs in addition to those applicable to a direct investment in securities.

 

Due to liquidity and transfer restrictions, the secondary markets on which P-Notes are traded may be less liquid than the markets for other securities, which may lead to the absence of readily available market quotations for securities in a Portfolio and/or an Underlying Fund. The ability of a Portfolio and/or an Underlying Fund to value its securities becomes more difficult and the judgment in the application of fair value procedures may play a greater role in the valuation of the Portfolio’s and/or the Underlying Fund’s securities due to reduced availability of reliable objective pricing data. Consequently, while such determinations will be made in good faith, it may nevertheless be more difficult for a Portfolio to accurately assign a daily value to such securities.

 

TYPES OF SECURITIES IN WHICH THE INTERNATIONAL EQUITY PORTFOLIO, THE ASSET ALLOCATION PORTFOLIOS, THE INVESTMENT QUALITY BOND PORTFOLIO, THE MUNICIPAL BOND PORTFOLIO AND THE U.S. GOVERNMENT MONEY MARKET PORTFOLIO MAY INVEST.

 

As discussed in the Prospectuses, the International Equity Portfolio seeks to achieve its investment objective through investment primarily in equity securities. The International Equity Portfolio may also invest in ADRs, GDRs, EDRs, foreign securities traded on a national securities market and may purchase and sell foreign currency on a spot basis and enter into forward currency contracts.

 

The International Equity Portfolio also may purchase shares of investment companies or trusts which invest principally in securities in which the Portfolios are authorized to invest. The return on the Portfolios’ investments in investment companies will be reduced by the operating expenses, including investment advisory and administrative fees, of such companies.

 

Certain Underlying Funds, and thus an Asset Allocation Portfolio, may also invest in ADRs, GDRs, EDRs, foreign securities traded on a national securities market and may purchase and sell foreign currency on a spot basis and enter into forward currency contracts.

 

The Portfolios’ and/or certain Underlying Funds’ investment in an investment company may require the payment of a premium above the NAV of the investment company’s shares, and the market price of the investment company’s assets. The Portfolios will not invest in any investment company or trust unless it is believed that the potential benefits of such investment are sufficient to warrant the payment of any such premium. Under the 1940 Act, a Portfolio and/or certain Underlying Funds may not invest more than 10% of its assets in investment companies or more than 5% of its total assets in the securities of any one investment company, nor may it own more than 3% of the outstanding voting securities of any such company. These limitations are relaxed or eliminated by certain SEC rules and exemptions.

 

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STRUCTURED NOTES. Certain Underlying Funds, and thus the Asset Allocation Portfolios, may invest in structured notes and indexed securities. Structured notes are derivative debt instruments, the interest rate or principal of which is linked to currencies, interest rates, commodities, indices or other financial indicators (reference instruments). Indexed securities may include structured notes and other securities wherein the interest rate or principal are determined by a reference instrument. Most structured notes and indexed securities are fixed income securities that have maturities of three years or less. The interest rate or the principal amount payable at maturity of an indexed security may vary based on changes in one or more specified reference instruments, such as a floating interest rate compared with a fixed interest rate. The reference instrument need not be related to the terms of the indexed security. Structured notes and indexed securities may be positively or negatively indexed (i.e., their principal value or interest rates may increase or decrease if the underlying reference instrument appreciates), and may have return characteristics similar to direct investments in the underlying reference instrument or to one or more options on the underlying reference instrument. Structured notes and indexed securities may entail a greater degree of market risk than other types of debt securities because the investor bears the risk of the reference instrument. Structured notes or indexed securities also may be more volatile, less liquid, and more difficult to accurately price than less complex securities and instruments or more traditional debt securities. In addition to the credit risk of the structured note or indexed security’s issuer and the normal risks of price changes in response to changes in interest rates, the principal amount of structured notes or indexed securities may decrease as a result of changes in the value of the underlying reference instruments. Further, in the case of certain structured notes or indexed securities in which the interest rate, or exchange rate in the case of currency, is linked to a referenced instrument, the rate may be increased or decreased or the terms may provide that, under certain circumstances, the principal amount payable on maturity may be reduced to zero resulting in a loss to the Portfolios and/or certain Underlying Funds, and thus the Asset Allocation Portfolios.

 

MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of mortgage pass-through securities differ from other forms of debt securities (which normally provide periodic payments of interest in fixed amounts and the payment of principal in a lump sum at maturity or on specified call dates). Instead, mortgage pass-through securities provide monthly payments consisting of both interest and principal payments. In effect, these payments are a “pass-through” of the monthly payments made by the individual borrowers on the underlying residential mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Unscheduled payments of principal may be made if the underlying mortgage loans are repaid or refinanced or the underlying properties are foreclosed, thereby shortening the securities’ weighted average life.

 

Some mortgage pass-through securities such as securities guaranteed by Ginnie Mae are described as “modified pass-through securities.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, on the scheduled payment dates regardless of whether the mortgagor actually makes the payment.

 

The principal governmental guarantor of mortgage pass-through securities is Ginnie Mae. Ginnie Mae is authorized to guarantee, with the full faith and credit of the United States, the timely payment of principal and interest on securities issued by lending institutions approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers) and is backed by pools of mortgage loans.

 

These mortgage loans are either insured by the Federal Housing Administration or guaranteed by the Veterans Administration. A “pool” or group of such mortgage loans is assembled and after being approved by Ginnie Mae, is offered to investors through securities dealers.

 

Government-related guarantors of mortgage pass-through securities (i.e., not backed by the full faith and credit of the United States) include Fannie Mae and Freddie Mac. Fannie Mae is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. Fannie Mae purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved sellers/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Mortgage pass-through securities issued by Fannie Mae are guaranteed as to timely payment of principal and interest by Fannie Mae but are not backed by the full faith and credit of the United States.

 

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Freddie Mac was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a U.S. government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. Freddie Mac issues PCs, which represent interests in conventional mortgages from Freddie Mac’s national portfolio. Freddie Mac guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States. Fannie Mae and Freddie Mac each may borrow from the Treasury to meet its obligations, but the Treasury is under no obligation to lend to Fannie Mae or Freddie Mac. In September 2008, the Treasury announced that the government would be taking over Fannie Mae and Freddie Mac and placing the companies into a conservatorship. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage pass-through securities. The Portfolios do not purchase interests in pools created by such non-governmental issuers.

 

EVENT-LINKED BONDS. Certain Underlying Funds, and thus the Asset Allocation Portfolios, may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are contingent on the non-occurrence of a pre-defined “trigger” event, such as market-wide or country-specific event. If a trigger event, as defined within the terms of an event-linked bond, involves losses or other metrics exceeding a specific amount and time period specified therein, the Portfolios and/or the Underlying Funds may lose a portion or all of its accrued interest and/or principal invested in such event-linked bond. In addition to the specified trigger events, event-linked bonds may expose the Portfolios and/or the Underlying Funds to other risks, including but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations and adverse tax consequences. Event-linked bonds are also subject to the risk that the model used to calculate the probability of a trigger event was not accurate and underestimated the likelihood of a trigger event. Upon the occurrence or possible occurrence of a trigger event, and until the completion of the processing and auditing of applicable loss claims, the Portfolios’ and/or the Underlying Funds’ investments in an event-linked bond may be priced using fair value methods. As a relatively new type of financial instrument, there is limited trading history for these securities, and there can be no assurance that a liquid market for these instruments will develop or that if a liquid market is developed, that it will remain liquid under all circumstances.

 

Real Estate Investment Trusts. Certain Portfolios may invest in the securities of real estate investment trusts (“REITs”). REITs offer investors greater liquidity and diversification than direct ownership of properties. A REIT is a corporation or business trust that invests substantially all of its assets in interests in real estate. Equity REITs are those which purchase or lease land and buildings and generate income primarily from rental income. Equity REITs may also realize capital gains (or losses) when selling property that has appreciated (or depreciated) in value. Mortgage REITs are those that invest in real estate mortgages and generate income primarily from interest payments on mortgage loans. Hybrid REITs generally invest in both real property and mortgages. Unlike corporations, REITs do not pay income taxes if they meet certain IRS requirements. Real estate related equity securities also include those insured by real estate developers, companies with substantial real estate holdings (for investment or as part of their operations), as well as companies whose products and services are directly related to the real estate industry, such as building supply manufacturers, mortgage lenders or mortgage servicing companies. Like any investment in real estate though, a REIT’s performance depends on several factors, such as its ability to find tenants, renew leases and finance property purchases and renovations. Other risks associated with REIT investments include the fact that equity and mortgage REITs are dependent upon specialized management skills and are not fully diversified.

 

These characteristics subject REITs to the risks associated with financing a limited number of projects. They are also subject to heavy cash flow dependency, defaults by borrowers, and self liquidation. Additionally, equity REITs may be affected by any changes in the value of the underlying property owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. By investing in REITs indirectly through a Portfolio, a shareholder bears not only a proportionate share of the expenses of a Portfolio, but also may indirectly bear similar expenses of some of the REITs in which it invests.

 

HIGH-YIELD BONDS. Certain Underlying Funds, and thus the Asset Allocation Portfolios, may invest in debt securities that are rated below “investment grade” by S&P, Moody’s or Fitch or, if unrated, are deemed by the Adviser and/or the Underlying Fund’s investment adviser to be of comparable quality. Securities rated less than Baa by Moody’s or BBB by S&P are classified as below investment grade securities and are commonly referred to as “junk bonds” or high yield, high risk securities. Debt rated BB, B, CCC, CC and C and debt rated Ba, B, Caa, Ca, C is regarded by S&P and Moody’s, respectively, on balance, as predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligation. For S&P, BB indicates the lowest degree of speculation and C the highest degree of speculation for below investment grade securities.

 

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For Moody’s, Ba indicates the lowest degree of speculation and C the highest degree of speculation for below investment grade securities. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. Similarly, debt rated Ba or BB and below is regarded by the relevant rating agency as speculative.

 

Debt rated C by Moody’s or S&P is the lowest rated debt that is not in default as to principal or interest, and such issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. Such securities are also generally considered to be subject to greater risk than securities with higher ratings with regard to a deterioration of general economic conditions. Excerpts from S&P’s, Moody’s, and Fitch’s descriptions of their bond ratings are contained in Appendix A to this SAI.

 

Ratings of debt securities represent the rating agency’s 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, since rating agencies may fail to make timely changes in credit ratings in response to subsequent events, the Adviser continuously monitors the issuers of high yield bonds to determine if the issuers will have sufficient cash flows and profits to meet required principal and interest payments. The achievement of the Portfolio’s and/or the Underlying Fund’s investment objective may be more dependent on the Adviser’s and/or the Underlying Fund’s investment adviser’s own credit analysis than might be the case for a fund which invests in higher quality bonds. The Portfolio and/or the Underlying Fund may retain a security whose rating has been changed. The market values of lower quality debt securities tend to reflect individual developments of the issuer to a greater extent than do higher quality securities, which react primarily to fluctuations in the general level of interest rates. In addition, lower quality debt securities tend to be more sensitive to economic conditions and generally have more volatile prices than higher quality securities. Issuers of lower quality securities are often highly leveraged and may not have available to them more traditional methods of financing. For example, during an economic downturn or a sustained period of rising interest rates, highly leveraged issuers of lower quality securities may experience financial stress. During such periods, such issuers may not have sufficient revenues to meet their interest payment obligations. The issuer’s ability to service debt obligations may also be adversely affected by specific developments affecting the issuer, such as the issuer’s inability to meet specific projected business forecasts or the unavailability of additional financing. Similarly, certain emerging market governments that issue lower quality debt securities are among the largest debtors to commercial banks, foreign governments and supranational organizations such as the World Bank and may not be able or willing to make principal and/or interest repayments as they come due. The risk of loss due to default by the issuer is significantly greater for the holders of lower quality securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. Lower quality debt securities frequently have call or buy-back features, which would permit an issuer to call or repurchase the security from the Portfolio and/or the Underlying Fund. In addition, the Portfolio and/or the Underlying Fund may have difficulty disposing of lower quality securities because they may have a thin trading market. There may be no established retail secondary market for many of these securities, and the Portfolio and/or the Underlying Fund anticipates that such securities could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market also may have an adverse impact on market prices of such instruments and may make it more difficult for the Portfolio and/or the Underlying Fund to obtain accurate market quotations for purposes of valuing the Portfolio’s and/or the Underlying Fund’s holdings. The Portfolio and/or the Underlying Fund may also acquire lower quality debt securities during an initial underwriting or which are sold without registration under applicable securities laws. Such securities involve special considerations and risks.

