GMO TRUST
GMO TRUST
STATEMENT OF ADDITIONAL INFORMATION
June 30, 2024
Multi-Asset Class Funds
Benchmark-Free Allocation Fund
Class III: GBMFX
Class IV: GBMBX
Class R6: GBMSX
Class I: GBMIX
Global Asset Allocation Fund
Class III: GMWAX
Class R6: GMWRX
Class I: GMOOX
Equity Funds
Climate Change Fund
Class III: GCCHX
Class IV: —
Class V: —
Class VI: —
Class R6: GCCAX
Class I: GCCLX
Emerging Markets Fund
Class II: GMEMX
Class III: GMOEX
Class IV: GMEFX
Class V: GEMVX
Class VI: GEMMX
Class R6: GEMNX
Class I: GEMEX
Emerging Markets ex-China Fund
Class II: —
Class III: GMAUX
Class IV: —
Class V: —
Class VI: GMAQX
Class R6: —
Class I: GMAVX
Global Developed
Equity Allocation Fund
Class III: GWOAX
Class R6: —
Class I: —
Global Equity Allocation Fund
Class III: GMGEX
Class R6: GMADX
Class I: GAAUX
International Developed
Equity Allocation Fund
Class III: GIOTX
Class R6: GAAWX
Class I: —
Equity Funds continued
International Equity
Allocation Fund
Class III: GIEAX
Class R6: GSXMX
Class I: —
International Equity Fund
Class II: GMICX
Class III: GMOIX
Class IV: GMCFX
Class R6: —
Class I: GMOUX
International Opportunistic Value Fund
Class III: GTMIX
Class IV: GMAZX
Class R6: GMBCX
Class I: IOVFX
Japan Value Creation Fund
Class III: GMAKX
Class IV: —
Class V: —
Class VI: GMAHX
Class R6: —
Class I: GMIIX
Quality Fund
Class III: GQETX
Class IV: GQEFX
Class V: GQLFX
Class VI: GQLOX
Class R6: GQESX
Class I: GQLIX
Quality Cyclicals Fund
Class III: GMANX
Class IV: —
Class V: —
Class VI: GMAEX
Class R6: —
Class I: GMAOX
Resources Fund
Class III: GOFIX
Class IV: GOVIX
Class V: —
Class VI: GMOWX
Class R6: GAAHX
Class I: GEACX
Resource Transition Fund
Class III: —
Class IV: —
Class V: —
Class VI: GMOYX
Class R6: —
Class I: GMOCX
Equity Funds continued
Small Cap Quality Fund
Class III: GMAWX
Class IV: —
Class V: —
Class VI: GSBGX
Class R6: —
Class I: GMAYX
U.S. Equity Fund
Class III: GMUEX
Class IV: GMRTX
Class V: GMEQX
Class VI: GMCQX
Class R6: —
Class I: —
U.S. Opportunistic Value Fund
Class III: PPADX
Class IV: GUSOX
Class V: —
Class VI: UUOAX
Class R6: PPAJX
Class I: PPAEX
U.S. Small Cap Value Fund
Class III: —
Class IV: —
Class V: —
Class VI: GCAVX
Class R6: —
Class I: —
Fixed Income Funds
Emerging Country Debt Fund
Class III: GMCDX
Class IV: GMDFX
Class VI: GMOQX
Emerging Country Debt Shares Fund
Class R6: GMAFX
Class I: GMAJX
Fixed Income Funds continued
High Yield Fund
Class III: —
Class IV: —
Class V: —
Class VI: GHVIX
Class R6: —
Class I: GMOZX
Multi-Sector Fixed Income Fund
Class III: GUGAX
Class IV: GPBFX
Class R6: —
Class I: —
Opportunistic Income Fund
Class III: GMOHX
Class VI: GMODX
Class R6: GAAAX
Class I: GMOLX
Alternative Funds
Alternative Allocation Fund
Class II: —
Class III: —
Class IV: —
Class V: —
Class VI: GAAVX
Class R6: GAAKX
Class I: GAAGX
Implementation Funds
Asset Allocation Bond Fund
Class III: GMOBX
Class VI: GABFX
Benchmark-Free Fund
Class III: GBFFX
Implementation Fund
Ticker: GIMFX
Strategic Opportunities
Allocation Fund
Class III: GBATX
U.S. Treasury Fund
Class VI: GUSTX
Class R6: —
Class I: —
This Statement of Additional Information (“SAI”) is not a prospectus. It relates to the GMO Trust prospectus for each series of GMO Trust (the “Trust”) set forth above, dated June 30, 2024, as amended and revised from time to time (the “Prospectus”), and should be read in conjunction therewith. Information from the Prospectus relating to the series of GMO Trust set forth above (each a “Fund,” and collectively, the “Funds”) and the Trust’s audited financial statements, financial highlights, and report of the independent registered public accounting firm of the Funds, which are included in the annual report to shareholders of each Fund, are incorporated by reference into this SAI. The Prospectus and the annual report to shareholders of each Fund may be obtained free of charge from GMO Trust, 53 State Street, Floor 33, Boston, Massachusetts 02109, or by calling the Trust collect at 1-617-346-7646.
Table of Contents 
 