 

In addition to the foregoing, factors that could have an adverse effect on the market value of lower quality debt securities in which the Portfolio and/or the Underlying Fund may invest include: (i) potential adverse publicity, (ii) heightened sensitivity to general economic or political conditions and (iii) the likely adverse impact of a major economic recession. The Portfolio and/or the Underlying Fund may also incur additional expenses to the extent the Portfolio and/or the Underlying Fund is required to seek recovery upon a default in the payment of principal or interest on its portfolio holdings, and the Portfolio and/or the Underlying Fund may have limited legal recourse in the event of a default. Debt securities issued by governments in emerging markets can differ from debt obligations issued by private entities in that remedies for defaults generally must be pursued in the courts of the defaulting government, and legal recourse is therefore somewhat diminished. Political conditions, in terms of a government’s willingness to meet the terms of its debt obligations, also are of considerable significance. There can be no assurance that the holders of commercial bank debt may not contest payments to the holders of debt securities issued by governments in emerging markets in the event of default by the governments under commercial bank loan agreements. The Adviser and/or the Underlying Fund’s investment adviser attempts to minimize the speculative risks associated with investments in lower quality securities through credit analysis and by carefully monitoring current trends in interest rates, political developments and other factors. Nonetheless, investors should carefully review the investment objective and policies of the Portfolio and/or the Underlying Fund and consider their ability to assume the investment risks involved before making an investment. The Portfolio and/or the Underlying Fund may also invest in unrated debt securities.

 

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Unrated debt securities, while not necessarily of lower quality than rated securities, may not have as broad a market. Because of the size and perceived demand for an issue, among other factors, certain issuers may decide not to pay the cost of obtaining a rating for their bonds. The Adviser and/or the Underlying Fund’s investment adviser will analyze the creditworthiness of the issuer of an unrated security, as well as any financial institution or other party responsible for payments on the security.

 

The investments described in this section are in addition to the investments described elsewhere in this SAI in which the International Equity Portfolio and Certain Underlying Funds, and thus the Asset Allocation Portfolios may invest.

 

FOREIGN CURRENCY TRANSACTIONS. When a Portfolio and/or an Underlying Fund agrees to purchase or sell a security in a foreign market it will generally be obligated to pay or will be entitled to receive a specified amount of foreign currency. The Portfolio and/or the Underlying Fund will then generally convert dollars to that currency (in the case of a purchase) or that currency to dollars (in the case of a sale). The Portfolios and/or the Underlying Funds will conduct their foreign currency exchange transactions either on a spot basis (i.e., cash) at the spot rate prevailing in the foreign currency exchange market, or through entering into forward foreign currency contracts (“forward contracts”) to purchase or sell foreign currencies. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement and no commissions are charged at any stage for trades. A Portfolio and/or an Underlying Fund may enter into forward contracts in order to lock in the U.S. dollar amount it must pay or expects to receive for a security it has agreed to buy or sell. A Portfolio and/or an Underlying Fund may also enter into forward currency contracts with respect to the Portfolio’s and/or the Underlying Fund’s positions when it believes that a particular currency may change unfavorably compared to the U.S. dollar.

 

If Portfolio securities are used to secure such a forward contract, on the settlement of the forward contract for delivery by the Portfolio and/or the Underlying Fund of a foreign currency, the Portfolio and/or the Underlying Fund may either sell the portfolio securities and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an “offsetting” contract obligating it to purchase, on the same settlement date, the same amount of foreign currency (referred to as a “closing transaction”). Closing transactions with respect to forward contracts are usually effected with the counterparty to the original forward contract.

 

The Portfolios and/or the Underlying Fund may effect currency hedging transactions in foreign currency futures contacts, exchange-listed and OTC call and put options on foreign currency futures contracts and on foreign currencies. The use of forward futures or options contracts will not eliminate fluctuations in the underlying prices of the securities which the Portfolios and/or the Underlying Funds own or intend to purchase or sell. They simply establish a rate of exchange for a future point in time.

 

Additionally, while these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, their use tends to limit any potential gain which might result from the increase in value of such currency. In addition, such transactions involve costs and may result in losses.

 

The successful use of these transactions will usually depend on the Advisers’ or SCM’s and/or an Underlying Fund’s investment adviser’s ability to accurately forecast currency exchange rate movements. Should exchange rates move in an unexpected manner, a Portfolio and/or an Underlying Fund may not achieve the anticipated benefits of the transaction, or it may realize losses. In addition, these techniques could result in a loss if the counterparty to the transaction does not perform as promised, including because of the counterparty’s bankruptcy or insolvency. Moreover, there may be an imperfect correlation between a Portfolio’s and/or an Underlying Fund’s holdings of securities denominated in a particular currency and the currencies bought or sold in the forward contracts entered into by the Portfolio and/or the Underlying Fund. This imperfect correlation may cause the Portfolio and/or the Underlying Fund to sustain losses that will prevent the Portfolio and/or the Underlying Fund from achieving a complete hedge or expose the Portfolio and/or the Underlying Fund to risk of foreign exchange loss. In addition, investors should bear in mind that a Portfolio and/or an Underlying Fund is not obligated to actively engage in hedging or other currency transactions. For example, a Portfolio and/or an Underlying Fund may not have attempted to hedge its exposure to a particular foreign currency at a time when doing so might have avoided a loss.

 

Although each Portfolio values its assets in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies to U.S. dollars on a daily basis. The Portfolios will, however, do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers typically do not charge a fee for conversion, they do realize a profit based on the spread between the prices at which they are buying and selling various currencies.

 

Thus, a dealer may offer to sell a foreign currency to a Portfolio and/or an Underlying Fund at one rate, while offering a lesser rate of exchange should a Portfolio and/or an Underlying Fund desire to resell that currency to the dealer. The transactions described in this section may also give risk to certain federal income tax consequences described below under the heading “Certain Tax Considerations.”

 

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Recent Market Events. U.S. and international markets have been experiencing dramatic volatility. As a result, the securities markets have experienced substantially lower valuations, reduced liquidity, price volatility, credit downgrades, and increased likelihood of default and valuation difficulties. Accordingly, the risks of investing in the following securities in which certain Portfolios may invest have increased.

 

LIBOR Risk. Certain of a Portfolio’s and/or an Underlying Fund’s investments, payment obligations and financing terms may be based on floating rates, such as London Interbank Offered Rates (“LIBOR”), Secured Overnight Financing Rate (“SOFR”), Euro Interbank Offered Rate and other similar types of reference rates (each, a “Reference Rate”). The use of certain LIBOR was generally phased out by the end of 2021, and some regulated entities (such as banks) have ceased to enter into new LIBOR-based contracts beginning January 1, 2022. The most widely used tenors of U.S. LIBOR had continued to be provided on a representative basis until mid-2023.

 

To identify a successor rate for LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed. ARRC has identified SOFR as its preferred alternative rate for LIBOR and, on July 2021, ARRC formally recommended the use of forward-looking Term SOFR rates.

 

Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In addition, a liquid market for newly-issued instruments that use a reference rate other than LIBOR still may be developing. There may also be challenges for a Portfolio to enter into hedging transactions against such newly-issued instruments until a market for such hedging transactions fully develops. All of the aforementioned may adversely affect the Portfolio’s performance or net asset value.

 

The Internal Revenue Service has issued regulations regarding the tax consequences of transition from LIBOR or another interbank offered rate (“IBOR”) to a new reference rate in debt instruments and non-debt contracts, including SOFR. Under the regulations, alteration or modification of the terms of a debt instrument to replace an operative rate that uses a discontinued IBOR with a qualified rate (as defined in the regulations) including true up payments equalizing the fair market value of contracts before and after such IBOR transition, to add a qualified rate as a fallback rate to a contract whose operative rate uses a discontinued IBOR or to replace a fallback rate that uses a discontinued IBOR with a qualified rate would not be taxable. The Internal Revenue Service may provide additional guidance, with potential retroactive effect.

 

Referendum on the UK’s EU Membership. On January 31, 2020, the United Kingdom (“UK”) officially withdrew from the European Union (“EU”) and the UK entered a transition period which ended on December 31, 2020. On December 30, 2020, the EU and UK signed the EU-UK Trade and Cooperation Agreement (“TCA”), an agreement on the terms governing certain aspects of the EU’s and the UK’s relationship following the end of the transition period. The TCA was subsequently ratified by the EU Parliament and entered into force on May 1, 2021. Notwithstanding the TCA, following the transition period, there is likely to be considerable uncertainty as to the UK’s post-transition framework.

 

The impact on the UK and European economies and the broader global economy could be significant, resulting in increased volatility and illiquidity, currency fluctuations, impacts on arrangements for trading and on other existing cross-border cooperation arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise), and in potentially lower growth for companies in the UK, Europe and globally, which could have an adverse effect on the value of a Portfolio’s investments. In addition, if one or more other countries were to exit the European Union or abandon the use of the euro as a currency, the value of investments tied to those countries or the euro could decline significantly and unpredictably.

 

Certain Portfolios and/or Underlying Funds may make investments in the UK, other EU members and in non-EU countries that are directly or indirectly affected by the exit of the UK from the EU. Adverse legal, regulatory or economic conditions affecting the economies of the countries in which the Portfolio conduct its business (including making investments) and any corresponding deterioration in global macro-economic conditions could have a material adverse effect on a Portfolio’s or an Underlying Fund’s investment returns. Potential consequences to which a Portfolio or an Underlying Fund may be exposed, directly or indirectly, as a result of the UK referendum vote include, but are not limited to, market dislocations, economic and financial instability in the UK and in other EU members, increased volatility and reduced liquidity in financial markets, reduced availability of capital, an adverse effect on investor and market sentiment, Sterling and Euro destabilization, reduced deal flow in a Portfolio’s or an Underlying Fund’s target markets, increased counterparty risk and regulatory, legal and compliance uncertainties. Any of the foregoing or similar risks could have a material adverse effect on the operations, financial condition or investment returns of a Portfolio, an Underlying Fund and/or the Advisers, or SCM in general.

 

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The effects on the UK, European and global economies of the exit of the UK (and/or other EU members during the term of the Portfolios) from the EU, or the exit of other EU members from the European monetary area and/or the redenomination of financial instruments from the Euro to a different currency, are difficult to predict and to protect fully against. Many of the foregoing risks are outside of the control of the Portfolios, the Underlying Funds and/or the Advisers and SCM. These risks may affect the Portfolios, the Underlying Funds and/or the Advisers and SCM and other service providers given economic, political and regulatory uncertainty created by Brexit.

 

Derivatives Rule. In October 2020, the SEC adopted a final rule related to the use of derivatives, short sales, reverse repurchase agreements and certain other transactions by registered investment companies (the “rule”). Subject to certain exceptions, the rule requires funds to trade derivatives and certain other transactions that create future payment or delivery obligations subject to a value-at-risk (VaR) leverage limit and to certain derivatives risk management program, reporting and board oversight requirements. Generally, these requirements apply to any fund engaging in derivatives transactions unless a fund satisfies a “limited derivatives users” exception, which requires the fund to limit its gross notional derivatives exposure (with certain exceptions) to 10% of its net assets and to adopt derivatives risk management procedures. Under the rule, when a fund trades reverse repurchase agreements or similar financing transactions, it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness (e.g., borrowings, if applicable) when calculating the fund’s asset coverage ratio or treat all such transactions as derivatives transactions. The SEC also provided guidance in connection with the final rule regarding the use of securities lending collateral that may limit securities lending activities. In addition, under the rule, a fund may invest in a security on a when-issued or forward-settling basis, or with a non-standard settlement cycle, and the transaction will be deemed not to involve a senior security (as defined under Section 18(g) of the 1940 Act), provided that (i) the fund intends to physically settle the transaction and (ii) the transaction will settle within 35 days of its trade date (the “Delayed-Settlement Securities Provision”). A fund may otherwise engage in when-issued, forward-settling and non-standard settlement cycle securities transactions that do not meet the conditions of the Delayed-Settlement Securities Provision so long as the fund treats any such transaction as a derivatives transaction for purposes of compliance with the rule. Furthermore, under the rule, a fund will be permitted to enter into an unfunded commitment agreement, and such unfunded commitment agreement will not be subject to the asset coverage requirements under the 1940 Act, if the fund reasonably believes, at the time it enters into such agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all such agreements as they come due. These requirements may limit the ability of the funds to use derivatives, short sales, reverse repurchase agreements and similar financing transactions, and the other relevant transactions as part of its investment strategies.

 

ADDITIONAL RISKS. Securities in which the Portfolios and/or an Underlying Funds may invest are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors and shareholders, such as the federal bankruptcy laws and federal, state and local laws which may be enacted by Congress or the state legislatures extending the time for payment of principal or interest, or both or imposing other constraints upon enforcement of such obligations.

 

RATINGS OF CORPORATE AND MUNICIPAL DEBT OBLIGATIONS. Moody’s, S&P and Fitch are private services that provide ratings of the credit quality of debt obligations, including issues of corporate and municipal securities. A description of the range of ratings assigned to corporate and municipal securities by Moody’s, S&P and Fitch is included in Appendix A to this SAI. Certain Portfolios and/or certain Underlying Funds may use these ratings in determining whether to purchase, sell or hold a security. These ratings represent Moody’s, S&P’s and Fitch’s opinions as to the quality of the securities that they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, securities with the same maturity, interest rate and ratings may have different market prices. Subsequent to its purchase by a Portfolio and/or an Underlying Fund an issue of securities may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Portfolio and/or an Underlying Fund. The Advisers or SCM will consider such an event in determining whether a Portfolio should continue to hold the obligation and will dispose of such securities in order to limit the holdings of debt securities rated below investment grade to less than 5% of the assets of the Portfolio. If a security is given different ratings by different nationally recognized statistical rating organizations, the Portfolios’ Advisers consider the security’s rating to be the highest rating of the ratings.

 

Opinions relating to the validity of municipal securities and to the exemption of interest thereon from federal income tax (and also, when available, from the federal alternative minimum tax) are rendered by bond counsel to the issuing authorities at the time of issuance. Neither the Municipal Bond Portfolio nor its Adviser or Manager will review the proceedings relating to the issuance of municipal securities or the basis for such opinions.

 

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An issuer’s obligations under its municipal securities are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors such as the federal bankruptcy laws and federal, state and local laws which may be enacted to extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. There also is the possibility that, as a result of litigation or other conditions, the power or ability of issuers to meet their obligations for the payment of principal and interest on their municipal securities may be materially adversely affected.

 

RESETS. The interest rates paid on the Adjustable Rate Mortgage Securities (“ARMs”) in which certain Portfolios and/or an Underlying Fund may invest generally are readjusted or reset at intervals of one year or less to an increment over some predetermined interest rate index.

 

There are two main categories of indices: those based on U.S. Treasury securities and those derived from a calculated measure, such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the National Median Cost of Funds, the one-month or three-month LIBOR, the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile.

 

CAPS AND FLOORS. The underlying mortgages, which collateralize the ARMs in which certain Portfolios and/or an Underlying Fund invests, will frequently have caps and floors which limit the maximum amount by which the loan rate to the residential borrower may change up or down: (1) per reset or adjustment interval and (2) over the life of the loan. Some residential mortgage loans restrict periodic adjustments by limiting changes in the borrower’s monthly principal and interest payments rather than limiting interest rate changes. These payment caps may result in negative amortization. The value of mortgage securities in which certain Portfolios and/or an Underlying Fund invests may be affected if market interest rates rise or fall faster and farther than the allowable caps or floors on the underlying residential mortgage loans. Additionally, even though the interest rates on the underlying residential mortgages are adjustable, amortization and prepayments may occur, thereby causing the effective maturities of the mortgage securities in which certain Portfolios and/or the Underlying Fund invests to be shorter than the maturities stated in the underlying mortgages.

 

MUNICIPAL NOTES. For liquidity purposes, pending investment in municipal bonds, or on a temporary or defensive basis due to market conditions, the Municipal Bond Portfolio and/or certain Underlying Funds may invest in tax-exempt short-term debt obligations (maturing in one year or less). These obligations, known as “municipal notes,” include tax, revenue and bond anticipation notes, construction loan notes and tax-exempt commercial paper, which are issued to obtain funds for various public purposes; the interest from these Notes is also exempt from federal income taxes. The Municipal Bond Portfolio and/or certain Underlying Funds will limit their investments in municipal notes to those which are rated, at the time of purchase, within the two highest grades assigned by Moody’s or the two highest grades assigned by S&P or Fitch, or if unrated, which are of comparable quality in the opinion of the Manager or the Adviser and/or an Underlying Fund’s investment adviser.

 

MUNICIPAL BONDS. Municipal bonds include debt obligations of a state, a territory, or a possession of the United States, or any political subdivision thereof (e.g., countries, cities, towns, villages, districts, authorities) or the District of Columbia issued to obtain funds for various purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets and water and sewer works. Other public purposes for which municipal bonds may be issued include the refunding of outstanding obligations, obtaining funds for general operating expenses and the obtaining of funds to loan to public or private institutions for the construction of facilities such as education, hospital and housing facilities. In addition, certain types of private activity bonds may be issued by or on behalf of public authorities to obtain funds to provide privately operated housing facilities, sports facilities, convention or trade show facilities, airport, mass transit, port or parking facilities, air or water pollution control facilities and certain local facilities for water supply, gas, electricity or sewage or solid waste disposal. Such obligations are included within the term municipal bonds if the interest paid thereon is at the time of issuance, in the opinion of the issuer’s bond counsel, exempt from federal income tax. The current federal tax laws, however, substantially limit the amount of such obligations that can be issued in each state.

 

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The two principal classifications of municipal bonds are “general obligation” and limited obligation or “revenue” bonds. General obligation bonds are secured by the issuer’s pledge of its faith, credit and taxing power for the payment of principal and interest, whereas revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source. Private activity bonds that are municipal bonds are in most cases revenue bonds and do not generally constitute the pledge of the credit of the issuer of such bonds. The credit quality of private activity revenue bonds is usually directly related to the credit standing of the industrial user involved. There are, in addition, a variety of hybrid and special types of municipal obligations as well as numerous differences in the collateral security of municipal bonds, both within and between the two principal classifications described above.

 

REPURCHASE AGREEMENTS. Each Portfolio and/or the Underlying Funds may invest without limit in repurchase agreements. A repurchase agreement is effectively a loan whereby an instrument under which the investor (such as a Portfolio and/or an Underlying Fund) acquires ownership of a security (known as the “underlying security”) and the seller (i.e., a bank or primary dealer) agrees, at the time of the sale, to repurchase the underlying security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period, unless the seller defaults on its repurchase obligations. A Portfolio will enter into repurchase agreements only where (i) the underlying securities are of the type (excluding maturity limitations) which the Portfolio’s investment guidelines would allow it to purchase directly; (ii) the market value of the underlying security, including interest accrued, will be at all times at least equal to the value of the repurchase agreement; and (iii) payment for the underlying security is made only upon physical delivery or evidence of book-entry transfer to the account of the Portfolio’s custodian. Repurchase agreements usually are for short periods, often under one week, and will not be entered into by a Portfolio for a duration of more than seven days if, as a result, more than 15% (5% with respect to the U.S. Government Money Market Portfolio) of the NAV of the Portfolio would be invested in such agreements or other investments, which are illiquid.

 

The Portfolio will assure that the amount of collateral with respect to any repurchase agreement is adequate. As with a true extension of credit, however, there is a risk of delay in recovery or the possibility of inadequacy of the collateral should the seller of the repurchase agreement fail financially. In addition, a Portfolio could incur costs in connection with the disposition of the collateral if the seller were to default. A Portfolio will enter into repurchase agreements only with sellers deemed to be creditworthy by the Portfolio’s Adviser or Manager or the Board of Trustees, or pursuant to guidelines established by the Board of Trustees of the Trust and only when the economic benefit to the Portfolio is believed to justify the attendant risks. The Portfolios have adopted standards for the sellers with whom they will enter into repurchase agreements.

 

The Board of Trustees of the Trust believes these standards are designed to reasonably assure that such sellers present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase agreement. The Portfolios may enter into repurchase agreements only with well-established securities dealers or with member banks of the Federal Reserve System.

 

REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements involve the sale of securities to a bank or other institution with an agreement that an investor (such as a Portfolio and/or an Underlying Fund) will buy back the securities at a fixed future date at a fixed price plus an agreed amount of “interest” which may be reflected in the repurchase price. Reverse repurchase agreements involve the risk that the market value of securities purchased by a Portfolio and/or an Underlying Fund with proceeds of the transaction may decline below the repurchase price of the securities sold by the Portfolio and/or the Underlying Fund that it is obligated to repurchase. The Portfolio and/or the Underlying Fund will also continue to be subject to the risk of a decline in the market value of the securities sold under the agreements because it will reacquire those securities upon effecting their repurchase. Under SEC requirements, a Portfolio needs to aggregate the amount of indebtedness associated with its reverse repurchase agreements and similar financing transactions with the aggregate amount of any other senior securities representing indebtedness (e.g., borrowings, if applicable) when calculating the fund’s asset coverage ratio or treat all such transactions as derivatives transactions.

 

SHORT SALES. Certain Portfolios and/or an Underlying Funds may sell securities short. A short sale is a transaction in which a Portfolio and/or an Underlying Fund sells a security it does not own or have the right to acquire (or that it owns but does not wish to deliver) in anticipation that the market price of that security will decline.

 

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When a Portfolio and/or an Underlying Fund makes a short sale, the broker-dealer through which the short sale is made must borrow the security sold short and deliver it to the party purchasing the security. The Portfolio and/or an Underlying Fund is required to make a margin deposit in connection with such short sales; the Portfolio and/or an Underlying Fund may have to pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed securities.

 

If the price of the security sold short increases between the time of the short sale and the time the Portfolio and/or the Underlying Fund covers its short position, the Portfolio and/or an Underlying Fund will incur a loss; conversely, if the price declines, the Portfolio and/or the Underlying Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. If a Portfolio and/or an Underlying Fund engages in short sales for hedging purposes, the successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.

 

To the extent a Portfolio sells securities short, it will provide collateral to the broker-dealer. Each Portfolio does not intend to enter into short sales (other than short sales “against the box”) if immediately after such sales the aggregate of the value of all collateral exceeds 10% of the value of the Portfolio’s net assets. This percentage may be varied by action of the Board of Trustees. A short sale is “against the box” to the extent the Portfolio and/or an Underlying Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short.

 

LARGE SHAREHOLDER REDEMPTIONS. Certain account holders may from time to time own (beneficially or of record) or control a significant percentage of a Portfolio’s shares. Redemptions by large account holders of their shares in a Portfolio may impact the Portfolio’s liquidity and NAV. These redemptions may also force the Portfolio to sell securities at a time when the Adviser or Manager would otherwise not choose to sell, which may negatively impact the Portfolio’s performance, as well as increase the Portfolio’s trading costs and its taxable distributions to shareholders.

 

Special Risks Related to Cyber Security. The Portfolios, including through their investment in the Underlying Funds, and their service providers are susceptible to cyber security risks that include, among other things, theft, unauthorized monitoring, release, misuse, loss, destruction or corruption of confidential and highly restricted data; denial of service attacks; unauthorized access to relevant systems; compromises to networks or devices that the Portfolios and their service providers use to service the Portfolios’ operations; or operational disruption or failures in the physical infrastructure or operating systems that support the Portfolios and their service providers. Cyber-attacks against or security breakdowns of the Portfolios or their service providers may adversely impact the Portfolios and their shareholders, potentially resulting in, among other things, financial losses; the inability of Portfolio shareholders to transact business and the Portfolios to process transactions; inability to calculate the Portfolios’ NAV; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. The Portfolios may incur additional costs for cyber security risk management and remediation purposes.