Page
1
1
11
43
45
47
50
51
52
66
73
83
84
89
90
91
94
95
96
114
115
A-1
B-1
C-1
D-1
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal strategies of, and risks of investing in, each Fund are described in each Fund’s Prospectus. Unless otherwise indicated in the Prospectus or this SAI, the investment objectives and policies of the Funds may be changed without shareholder approval.
FUND INVESTMENTS
The charts on the following pages indicate the types of investments that each Fund is generally permitted (but not required) to make. A Fund may, however, make other types of investments, provided the investments are consistent with the Fund’s investment objective and policies and the Fund’s investment restrictions do not expressly prohibit it from so doing.
Investors should note that, when used in this SAI, (i) the term “invest” includes both direct and indirect investing as well as both long and short investing and (ii) the term “investments” includes both direct and indirect investments as well as both long and short investments. For example, a Fund may invest indirectly in a given asset or asset class by investing in another Fund or a wholly-owned subsidiary or by investing in derivatives and synthetic instruments, and the resulting exposure to the asset or asset class may be long or short. Accordingly, the following charts indicate the types of investments that a Fund is directly or indirectly permitted to make.
Multi-Asset Class Funds 
 
Benchmark-Free
Allocation
Fund
Global
Asset
Allocation
Fund
U.S. Equity Securities1
X
X
Non-U.S. Investments – Non-U.S. Issuers2
X
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S. Exchanges)2
X
X
Non-U.S. Investments – Emerging Countries2
X
X
Securities Lending
X
X
Depositary Receipts
X
X
Convertible Securities
X
X
Preferred Stocks
X
X
Contingent Value Rights
X
X
Master Limited Partnerships
X
X
Income Trusts
X
X
Warrants and Rights
X
X
Non-Standard Warrants (GDP Warrants, LEPOs, and P-Notes)
X
X
Options, Futures, and Forward Contracts
X
X
Swap Contracts and Other Two-Party Contracts
X
X
Foreign Currency Transactions
X
X
Repurchase Agreements
X
X
Debt and Other Fixed Income Securities Generally
X
X
Debt and Other Fixed Income Securities – Long- and Medium-Term Corporate & Government Bonds3
X
X
Debt and Other Fixed Income Securities – Short-Term Corporate & Government Bonds3
X
X
Debt and Other Fixed Income Securities – Municipal Securities4
X
X
Cash and Other High Quality Investments
X
X
U.S. Government Securities and Foreign Government Securities
X
X
Auction Rate Securities
X
X
Real Estate Investment Trusts and Other Real Estate-Related Investments
X
X
Asset-Backed and Related Securities
X
X
Variable Rate Securities
X
X
Mezzanine Securities
X
X
Below Investment Grade Securities
X
X
Distressed or Defaulted Debt Securities
X
X
Leveraged Companies
X
X
Brady Bonds
X
X
Euro Bonds
X
X
Zero Coupon Securities
X
X
Indexed Investments
X
X
Structured Notes
X
X
Firm Commitments, When-Issued Securities and TBAs
X
X
Loans, Loan Participations, and Assignments
X
X
Reverse Repurchase Agreements and Dollar Roll Agreements
X
X
Commodity-Related Investments
X
X
Illiquid Investments, Private Placements, Restricted Securities, and IPOs and Other Limited Opportunities
X
X
Investments in Other Investment Companies or Other Pooled Investments
X
X
Investments in Other Investment Companies – Shares of Other GMO Trust Funds
X
X
Investments in Subsidiary Companies – Shares of Wholly-Owned Subsidiary5
 