 

In addition, cyber security risks may also impact issuers of securities in which the Portfolios invest, including the Underlying Funds, which may cause the Portfolios’ investment in such issuers to lose value. There can be no assurance that the Portfolios or their service providers will not suffer losses relating to cyber-attacks or other information security breaches in the future.

 

PORTFOLIO TURNOVER. Information regarding the portfolio turnover rate for each Portfolio is available in the Financial Highlights section of each Portfolio’s respective Prospectus. The portfolio turnover rate for each of the Moderately Conservative Balanced Allocation Portfolio, Investment Quality Bond Portfolio, and Municipal Bond Portfolio increased during the fiscal year end ended August 31, 2023 as compared to the previous fiscal year due to changes in the investment allocations of each Portfolio.

 

INVESTMENT RESTRICTIONS

 

The following policies and limitations supplement those set forth in the Prospectuses. For purposes of the following restrictions and those contained in each Prospectus: (i) all percentage limitations apply immediately after a purchase or initial investment; and (ii) except for the limitation applicable to borrowing money, any subsequent change in any applicable percentage resulting from market fluctuations or other changes in the amount of total assets does not require elimination of any security from a Portfolio. Accordingly, any subsequent change in values, net assets or other circumstances will not be considered when determining whether the investment complies with a Portfolio’s investment policies and limitations.

 

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A Portfolio’s fundamental investment policies and limitations may be changed only with the consent of a “majority of the outstanding voting securities” of the particular Portfolio. As used in this SAI, the term “majority of the outstanding voting securities” means the lesser of (1) 67% of the shares of a Portfolio present at a meeting where the holders of more than 50% of the outstanding shares of a Portfolio are present in person or by proxy, or (2) more than 50% of the outstanding shares of a Portfolio. Shares of each Portfolio will be voted separately on matters affecting only that Portfolio, including approval of changes in the fundamental investment policies of that Portfolio.

 

The investment objectives of the Initial Portfolios, in addition to the investment restrictions listed below, are fundamental and may not be changed without shareholder approval. The investment objective of the Asset Allocation Portfolios may be changed by the Board of Trustees without shareholder approval. All investment policies and restrictions that are not identified as fundamental may be changed with Board approval and do not require a shareholder vote.

 

FUNDAMENTAL INVESTMENT RESTRICTIONS

 

A Portfolio may not:

 

1. With respect to 75% of its total assets taken at market value, invest more than 5% of its total assets in the securities of any one issuer, except obligations of, or guaranteed by, the U.S. government, its agencies, or instrumentalities, if, as a result, more than 5% of the value of the Portfolio’s total assets would be invested in the securities of any one issuer. This restriction does NOT apply to the Asset Allocation Portfolios;

 

2. With respect to 75% of its assets, purchase more than 10% of any class of the outstanding voting securities of any issuer. This restriction does NOT apply to the Asset Allocation Portfolios;

 

3. With respect to the Asset Allocation Portfolios only, purchase securities of any issuer if such purchase would not be consistent with the maintenance of the Portfolio’s status as a diversified company under the 1940 Act, or the rules or regulations thereunder, as such statute, rules or regulations may be amended from time to time;

 

4. With respect to the Initial Portfolios only, invest 25% or more of its total assets in securities of issuers in any one industry except that:

 

(i) the Health & Biotechnology Portfolio will invest at least 25% of its total assets in securities of healthcare and biotechnology companies;

 

(ii) the Technology & Communications Portfolio will invest at least 25% of its total assets in securities of technology and communications companies;

 

(iii) the Financial Services Portfolio will invest at least 25% of its assets in securities of financial services companies, as well as related services and technology companies;

 

(iv) the Energy & Basic Materials Portfolio will invest at least 25% of its total assets in securities of companies involved in the exploration, development, production or distribution of oil, natural gas, coal and uranium, basic materials such as metals, minerals, chemicals, water, forest products, precious metals, and other related industries;

 

5. With respect to the Asset Allocation Portfolios, purchase any securities that would cause more than 25% of the total assets of a Portfolio to be invested in the securities of one or more issuers conducting their principal business activities in the same industry (except for investments in other registered investment companies in the same “group of investment companies” as that term is defined in Section 12(d)(1)(G) of the 1940 Act);

 

6. With respect to the Initial Portfolios, borrow money, except from a bank in an aggregate amount not exceeding one third of the Portfolio’s total assets to meet redemptions and for other temporary or emergency purposes not involving leveraging. A Portfolio may not purchase securities while borrowings exceed 5% of the value of its total assets, except that this restriction is non-fundamental with respect to the Health & Biotechnology Portfolio, the Technology & Communications Portfolio, the Financial Services Portfolio, the Energy & Basic Materials Portfolio, and the Mid Capitalization Portfolio;

 

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7. With respect to the Asset Allocation Portfolios only, borrow money, except to the extent permitted under the 1940 Act, or the rules or regulations thereunder, as such statute, rules or regulations may be amended from time to time;

 

8. With respect to the Asset Allocation Portfolios, purchase physical commodities or contracts relating to physical commodities, except as permitted under the 1940 Act, as interpreted or modified by regulatory authority having jurisdiction, from time to time;

 

9. With respect to the Initial Portfolios only, invest in real estate or real estate limited partnerships (direct participation programs), except that each Portfolio may (as appropriate and consistent with its investment objectives and policies) purchase securities of issuers which engage in real estate operations and securities, which are secured by real estate or interests therein;

 

In addition, these Portfolios may hold and sell real estate acquired through default, liquidation or other distributions of an interest in real estate as a result of the Portfolios’ ownership of such securities;

 

10. With respect to the Asset Allocation Portfolios only, purchase or sell real estate (however, each Portfolio may, to the extent appropriate to its investment objective, purchase securities secured by real estate or interests therein or securities issued by companies investing in real estate or interests therein);

 

11. With respect to the Initial Portfolios, underwrite securities of other companies, except to the extent that the Portfolio may be deemed to be an underwriter under the 1933 Act in disposing of a security;

 

12. With respect to the Asset Allocation Portfolios only, underwrite the securities of other issuers except to the extent that a Portfolio may be deemed to be an underwriter under certain securities laws in the disposition of “restricted securities”;

 

13. With respect to the Initial Portfolios only, purchase warrants if as a result the Portfolio would then have either more than 5% of its total assets (determined at the time of investment) invested in warrants or more than 2% of its total assets invested in warrants not listed on the New York or NYSE Amex Stock Exchanges, except that this limitation is non-fundamental with respect to the Health & Biotechnology Portfolio, the Technology & Communications Portfolio, the Financial Services Portfolio, the Energy & Basic Materials Portfolio, and the Mid Capitalization Portfolio;

 

14. With respect to the Initial Portfolios only, pledge its assets or assign or otherwise encumber its assets in excess of 33 1/3% of its net assets (taken at market value at the time of pledging) and then only to secure borrowings effected within the limitations set forth in its Prospectus, except that this limitation is considered non-fundamental with respect to the Health & Biotechnology Portfolio, the Technology & Communications Portfolio, the Financial Services Portfolio, the Energy & Basic Materials Portfolio, and the Mid Capitalization Portfolio;

 

15. With respect to the Initial Portfolios only, issue senior securities, except to the extent permitted by the 1940 Act, which may include, but is not limited to: (i) entering into repurchase agreements; (ii) borrowing money in accordance with restrictions described above; or (iii) lending Portfolio securities;

 

16. With respect to the Asset Allocation Portfolios only, issue senior securities except with respect to any permissible borrowings;

 

17. With respect to the Asset Allocation Portfolios only, make loans, except that a Portfolio may (i) purchase or hold debt instruments in accordance with its investment objective and policies; (ii) enter into repurchase agreements; (iii) engage in securities lending as described in the Prospectus and the Statement of Additional Information; and (iv) make loans to the extent permitted by an order issued by the SEC;

 

18. With respect to the Initial Portfolios only, make loans to any person or individual, except that Portfolio securities may be loaned by all Portfolios within the limitations set forth herein; and

 

19. With respect to the Asset Allocation Portfolios only, purchase securities of other investment companies except as permitted by the 1940 Act and rules, regulations and applicable exemptive relief thereunder.

 

34

 

 

Each Portfolio may purchase securities, which are not registered under the 1933 Act but which can be sold to “qualified institutional buyers” in accordance with Rule 144A under the 1933 Act. Any such security will not be considered illiquid so long as it is determined not to be illiquid by the Board of Trustees or the Portfolio’s Adviser or SCM, acting under guidelines approved and monitored by the Board, which has the ultimate responsibility for any determination regarding liquidity and that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in each of the Portfolios during any period that qualified institutional buyers become uninterested in purchasing these restricted securities. The ability to sell to qualified institutional buyers under Rule 144A is a recent development and it is not possible to predict how this market will develop. The Board will carefully monitor any investments by each of the Portfolios in these securities. Investment limitations and restrictions described above apply at the time of investment, except for the restriction applicable to borrowings, which is ongoing.

 

NON-FUNDAMENTAL POLICIES

 

The following policies may be changed by the Board of Trustees without shareholder approval. A Portfolio will not invest more than 15% (5% with respect to the U.S. Government Money Market Portfolio) of the value of its net assets in securities that are illiquid, including certain government stripped mortgage related securities, repurchase agreements maturing in more than seven days and that cannot be liquidated prior to maturity and securities that are illiquid by virtue of the absence of a readily available market. Securities that have legal or contractual restrictions on resale but have a readily available market are deemed not illiquid for this purpose. In addition, the Initials Portfolios cannot: (a) purchase securities on margin (except for such short-term loans as are necessary for the clearance of purchases of Portfolio securities collateral arrangements in connection with transactions in futures and options); and (b) invest for the purpose of exercising control or management of another company.

 

The Asset Allocation Portfolios cannot: (a) purchase securities on margin (except for such short-term loans as are necessary for the clearance of purchases of Portfolio securities and collateral arrangements in connection with transactions in futures and options, forwards, swaps and other derivative instruments); and (b) invest for the purpose of exercising control or management of another company.

 

The 80% investment restriction noted in the Prospectuses of certain Portfolios is also non-fundamental, but requires 60 days’ prior written notice to shareholders before it can be changed. However, the 80% investment policy of the Municipal Bond Portfolio is fundamental and may not be changed without shareholder approval.

 

With respect to the Asset Allocation Portfolios, non-fundamental policies described above apply at the time of investment.

 

PORTFOLIO HOLDINGS DISCLOSURE

 

The Trust has adopted policies and procedures regarding disclosure of portfolio holdings (the “Policy”). Pursuant to the Policy, the Trust may disclose information concerning Trust portfolio holdings only if such disclosure is consistent with the antifraud provisions of the federal securities laws and the Trust’s and the Manager’s fiduciary duties to Trust shareholders. The Manager may not receive compensation or any other consideration in connection with the disclosure of information about the portfolio securities of the Trust. Consideration includes any agreement to maintain assets in the Trust or in other investment companies or accounts managed by each of the Manager or by any of its affiliates. Material non-public information concerning portfolio holdings may be divulged to third parties only when the Trust has a legitimate business purpose for doing so and the recipients of the information are subject to a duty of confidentiality, which has been memorialized in an approved non-disclosure agreement.

 

Such non-disclosure agreement shall also prohibit the recipient from trading on the basis of non-public portfolio holdings information. Persons who owe a duty of trust or confidence to the Trust or of the Manager (such as legal counsel) may receive non-public portfolio holdings information without entering into a non-disclosure agreement. Under no circumstances shall current or prospective Trust shareholders receive non-public portfolio holdings information, except as described below.

 

Statutory Portfolio Holdings Disclosure. As required by Section 30 of the 1940 Act, the Trust discloses each Portfolio’s portfolio holdings by mailing a notice to shareholders regarding website availability of its annual and semi-annual reports to shareholders approximately two months after the end of the Trust’s fiscal year and semi-annual periods. The notice also provides shareholders with a toll-free phone number and website address to request a printed or emailed copy, or to elect to receive paper reports in the future, of its annual and semi-annual reports at no charge.

 

35

 

 

Shareholders may call 1-800-807-FUND to obtain each Portfolio’s portfolio holdings within two months of the Trust’s first and third fiscal quarter endings in its filings with the SEC as an exhibit to Form N-PORT.

 

Selective Portfolio Holdings Disclosure. Each Portfolio does not selectively disclose its portfolio holdings to any person, other than to rating agencies and newly hired or prospective investment advisers or sub-advisers. Selective disclosures to newly hired or prospective investment advisers or sub-advisers are made only pursuant to written agreements which require that the information be kept confidential and prohibit the recipient from trading on the basis of the information. Each Portfolio may disclose its month-end portfolio holdings to rating agencies no sooner than thirty days after the month-end, with the understanding that such holdings may be posted or disseminated to the public by the rating agencies at any time.

 

Voluntary Portfolio Holdings Disclosure. Approximately one to three weeks after the end of each calendar quarter, Saratoga posts on the Trust’s website a profile of each Portfolio, which typically includes the respective Portfolio’s top holdings.

 

Each Portfolio will make available by telephone (1-800-807-FUND), no sooner than thirty days after the end of each month, a complete schedule of its month-end portfolio holdings.

 

Information concerning the U.S. Government Money Market Portfolio’s portfolio holdings, as well as its daily weighted average portfolio maturity and weighted average life, is posted on its website, www.saratogacap.com, within five business days after the end of each month. The Portfolio also files more detailed portfolio holdings information with the SEC on Form N-MFP within five business days after the end of each month. The SEC will make Form N-MFP filings publicly available on its website two months after the filings and a link to the SEC filing is posted on the U.S. Government Money Market Portfolio’s website referenced above.

 

The Trust’s Administrator shall review initial registration statements and post-effective amendments to ensure that the disclosure referenced above is included and continues to be accurate.

 

PRINCIPAL HOLDERS OF SECURITIES AND CONTROL PERSONS OF THE PORTFOLIOS

 

To the knowledge of the Trust, the following were owners of record or beneficially of more than 5% of the outstanding shares of Class A, Class C, and Class I of each Portfolio of the Trust as of December 7, 2023. Persons who own, either directly or through one or more controlled companies, 25% or more of the voting securities of the Portfolios are deemed to be control persons (“Control Persons”).

 

Title of Portfolio/Class   Name and Address   Percentage
         
Conservative Balanced Allocation Portfolio – Class A  

Pershing LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

  99.97%
         
Moderately Conservative Balanced Allocation Portfolio – Class A  

Saratoga Capital

Management, LLC

12725 W. Indian School

Road, E-101, Avondale, AZ

85392

  100.00%
         
Moderate Balanced Allocation Portfolio – Class A  

Robert H Elder III

9764 Creekside Road

Coeur D Alene, ID 83814

  46.63%
         
   

Jason K Atkins as

Custodian for/Ariella Phillips

UTMA CO

336 Tynan Dr

Erie, CO 80516

  53.30%

 

36

 

 

Moderately Aggressive Balanced Allocation Portfolio – Class A

 

 

First National Bank Cust

FBO/John Chan IRA (Bene

of) Dan Chan IRA (Decd)

PO Box 1045

Ukiah, CA 95482

  88.36%
         
   

Pershing LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

  9.76%
         
Aggressive Balanced Allocation Portfolio – Class A  

First National Bank Cust

FBO/Gillian A Lillich R/O IRA

5045 Manzano Street

Camarillo, CA 93012

  99.99%
         
U.S. Government Money Market Portfolio – Class A  

Janice Stowell Clark/Eric

L. Clark Jtwros

3613 Danvers Dr.

Columbia, MO 65203-5619

 

7.37%

 

         
   

First National Bank Cust

FBO/Jacquelyn A Decamp Ira

8374 SW 56th Ave Road
Ocala, FL 34476

  30.87%
         
   

First National Bank Cust

FBO/Russell M Walter Roth Ira

528 N Raynolds Ave

Canon City, CO 81212

  14.25%
         
   

First National Bank Cust

FBO/Tami S Long Ira

3714 Fair Oaks Rd

Selinsgrove, PA 17870

  15.70%
         
   

First National Bank Cust

FBO/Gregory R St Clair

1903 Harriman Ln Unit B

Redondo Beach, CA 90278

  17.95%
         
   

First National Bank Cust

FBO/Josephine J Hancock

R/O IRA

8532 Forsythe St

Sunland, CA 91040

  8.88%

 

37

 

 

Municipal Bond Portfolio – Class A  

Donna Marie Anderson

81 Jessup RD

Warwick, NY 10990-2509

 

94.21%

 

         
   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  5.72%
         
Investment Quality Bond Portfolio – Class A  

First National Bank Cust

FBO/Donna Marie Anderson IRA (Bene Of)

Maryann C Swanson IRA

(Dec’d)

81 Jessup Rd

Warwick, NY 10990-2509

 

30.96%

 

         
   

First National Bank Cust

FBO/Jacquelyne A DeCamp

IRA

8374 SW 56th Ave Road

Ocala, FL 34476

  37.16%
         
   

First National Bank Cust

FBO/Tami S Long Ira

3714 Fair Oaks Rd

Selinsgrove, PA 17870

  8.95%
         
   

First National Bank Cust

FBO/Gregory R. St. Clair R/O

Ira

1903 Harriman Ln. Unit B

Redondo Beach, CA 90278

 

6.07%

 

         
Large Capitalization Growth Portfolio – Class A  

Mofied Kassab Ttee

&/Hazar Kharson Ttee

The MHK Family Trust

Ua Dtd 07/29/1999

1649 E. Desert Willow Dr.

Phoenix, AZ 85048-4520

 

10.38%

 

         
   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  26.39%

 

38

 

 

Large Capitalization Value Portfolio – Class A  

Mofied Kassab Ttee

&/Hazar Kharson Ttee

The MHK Family Trust

Ua Dtd 07/29/1999

1649 E. Desert Willow Dr.

Phoenix, AZ 85048-4520

 

36.77%

 

         
   

First National Bank Cust

FBO/Gregory R. St. Clair R/O Ira

1903 Harriman Ln. Unit B

Redondo Beach, CA 90278

 

10.28%

 

         
   

First National Bank Cust

FBO/Jacquelyn A DeCamp

IRA

8374 SW 56th Ave Road

Ocala, FL 34476

 

8.33%

 

         
   

First National Bank Cust FBO/John Chan IRA (Bene of) Dan Chan IRA (Decd)

PO Box 1045

Ukiah, CA 95482

  15.57%
         
   

RBC Capital Markets

LLC/Shirley A Paulk

35 Crosscreek Dr #H5

Charleston, SC 29412

  6.01%
         

Small Capitalization Portfolio – Class A

 

 

First National Bank Cust

FBO/Gregory R. St. Clair R/O

Ira

1903 Harriman Ln. Unit B

Redondo Beach, CA 90278

 

27.39%

 

         
   

First National Bank Cust

FBO/Donna Marie

Anderson IRA (Bene Of) 

Maryann C Swanson IRA

(Dec’d)

81 Jessup Rd

Warwick, NY 10990-2509

 

28.85%

 

 

39

 

 

   

First National Bank Cust

FBO/Jacquelyn A DeCamp

IRA

8374 SW 56th Ave Road

Ocala, FL 34476

  6.59%
         
   

RBC Capital Markets

LLC/Michael J. Dailey

110 Spring Garden St.

Moscow, PA 18444-9059

 

17.54%

 

         
International Equity Portfolio – Class A  

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

 

46.79%

 

         
   

First National Bank Cust

FBO/Gregory R. St. Clair R/O

Ira

1903 Harriman Ln. Unit B

Redondo Beach, CA 90278

  20.40%
         
   

First National Bank Cust

FBO/Donna Marie

Anderson IRA (Bene Of)

Maryann C Swanson IRA

(Dec’d)

81 Jessup Rd

Warwick, NY 10990-2509

  10.67%
         
   

First National Bank Cust

FBO/Jacquelyn A DeCamp

IRA

8374 SW 56th Ave Road

Ocala, FL 34476

  6.05%
         
Financial Services Portfolio – Class A  

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSFSI

0o0 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

 

15.19%

 

 

40

 

 

   

RBC Capital Markets

LLC/Alfon Holdings Ltd.

Attn: Brain D. Wallace

Fourdry Road

Silverdale Rotor

New Zealand

 

17.37%

 

         
   

National Financial Services LLC

499 Washington Blvd.

Jersey City, NJ 07310

 

24.02%

 

         
   

RBC Capital Markets

LLC/Diane Byers

Roth Ira

313 Sunset Road

Pittsburgh, PA 15237-4926

 

14.13%

 

         
   

First National Bank Cust

FBO/Richard Difebo IRA

390 Harvest Ln

Bangor, PA 18013

  6.86%
         
   

First National Bank Cust

FBO/Gregory R St Clair

1903 Harriman Ln Unit B

Redondo Beach, CA 90278

  6.71%
         
   

Verona Hylton

2414 Cortelyou Rd

Brooklyn, NY 11226

  5.97%
         

Energy & Basic Materials Portfolio – Class A

 

 

LPL Financial/A/C 1000-0005

4707 Executive Dr.

San Diego, CA 92121

  20.74%
         
   

RBC Capital Markets

LLC/Mary Elizabeth E Mawn-Ferullo

15 Carlson Way

Woburn, MA 01801

  12.87%
         
   

Pershing LLC

P.O. Box 2052

Jersey City, NJ 07303-2052

  24.31%

 

41

 

 

   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  15.57%
         
   

Salomon Smith Barney Inc.

333 West 34th St – 3rd Floor

New York, NY 10001

  5.39%
         
Technology & Communications Portfolio – Class A  

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

0o0 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd

Weehawken, NJ 07086-6761

  17.71%
         
   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  6.39%
         
Health & Biotechnology Portfolio – Class A  

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSFSI

000 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

 

14.60%

 

         
   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  5.11%
         
Conservative Balanced Allocation Portfolio – Class C  

First National Bank Cust

FBO/Richard A Callahan

Roth IRA

780 Wagner Dr.

Rochester HLS, MI

48307-2745

 

19.42%

 

         
   

First National Bank Cust

FBO/Melinda K Conway-Callahan IRA

780 Wagner Dr.

Rochester HLS, MI

48307-2745

 

5.96%

 

 

42

 

 

   

First National Bank Cust

FBO/Melinda K Callahan

Roth IRA

780 Wagner Dr.

Rochester MI

48307-2745 

 

21.70%

 

         
   

First National Bank Cust

FBO/Beth Callahan

Roth IRA

4424 Pasadena Ave.

Sacramento, CA 95821-2921

 

8.20%

 

         
   

First National Bank Cust

FBO/Robert J Opiteck

Roth IRA

32674 Bingham Ln

Bingham Farms, MI 48025

 

5.94%

         
   

First National Bank Cust

FBO/Paul M. Brookenthal

Non DFI Simple IRA

5373 Terence Ct

Bloomfield, MI 48302

  5.08%
         
   

First National Bank Cust

FBO/Ryan E Callahan

Roth IRA

118 Venus Way

Madison, WI 53718

  5.23%
         
Moderately Conservative Balanced Allocation Portfolio – Class C  

First National Bank Cust

FBO/Rob Andrew Opiteck

R/O IRA

2250 Ramsgate Dr.

Henderson, NV 89074

 

31.30%

         
    First National Bank Cust
FBO/Melinda K Conway- Callahan IRA
780 Wagner Dr.
Rochester, MI 48307
  48.17%
         
    First National Bank Cust
FBO/Rob Andrew Opiteck Roth IRA
2250 Ramsgate Dr.
Henderson, NV 89074
  17.25%
         
Moderate Balanced Allocation Portfolio – Class C  

First National Bank Cust

FBO/Paul M Brookenthal

Non DFI Simple IRA

5373 Terence CT

Bloomfield MI, 48302-2555

  17.94%

 