 
1
Equity Funds 
 
Climate
Change
Fund
Emerging
Markets
Fund
Emerging
Markets ex-
China
Fund
Global
Developed Equity
Allocation
Fund
Global
Equity
Allocation
Fund
International Developed
Equity
Allocation
Fund
International
Equity
Allocation
Fund
U.S. Equity
Securities1
X
X
X
X
X
X
X
Non-U.S.
Investments
– Non-U.S.
Issuers2
X
X
X
X
X
X
X
Non-U.S.
Investments
– Non-U.S.
Issuers
(Traded on
U.S.
Exchanges)2
X
X
X
X
X
X
X
Non-U.S.
Investments
– Emerging
Countries2
X
X
X
X
X
X
X
Securities
Lending
X
X
X
X
X
X
X
Depositary
Receipts
X
X
X
X
X
X
X
Convertible
Securities
X
X
X
X
X
X
X
Preferred
Stocks
X
X
X
X
X
X
X
Contingent
Value Rights
X
X
X
X
X
X
X
Master
Limited
Partnerships
X
 
 
X
X
X
X
Income Trusts
X
X
X
X
X
X
X
Warrants and
Rights
X
X
X
X
X
X
X
Non-Standard
Warrants
(GDP
Warrants,
LEPOs, and
P-Notes)
X
X
X
X
X
X
X
Options,
Futures, and
Forward
Contracts
X
X
X
X
X
X
X
Swap
Contracts
and Other
Two-Party
Contracts
X
X
X
X
X
X
X
Foreign
Currency
Transactions
X
X
X
X
X
X
X
Repurchase
Agreements
X
X
X
X
X
X
X
Debt and
Other Fixed
Income
Securities
Generally
X
X
X
X
X
X
X
Debt and
Other Fixed
Income
Securities –
Long- and
Medium-
Term
Corporate &
Government
Bonds3
X
X
X
X
X
X
X
2
 
Climate
Change
Fund
Emerging
Markets
Fund
Emerging
Markets ex-
China
Fund
Global
Developed Equity
Allocation
Fund
Global
Equity
Allocation
Fund
International Developed
Equity
Allocation
Fund
International
Equity
Allocation
Fund
Debt and
Other Fixed
Income
Securities –
Short-Term
Corporate &
Government
Bonds3
X
X
X
X
X
X
X
Debt and
Other Fixed
Income
Securities –
Municipal
Securities4
 
 
 
X
X
X
X
Cash and
Other High
Quality
Investments
X
X
X
X
X
X
X
U.S.
Government
Securities
and Foreign
Government
Securities
X
X
X
X
X
X
X
Auction Rate
Securities
 
 
 
X
X
X
X
Real Estate
Investment
Trusts and
Other Real
Estate-
Related
Investments
X
X
X
X
X
X
X
Asset-Backed
and Related
Securities
 
 
 
X
X
X
X
Variable Rate
Securities
 
 
 
X
X
X
X
Mezzanine
Securities
X
X
X
X
X
X
X
Below
Investment
Grade
Securities
X
X
X
X
X
X
X
Distressed or
Defaulted
Debt
Securities
 
 
 