43

 

 

   

First National Bank Cust

FBO/Richard A Callahan

Non DFI Simple IRA

780 Wagner Dr.

Rochester HLS MI

48307-2745

  13.79%
         
   

First National Bank Cust

FBO/Bella Brookenthal

Non Dfi Simple Ira

5373 Terence Court 

Bloomfield Hills, MI 48302

  24.94%
         
   

First National Bank Cust

FBO/Aleli Mejia Nava R/O IRA

2250 Ramsgate Dr.

Henderson, NV 89074

  10.49%
         
   

First National Bank Cust 

FBO/Shirley G Pascaretti

Roth IRA

28044 Ashland

Harrison Township, MI

48045

  6.89%
         
   

First National Bank Cust

FBO/John E Pascaretti

Roth IRA

28044 Ashland

Harrison Township, MI

48045

  6.27%
         
   

First National Bank Cust

FBO/Aleli Mejia Nava Roth IRA

2250 Ramsgate

Dr. Henderson, NV 89074

  5.09%
         

Moderately Aggressive Balanced Allocation Portfolio – Class C

 

 

First National Bank Cust

FBO/James W Shillenn Non

DFI Simple IRA

1595 N Ortonville Rd

Ortonville, MI 48462

 

46.82%

 

         
   

First National Bank Cust

FBO/Lillian Goldberg Roth IRA

30110 Fernhill Dr.

Farmington, MI 48334-2034

 

15.68%

 

         
   

First National Bank Cust

FBO/Caitlin E Callahan

Roth IRA

471 Allard

Grosse Pointe, MI

48236-2811

 

8.71%

 

 

44

 

 

   

First National Bank Cust

FBO/Robert J Opiteck IRA

32674 Bingham Ln

Bingham Farms, MI 48025

  5.90%
         
   

First National Bank Cust

FBO/Scott R Callahan

R/O IRA

4424 Pasadena Ave

Sacramento, CA 95821

  9.52%
         
Aggressive Balanced Allocation Portfolio – Class C  

First National Bank Cust

FBO/Aiden Kelly Non DFI

Simple IRA

6887 Helen St

Garden City, MI 48135-2210

 

8.19%

 

         
   

First National Bank Cust

FBO/Christopher D Pascaretti IRA

28044 Ashland

Harrison Township, MI

48045

 

16.82%

 

         
   

First National Bank Cust

FBO/Patrick J Kubera Non DFI Simple IRA

2817 Red Arrow Dr.

Commerce TWP MI

48382-3470

 

7.81%

 

         
   

First National Bank Cust

FBO/Carie Lee Taylor Non DFI Simple IRA

1670 John Hix Rd.

Westland, MI 48186

 

28.23%

 

         
   

First National Bank Cust

FBO/Bella Brookenthal

Non Dfi Simple Ira

5373 Terence Court

Bloomfield Hills, MI 48302

  26.85%
         
U.S. Government Money Market Portfolio – Class C

 

 

First National Bank Cust

FBO/Stephen C Callahan

Non DFI Simple IRA

1308 E Fairview Ln

Rochester, MI 48306

  6.87%
         
   

First National Bank Cust

FBO/Robert J Opiteck IRA

32674 Bingham Ln

Bingham Farms, MI 48025

  68.67%

 

45

 

 

   

First National Bank Cust

FBO/Carole Kress Non DFI Simple IRA

665 N Hughes

Howell, MI 48843

  9.90%
         
   

First National Bank Cust

FBO/Robert Kress Non DFI Simple IRA

665 N Hughes

Howell, MI 48843

  9.60%
         
Municipal Bond Portfolio – Class C  

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

0o0 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

 

34.92%

 

         
   

Donna Marie Anderson

81 Jessup Rd.

Warwick, NY 10990-2509

  65.02%
         

Investment Quality Bond Portfolio – Class C

First National Bank Cust

FBO/Annette Back Roth IRA

9460 S 520 E

Sandy, UT 84070

15.36%
         

First National Bank Cust

FBO/Allan Back Roth IRA

9460 S 520 E

Sandy, UT 84070

15.36%

         

UBS Financial Services Inc.

FBO/David Reid Hausmann

41 Bissell Road

Lebanon, NJ 08833

67.93%
         

Large Cap Growth Portfolio – Class C

UBS WM USA/SPEC CDY A/C

EXL BEN CUST OF UBSFSI
0O0 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd

Weehawken, NJ 07086-6761

18.71%

         
    Wells Fargo Clearing
Services/A/C 5726-1057 2801
Market Street
Saint Louis, MO 63103
  50.55%

 

46

 

 

Large Cap Value Portfolio – Class C

Charles Schwab & Co.

Inc./Special Custody Acct

FBO

Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

31.24%

         
    National Financial Services, LLC
499 Washington Blvd
Jersey City, NJ 07310
  16.35%
         
    Wells Fargo Clearing
Services/A/C 8504-4278
2801 Market Street
Saint Louis, MO 63103
  20.23%
         

Pershing, LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

6.32%
         

First National Bank Cust

FBO/Melinda K Conway-Callahan NON DFI Simple IRA

780 Wagner Dr.

Rochester HLS MI

48307-2745

13.43%
         
Mid Capitalization Portfolio – Class C

LPL Financial/A/C 1000-0005

4707 Executive Dr.

San Diego, CA 92121

78.16%

         

First National Bank Cust

FBO/Melinda K Conway-Callahan NON DFI Simple IRA

780 Wagner Dr.

Rochester HLS MI

48307-2745

16.71%
         
Small Cap Portfolio – Class C  

First National Bank Cust

FBO/Melinda K Conway-Callahan IRA

780 Wagner Dr.

Rochester HLS MI

48307-2745

  98.08%
         

 

47

 

 

International Equity Portfolio – Class C

Pershing, LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

61.32%

         
    First National Bank Cust
FBO/Melinda K Conway
Callahan
Non DFI Simple IRA
780 Wagner Dr
Rochester Hills, MI 48307
  38.08%
         
Financial Services Portfolio – Class C

Pershing, LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

100.00%

         

Technology & Communications Portfolio – Class C

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

000 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

54.27%

         
   

Charles Schwab & Co.

Inc./Special Custody Acct

FBO

Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

 

9.44%

         
Energy & Basic Materials Portfolio – Class C  

Charles Schwab & Co.

Inc./Special Custody Acct

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  74.95%
         
   

Morgan Stanley Smith Barney, LLC

FBO a Customer of MSSB

1 New York Plaza

New York, NY 10004

  20.06%
         
Health & Biotechnology Portfolio – Class C

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

0o0 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

35.28%

 

48

 

 

    Wells Fargo Clearing
Services/A/C 2983-1143
2801 Market Street
Saint Louis, MO 63103
  12.98%
         
Conservative Balanced Allocation Portfolio – Class I

First National Bank Cust

FBO/Ann Ventimiglia R/O
Ira C/O SCM, 12725 W.
Indian School Road, E-101,
Avondale, AZ 85392

8.03%

         
   

First National Bank Cust
FBO/Veda Solomon R/O Ira

324 South Brookside Ave.
Freeport, NY 11520

  12.70%
         
    Pershing LLC
P.O. Box 2052
Jersey City, NJ 07303-9998
  27.72%
         

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place, Suite

525 Pittsburgh, PA 15222

39.07%
         

Moderately Conservative Balanced Allocation Portfolio – Class I

First National Bank Cust

FBO/Patrick H. McCollough

R/O Ira C/O SCM, 12725

W. Indian School Road, E-101, Avondale, AZ 85392

54.65%

         

First National Bank Cust

FBO/Veda Solomon Ira

324 S. Brookside Avenue

Freeport, NY 11520

14.05%

         

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place,
Suite 525 Pittsburgh, PA 15222

19.44%

 

49

 

 

Loretta Van Tassell &/ Anne Black JT TEN

188 Furman Blvd

Keyport, NJ 07735

6.59%
         
Moderate Balanced Allocation Portfolio – Class I

First National Bank Cust

FBO/Stephen Ventimiglia Ira C/O SCM, 12725

W. Indian School Road, E-101, Avondale, AZ 85392

7.27%

         
   

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place, Suite 525 Pittsburgh, PA 15222

 

36.25%

         
   

Pershing LLC

P.O. Box 2052

Jersey City, NJ 07303-9998

 

19.40%

         
   

Laura C Vong &/LE H BUI JT TEN

509 S Curtis Ave

Alhambra, CA 91803 

 

9.69%

 

         
   

First National Bank Cust

FBO/Julie L. Maggio IRA

218 Christine Court

Covington, LA 70433

  12.35%
         
Moderately Aggressive Balanced Allocation Portfolio – Class I

First National Bank Cust

FBO/Bruce E. Ventimiglia

R/O Ira

C/O SCM, 12725 W. Indian
School Road, E-101,
Avondale, AZ 85392

7.63%

         
   

First National Bank Cust

FBO/Stephen H Hamrick

C/O SCM, 12725 W. Indian

School Road, E-101,

Avondale, AZ 85392

 

18.35%

         
   

First National Bank Cust
FBO/Susan Stadsklev SEP
IRA
3 W Glendale Ave
Alexandria, VA 22301-2400

 

5.43%

 

 

50

 

 

   

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place,

Suite 525 Pittsburgh, PA 15222

  58.48%
         

Aggressive Balanced Allocation Portfolio – Class I

First National Bank Cust

FBO/Bruce E. Ventimiglia

R/O Ira

C/O SCM, 12725

W. Indian School Road, E-101, Avondale, AZ 85392

43.01%

         
   

First National Bank Cust

FBO/Glenda P. Parris R/O Ira

2212 S 216th Ln.

Buckeye, AZ 85326

  9.04%
         
   

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place, Suite 525 Pittsburgh, PA 15222

  44.50%
         
U.S. Government Money Market Portfolio – Class I

Ross L Guarino &/ Joanne C Guarino JTEN

1101 North Atlantic Dr

Lantana, FL 33462

6.54%
         

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place, Suite 525 Pittsburgh, PA 15222

6.21%
         

Municipal Bond Portfolio – Class I

Triole Investments LP/Robert I. Theis/Mary R. Theis

420 Cyprus Drive

Los Altos, CA 94022

16.94%

         

Barbara Graham Terry

Ttee O/The/Mark W Graham & Margaret Graham

Living Trust Ua Dtd

11/27/1995

FBO Barbara Graham Terry

2031 W. Liberty Ct.

Grand Junction, CO 81507

6.86%

         

Anita Mortimer

3044 N.E. 60th Ave.

Portland, OR 97213

26.80%

         

Lynnette B Weisner

370 Weisner Lane

Milton, PA 17847

9.07%

 

51

 

 

Large Capitalization Growth Portfolio – Class I

Charles Schwab & Co.

Inc./Special Custody

Account For

The Benefit Of Customers

Attn: Mutual Funds

101 Montgomery Street

San Francisco, CA 94104

14.06%
         
Large Cap Value Portfolio – Class I

LPL Financial/A/C 1000-0005

4707 Executive Dr.

San Diego, CA 92121

16.18%
         
   

Charles Schwab & Co.

Inc./Special Custody

Account For

The Benefit Of Customers

Attn: Mutual Funds

101 Montgomery Street

San Francisco, CA 94104

  7.45%
         
Mid Capitalization Portfolio – Class I  

Charles Schwab & Co.

Inc./Special Custody

Account For

The Benefit Of Customers

Attn: Mutual Funds

101 Montgomery Street

San Francisco, CA 94104

  6.93%
         
Small Capitalization Portfolio – Class I

Mid Atlantic Trust Company

FBO/Saratoga Capital

Management 401(K)

1251 Waterfront Place, Suite 525

Pittsburgh, PA 15222

5.21%
         
   

Mid Atlantic Trust Company

FBO/PJDANNAIII Group LLC 401(K) Prof

1251 Waterfront Place, Suite 525

Pittsburgh, PA 15222

  5.46%
         
   

Charles Schwab & Co.

Inc./Special Custody

Account For

The Benefit Of Customers

Attn: Mutual Funds

101 Montgomery Street

San Francisco, CA 94104

  6.90%

 

52

 

 

International Equity Portfolio – Class I  

Charles Schwab & Co.

Inc./Special Custody

Account For

The Benefit Of Customers

Attn: Mutual Funds

101 Montgomery Street

San Francisco, CA 94104

  11.56%
         

Health & Biotechnology Portfolio – Class I

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

000 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd., Weehawken, NJ 07086-6761

17.48%

         
   

Charles Schwab & Co.

Inc/Special Custody Acct

FBO

Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  13.91%
         
Technology & Communications Portfolio – Class I

UBS Wm USA/Spec Cdy A/C

Exl Ben Cust Of UBSfsi

000 11011 6100

Omni Account M/F

Attn: Department Manager

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

19.10%

         
   

Charles Schwab & Co.

Inc./Special Custody Acct 

FBO Customers

Attn: Mutual Funds

211 Main Street

San Francisco, CA 94105

  14.95%
         
Energy & Basic Materials Portfolio – Class I  

First National Bank Cust

FBO/Ronald L Raines R/O IRA

46 Scattertree Lane

Orchard Park, NY 14127

  5.60%

 

53

 

 

TRUSTEES AND OFFICERS

 

The Trustees and executive officers of the Trust, and their principal occupations during the past five years, are set forth in the table below. Bruce E. Ventimiglia, Stephen Ventimiglia and Jonathan W. Ventimiglia are “interested persons” of the Trust (as that term is defined in the 1940 Act) by virtue of their positions as officers and/or directors of the Manager.

 

Name, Age and
Address
Position(s)
Held with
Trust
Term*/
Length of
Time
Served
Principal
Occupation(s) During
Past 5 Years
Number of
Portfolios in Fund
Complex Overseen by
Trustee

Other
Directorships
Held by Trustee

During Past 5 Years

INTERESTED TRUSTEES:

Bruce E. Ventimiglia, 68
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

President, CEO, and
Chairman of the Board of Trustees**
Since September 1994 Chairman, President and Chief Executive Officer of Saratoga Capital Management, LLC 17 None
INDEPENDENT TRUSTEES:        

Patrick H. McCollough, 81
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Trustee

Since September 1994

Retired 17 Chairman of the Board (2018–Present), Trustee (2011–2018), Harbor Beach Community Hospital

Udo Koopmann, 82
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Trustee Since April 1997 Retired 17

None

Floyd E. Seal, 74
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Trustee Since April 1997 Retired 17 None

Stephen H. Hamrick, 71
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Trustee Since January 2003 Retired. President and Chief Executive Officer, Terra Capital Markets, LLC (2011–2021) (broker-dealer) 17

None

 

54

 

 

Name, Age and
Address
Position(s)
Held with
Trust
Term*/
Length of
Time
Served
Principal
Occupation(s) During
Past 5 Years
Number of
Portfolios in Fund
Complex Overseen by
Trustee

Other
Directorships
Held by Trustee

During Past 5 Years

OFFICERS:

Stephen Ventimiglia, 67
12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Vice President
and Secretary**
Since September 1994 Vice Chairman and Chief Investment Officer of Saratoga Capital Management, LLC N/A None

Jonathan W. Ventimiglia, 40

12725 W. Indian School Road, Suite E-101,

Avondale, Arizona 85392

Treasurer, Chief Financial Officer, Vice President & Assistant Secretary*** Treasurer & Chief Financial Officer since July 2009; Vice President & Assistant Secretary since January 2008 Chief Financial Officer and Chief Compliance Officer of Saratoga Capital Management, LLC N/A None

Frederick C. Teufel, Jr., 64

c/o Vigilant, LLC

223 Wilmington West Chester Pike, Suite 216

Chadds Ford, PA 19317

Chief Compliance Officer Since July 2021 Director, Vigilant Compliance, LLC N/A

None

 

* Each Trustee will serve an indefinite term until his or her successor, if any, is duly elected and qualified. Officers of the Trust are elected annually.
** Bruce E. Ventimiglia and Stephen Ventimiglia are brothers.
*** Jonathan W. Ventimiglia is Bruce E. Ventimiglia’s son.

 

For each Trustee, the dollar range of equity securities beneficially owned by the Trustee as of December 31, 2022 is shown in the tables below.

 

Name of Trustee   Dollar Range of Equity Securities in the Trust
Bruce E. Ventimiglia   Over $100,000
Patrick H. McCollough   Over $100,000
Udo W. Koopmann   $10,001 – $50,000
Floyd E. Seal   $10,001 – $50,000
Stephen H. Hamrick   Over $100,000

 

As to each Independent Trustee and his immediate family members, no person owned beneficially or of record securities in an investment advisor or principal underwriter of the Trust, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment adviser or principal underwriter of the Trust.

 

55

 

 

Board Leadership Structure, Risk Oversight and Trustee Qualifications

 

The Board of the Trust consists of five Trustees, four of whom are not “interested persons” (as defined in the 1940 Act), of the Trust (the “Independent Trustees”). The Board is responsible for overseeing the management and operations of the Trust, including general supervision of the duties performed by SCM and other service providers to the Trust. SCM is responsible for overseeing the day-to-day business affairs of the Trust.

 

The Board believes that each Trustee’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Trustees lead to the conclusion that each Trustee possesses the requisite skills and attributes to carry out his oversight responsibilities with respect to the Trust. The Board believes that the Trustees’ ability to review, critically evaluate, question and discuss information provided to them, to interact effectively with the Manager, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties, support this conclusion.

 

The Board also has considered the following experience, qualifications, attributes and/or skills, among others, of its members in reaching its conclusion: such person’s character and integrity; length of service as a Board member of the Trust; such person’s willingness to serve and willingness and ability to commit the time necessary to perform the duties of a Trustee; and as to each Trustee other than Mr. Ventimiglia, his status as not being an “interested person” (as defined in the 1940 Act) of the Trust. In addition, the following specific experience, qualifications, attributes and/or skills apply as to each Trustee:

 

Bruce Ventimiglia

 

Mr. Ventimiglia has business and financial experience through his service as the Chairman, President and Chief Executive Officer of Saratoga Capital Management, LLC, and as a Trustee of the Trust since September 1994. Mr. Ventimiglia was previously a Senior Vice President and the National Director of Financial Services for Prudential Securities Incorporated and was a member of that firm’s Operating Council. In addition, he was previously Co-Chair of the Business and Labor Coalition of New York.

 

Patrick McCollough

 

Mr. McCollough has business and financial experience through his former consulting relationship to a law and government relations firm, his former service as a partner in a law firm, and as a Trustee of the Trust since September 1994. Mr. McCollough also served as a Michigan State Senator, where he was Chairman of the Finance Committee.

 

Floyd Seal

 

Mr. Seal has business, financial and accounting experience through his former service as the Director of Operations of Pet Goods Manufacturing, LLC, through his previous service as the Chief Executive Officer and owner of Tarahill Inc., d.b.a. Pet Goods Manufacturing & Imports, as a Certified Public Accountant and as a Trustee of the Trust since April 1997.

 

Udo Koopmann

 

Mr. Koopmann has business and financial experience through his former service as Chief Financial and Administrative Executive of the North American subsidiary of Klockner & Company AG, a multinational German company and as a Trustee of the Trust since April 1997.

 

Stephen Hamrick

 

Mr. Hamrick has business and financial experience through his previous service as President and Chief Executive Officer of Terra Capital Markets, LLC, a broker-dealer, and through his former service as President of Lightstone Value Plus REIT (a real estate investment trust) and Lightstone Securities LLC (a broker-dealer), and his former service as a Managing Director of W.P. Carey & Co., a real estate investments and management firm, Chairman and President of Carey Financial Corp., a broker-dealer, and as a Trustee of the Trust since January 2003.

 

56

 

 

The Trustees of the Trust, their addresses, positions with the Trust, ages, term of office and length of time served, principal occupations during the past five years, the number of portfolios in the Trust overseen by each Trustee and other directorships, if any, held by the Trustees, are set forth above.

 

The Board of the Trust met four times during the fiscal year ended August 31, 2023.

 

The Board has an Audit Committee consisting of three Trustees who are Independent Trustees. Messrs. Seal, Koopmann and McCollough are members of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) oversee the accounting and financial reporting processes of the Trust and its internal control over financial reporting; (ii) oversee the quality and integrity of the Trust’s financial statements and the independent audit thereof; (iii) oversee or, as appropriate, assist the Board’s oversight of the Trust’s compliance with legal and regulatory requirements that relate to the Trust’s accounting and financial reporting, internal control over financial reporting and independent audit; (iv) approve prior to appointment the engagement of the Trust’s independent registered public accounting firm and, in connection therewith, to review and evaluate the qualifications, independence and performance of the Trust’s independent registered public accounting firm; and (v) act as a liaison between the Trust’s independent registered public accounting firm and the full Board.

 

The Audit Committee met four times during the fiscal year ended August 31, 2023. Mr. Ventimiglia serves as Chairman of the Board and in this capacity presides at all Board meetings of the Trustees and oversees the functioning of the Board activities. In selecting Mr. Ventimiglia to serve as Chairman of the Board of the Trust, the Board of Trustees has determined that the use of an interested person as Chairman is appropriate and benefits shareholders. The Board believes that an interested Chairman has a personal as well as a professional stake in the management of the Trust and that the Board’s leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from the management of the Trust.

 

The Independent Trustees also believe that because a majority of the Trustees are independent trustees, the Board is able to operate in a manner that provides for an appropriate level of independent action and oversight. The Independent Trustees regularly meet outside the presence of management during which time they review matters relating to the independent oversight of the Trust and are advised by independent legal counsel. As a result, the Independent Trustees believe that they can act independently and effectively without having an Independent Trustee serving as Chairman of the Board or as a lead independent trustee.

 

As an integral part of its responsibility for oversight of the Trust in the interests of shareholders, the Board, as a general matter, oversees risk management of the Trust’s investment programs and business affairs. The function of the Board with respect to risk management is one of oversight and not active involvement in, or coordination of, day-to-day risk management activities for the Trust. The Board recognizes that not all risks that may affect the Trust can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Trust’s goals, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees that may relate to risk management matters are typically summaries of the relevant information.

 

The Board exercises oversight of the risk management process primarily through the Audit Committee, and through oversight by the Board itself. The Trust faces a number of risks, such as investment-related and compliance risks.

 

Personnel of the Manager seek to identify and address risks, i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment performance or reputation of the Trust. Under the overall supervision of the Board, the Manager employs a variety of processes, procedures and controls in seeking to identify such possible events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Different processes, procedures and controls are employed with respect to different types of risks. Various personnel, including the Trust’s Chief Compliance Officer, as well as various personnel of the Manager and other service providers such as the Trust’s independent accountants, may report to the Audit Committee and/or to the Board with respect to various aspects of risk management, as well as events and circumstances that may arise and responses thereto.

 

57

 

 

Compensation

 

As of January 1, 2019, each Independent Trustee receives fees for attendance, in-person or by telephone, at regular or special Board and Audit Committee and other committee meetings and at non-regular limited purpose Board meetings, based on the aggregate value of the Portfolios’ assets on the last day of the reporting month for each meeting according to the following schedule:

 

Aggregate Value of

Portfolios’ Assets

Trustee Fee Per Board Meeting Day

Trustee Fee Per Audit Committee Meeting

and Other Committee

Meeting Day

Trustee Fee Per Non-Regular Limited

Purpose Board Meeting

Below $200 million $2,500 $500 $500
$200 million to $249,999,999 $3,000 $600 $500
$250 million to $299,999,999 $3,500 $700 $500
$300 million to $349,999,999 $4,000 $800 $500
$350 million to $399,999,999 $4,500 $900 $500
$400 million to $999,999,999 $5,000 $1,000 $500
$1,000,000,000 to $1,499, 999,999 $7,000 $1,200 $500
$1,500, 000,000 to $1,999,999,999 $8,000 $1,300 $500
$2,000,000,000 and above $9,000 $1,400 $500

 

Such compensation is paid by each Portfolio in proportion to each Portfolio’s assets relative to the aggregate of all of the Portfolios’ assets, with the exception of the U.S. Government Money Market Portfolio for which the Trustees have agreed to waive their fees.

 

Such compensation is paid by each Portfolio in proportion to each Portfolio’s assets relative to the aggregate of all of the Portfolios’ assets, with the exception of the U.S. Government Money Market Portfolio for which the Trustees have agreed to waive their fees.

 

The following table sets forth the aggregate compensation paid by the Trust to each of the Trustees for the fiscal year ended August 31, 2023.

 

Trustee   Aggregate Compensation from Trust   Pension or Retirement Benefits Accrued As Part of Portfolio Expenses   Estimated Annual Benefits Upon Retirement   Total Compensation From Trust and Fund Complex Paid to Trustee
Bruce E. Ventimiglia   None   N/A   N/A   None
Patrick H. McCollough   $11,549.83   N/A   N/A   $11,549.83
Udo W. Koopmann   $11,549.83   N/A   N/A   $11,549.83
Floyd E. Seal   $11,549.83   N/A   N/A   $11,549.83
Stephen H. Hamrick*   None   N/A   N/A   None

 

* Mr. Hamrick attended all four of the Board meetings that were held during the fiscal year ended August 31, 2023; however, he voluntarily waived his compensation for the fiscal year ended August 31, 2023.

 

58

 

 

General Information about the Board. The Board is responsible for protecting the interests of the Trust’s shareholders. The Trustees meet periodically throughout the year to oversee the Trust’s activities, review its performance and review the actions of the Manager, which is responsible for the Portfolios’ day-to-day operations. Four regular meetings were held during the fiscal year ended August 31, 2023.

 

Committees. The Board of Trustees has appointed a standing Audit Committee comprised solely of Independent Trustees. Currently, the Audit Committee is composed of Messrs. McCollough, Koopmann, and Seal. The Audit Committee, among other matters, approves professional services provided by the independent registered public accounting firm and other accounting firms prior to the performance of the services, makes recommendations to the Board with respect to the engagement of the independent registered public accounting firm and reviews with the independent accountants the plan and results of the audit engagement and matters having a material effect on the Portfolios’ financial operations.

 

As of December 7, 2023, the Trustees and Officers of the Trust as a group owned 5.74% of the Saratoga Conservative Balanced Allocation Portfolio, 19.90% of the Saratoga Moderately Aggressive Balanced Allocation Portfolio, 1.90% of the Saratoga U.S. Government Money Market Portfolio, 2.38% of the Saratoga Investment Quality Bond Portfolio, 1.15% of the Saratoga Mid Capitalization Portfolio, 1.84% of the Saratoga Small Capitalization Portfolio, 1.16% of the Saratoga International Equity Portfolio, 4.98% of the Saratoga Financial Services Portfolio, and 1.86% of the Saratoga Energy & Basic Materials Portfolio, and owned less than 1% of the outstanding shares of the other Portfolios.

 

MANAGEMENT AND OTHER SERVICES

 

The Initial Portfolios and Asset Allocation Portfolios

 

SCM serves as Manager to the Initial Portfolios and Asset Allocation Portfolios. SCM is located at 12725 W. Indian School Road, Suite E-101, Avondale, Arizona 85392. Saratoga is regarded for purposes of the 1940 Act as being controlled by the following persons, who are principals of the firm and/or own more than 25% of the voting securities of the firm: Bruce E. Ventimiglia, Stephen Ventimiglia and Jonathan W. Ventimiglia.

 

Pursuant to a Management Agreement with the Trust (the “Initial Portfolios Management Agreement”), SCM, subject to the supervision of the Trustees and in conformity with the stated policies of the Trust, manages the operations of the Initial Portfolios, including the day-to-day management of the Investment Quality Bond, Municipal Bond and U.S. Government Money Market Portfolios’ investments, reviews the performance of the Advisers to these Portfolios, and makes recommendations to the Trustees with respect to their retention and renewal of contracts. The Initial Portfolios Management Agreement with Saratoga was most recently approved by the Board of Trustees of the Trust, including by a majority of the non-interested Trustees, at a meeting held on April 10, 2023. Pursuant to a Management Agreement with the Trust (the “Asset Allocation Portfolios Management Agreement”), SCM, subject to the supervision of the Trustees and in conformity with the stated policies of the Trust, manages each Asset Allocation Portfolio in accordance with its investment objectives and policies. SCM has discretion to invest and reinvest each Asset Allocation Portfolio’s assets in securities and other instruments. The Asset Allocation Portfolios Management Agreement was most recently approved by the Board of Trustees of the Trust, including by a majority of the non-interested Trustees, at a meeting held on April 10, 2023.

 

The Asset Allocation Portfolios Management Agreement will continue in effect from year-to-year if such continuance is specifically approved at least annually by the Board of Trustees and a majority of Independent Trustees or by vote of a majority of a Portfolio’s outstanding voting securities and by a majority of the trustees who are not parties to the Asset Allocation Portfolios Management Agreement or interested persons of any such party, at a meeting called for the purpose of voting on the Asset Allocation Portfolios Management Agreement. The Asset Allocation Portfolios Management Agreement is terminable without penalty by the Trust on behalf of a Portfolio immediately upon written notice when authorized either by a majority vote of the Portfolio’s shareholders or by a vote of a majority of the Board of Trustees, or by SCM upon 60 days’ written notice, and will automatically terminate in the event of its “assignment” (as defined in the 1940 Act). The Asset Allocation Portfolios Management Agreement provides that Saratoga, under such Agreement, shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the execution of portfolio transactions for a Portfolio, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations or duties thereunder.

 

59

 

 

SCM and the Trust have obtained an exemptive order (the “Order”) from the SEC that permits SCM to enter into investment advisory agreements with Advisers without obtaining shareholder approval. SCM, subject to the review and approval of the Board of Trustees of the Trust, selects Advisers for each Portfolio and supervises and monitors the performance of each Adviser. The Order also permits SCM, subject to the approval of the Trustees, to replace investment advisers or amend investment advisory agreements without shareholder approval whenever the Manager and the Trustees believe such action will benefit a Portfolio and its shareholders. Saratoga compensates each Adviser out of its management fee. Pursuant to the Order, the Manager is not required to disclose its contractual fee arrangements with any sub-adviser. The following table sets forth the annual management fee rates payable by each Initial Portfolio to Saratoga pursuant to the Management Agreement, expressed as a percentage of the Portfolio’s average daily net assets:

 

Large Capitalization Growth Portfolio   0.65%
Large Capitalization Value Portfolio   0.65%
Mid Capitalization Portfolio   0.75%
Small Capitalization Portfolio   0.65%
International Equity Portfolio   0.75%
Investment Quality Bond Portfolio   0.55%
Municipal Bond Portfolio   0.55%
U.S. Government Money Market Portfolio   0.475%
Health & Biotechnology Portfolio   1.25%
Technology & Communications Portfolio   1.25%
Financial Services Portfolio   1.25%
Energy & Basic Materials Portfolio   1.25%

 

The fee is computed daily and payable monthly. Currently, SCM is voluntarily limiting total annual operating expenses of the Initial Portfolios as follows:

 

Name of Portfolio   Class I Shares   Class A Shares   Class C Shares
Large Capitalization Growth Portfolio   2.60%   3.00%   3.60%
Large Capitalization Value Portfolio   2.60%   3.00%   3.60%
Mid Capitalization Portfolio   2.60%   3.00%   3.60%
Small Capitalization Portfolio   2.60%   3.00%   3.60%
Investment Quality Bond Portfolio   1.90%   2.30%   2.90%
Municipal Bond Portfolio   1.90%   2.30%   2.90%
U.S. Government Money Market Portfolio   1.75%   2.15%   2.75%
International Equity Portfolio   2.90%   3.30%   3.90%
Health & Biotechnology Portfolio   3.00%   3.40%   4.00%
Technology & Communications Portfolio   3.00%   3.40%   4.00%
Financial Services Portfolio   3.00%   3.40%   4.00%
Energy & Basic Materials Portfolio   3.00%   3.40%   4.00%

 

Each Asset Allocation Portfolio is responsible for its own operating expenses. Pursuant to an operating expense limitation agreement between the Manager and the Portfolios (the “Operating Expense Limitation Agreement”), the Manager has agreed to waive its management fees and/or pay expenses of the Asset Allocation Portfolios to ensure that the total amount of Portfolio operating expenses (excluding front-end and contingent deferred sales loads, leverage, interest and tax expenses, dividends and interest on short positions, brokerage commissions, expenses incurred in connection with any merger, reorganization or liquidation, extraordinary or non-routine expenses and Acquired Fund Fees and Expenses) for a Portfolio do not exceed 1.24%, 0.99%, and 1.99% of a Portfolio's average net assets for Class A, Class I and Class C shares, respectively, through December 31, 2024, subject thereafter to annual re-approval of the agreement by the Board of Trustees (the “Expense Cap”). Any reduction in management fees or payment of expenses made by the Manager may be reimbursed by a Portfolio in subsequent fiscal years if the Manager so requests. This reimbursement may be requested if the aggregate amount actually paid by the Manager toward operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the applicable limitation on Portfolio expenses. The Manager is permitted to be reimbursed by the Portfolios for management fees waived and/or expense payments made by the Manager within three (3) years of the end of the fiscal year in which such management fees were waived or expenses paid as long as the reimbursement does not cause a Portfolio's operating expenses to exceed (i) the expense cap in place at the time the fees were waived or the expenses were incurred; or (ii) the current Expense Cap, whichever is less. Any such reimbursement will be reviewed and approved by the Board of Trustees.

 

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A Portfolio must pay its current ordinary operating expenses before the Manager is entitled to any reimbursement of management fees and/or expenses. This Operating Expense Limitation Agreement can be terminated during its term only by, or with the consent of, the Trust’s Board of Trustees.

 

The Expense Cap in place for each Asset Allocation Portfolio is shown in the table below:

 

Name of Portfolio   Class I Shares   Class A Shares   Class C Shares
Conservative Balanced Allocation Portfolio   0.99%   1.24%   1.99%
Moderately Conservative Balanced Allocation Portfolio   0.99%   1.24%   1.99%
Moderate Balanced Allocation Portfolio   0.99%   1.24%   1.99%
Moderately Aggressive Balanced Allocation Portfolio   0.99%   1.24%   1.99%
Aggressive Balanced Allocation Portfolio   0.99%   1.24%   1.99%

 

Subject to the supervision and direction of SCM with respect to the Initial Portfolios and, ultimately, the Trustees, SCM and each Adviser manage the securities held by the Initial Portfolio it serves in accordance with the Initial Portfolio’s stated investment objective and policies, make investment decisions for the Initial Portfolio and place orders to purchase and sell securities on behalf of the Initial Portfolio.

 

The following table shows for the past three fiscal years: (i) the amount of management fees paid by each Initial Portfolio to SCM and the amount of management fees paid by each Asset Allocation Portfolio during the fiscal years ended August 31, 2021, August 31, 2022 and August 31, 2023 and (ii) the amount of the management fees waived by SCM and other expenses reimbursed by SCM.

 

    Management Fees Paid By Initial Portfolios And Asset Allocation Portfolios To SCM   Management Fees Waived By Saratoga And Other Expenses Reimbursed By SCM
Conservative Balanced Allocation Portfolio        
         
August 31, 2021   $22,794   $25,699
August 31, 2022   $24,345   $27,543
August 31, 2023   $24,091   $28,817
         
Moderately Conservative Balanced Allocation Portfolio        
         
August 31, 2021   $7,280   $11,586
August 31, 2022   $6,455   $10,829
August 31, 2023   $4,968   $11,198
         
Moderate Balanced Allocation Portfolio        
         
August 31, 2021   $14,279   $19,205
August 31, 2022   $15,468   $19,364
August 31, 2023   $14,576   $21,341
         
Moderately Aggressive Balanced Allocation Portfolio        
         
August 31, 2021   $7,325   $12,873
August 31, 2022   $8,318   $11,730
August 31, 2023   $8,355   $14,601

 

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Aggressive Balanced Allocation Portfolio        
         
August 31,