X
X
X
X
Leveraged
Companies
X
 
 
X
X
X
X
Brady Bonds
 
 
 
X
X
X
X
Euro Bonds
 
 
 
X
X
X
X
Zero Coupon
Securities
 
 
 
X
X
X
X
Indexed
Investments
 
X
X
X
X
X
X
Structured
Notes
X
X
X
X
X
X
X
Firm
Commitments,
When-
Issued
Securities
and TBAs
 
X
X
X
X
X
X
Loans, Loan
Participations,
and
Assignments
 
 
 
X
X
X
X
3
 
Climate
Change
Fund
Emerging
Markets
Fund
Emerging
Markets ex-
China
Fund
Global
Developed Equity
Allocation
Fund
Global
Equity
Allocation
Fund
International Developed
Equity
Allocation
Fund
International
Equity
Allocation
Fund
Reverse
Repurchase
Agreements
and Dollar
Roll
Agreements
X
X
X
X
X
X
X
Commodity-
Related
Investments
X
 
 
X
X
X
X
Illiquid
Investments,
Private
Placements,
Restricted
Securities,
and IPOs
and Other
Limited
Opportunities
X
X
X
X
X
X
X
Investments in
Other
Investment
Companies
or Other
Pooled
Investments
X
X
X
X
X
X
X
Investments in
Other
Investment
Companies
– Shares of
Other GMO
Trust Funds
X
X
X
X
X
X
X
Investments in
Subsidiary
Companies
– Shares of
Wholly-
Owned
Subsidiary5
 
 
 
 
 
 
 
Equity Funds (continued) 
 
International
Equity
Fund
International
Opportunistic
Value
Fund
Japan
Value
Creation
Fund
Quality
Fund
Quality
Cyclicals
Fund
U.S. Equity Securities1
X
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers2
X
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S. Exchanges)2
X
X
X
X
X
Non-U.S. Investments – Emerging Countries2
X
X
X
X
X
Securities Lending
X
X
X
X
X
Depositary Receipts
X
X
X
X
X
Convertible Securities
X
X
X
X
X
Preferred Stocks
X
X
X
X
X
Contingent Value Rights
X
X
X
X
X
Master Limited Partnerships
X
X
X
 
 
Income Trusts
X
X
X
X
X
Warrants and Rights
X
X
X
X
X
Non-Standard Warrants (GDP Warrants, LEPOs, and P-Notes)
X
X
X
 
 
Options, Futures, and Forward Contracts
X
X
X
X
X
Swap Contracts and Other Two-Party Contracts
X
X
X
X
X
Foreign Currency Transactions
X
X
X
X
 
Repurchase Agreements
X
X
X
X
X
Debt and Other Fixed Income Securities Generally
X
X
X
X
X
Debt and Other Fixed Income Securities – Long- and
Medium-Term Corporate & Government Bonds3
 
 
 
 
 
X
X
X
X
X
Debt and Other Fixed Income Securities – Short- Term
Corporate & Government Bonds3
X
X
X
X
X
4
 
International
Equity
Fund
International
Opportunistic
Value
Fund
Japan
Value
Creation
Fund
Quality
Fund
Quality
Cyclicals
Fund
Debt and Other Fixed Income Securities – Municipal
Securities4
X
X
X
 
 
Cash and Other High Quality Investments
X
X
X
X
X
U.S. Government Securities and Foreign Government
 
 
 
 
 
Securities
X
X
X
X
X
Auction Rate Securities
X
X
X
 
 
Real Estate Investment Trusts and Other Real Estate
Related Investments
X
X
X
X
X
Asset-Backed and Related Securities
X
X
X
 
 
Variable Rate Securities
X
X
X
 
 
Mezzanine Securities
X
X
X
 
 
Below Investment Grade Securities
X
X
X
 
 
Distressed or Defaulted Debt Securities
X
X
X
 
 
Leveraged Companies
X
X
X
X
X
Brady Bonds
X
X
X
 
 
Euro Bonds
X
X
X
 
 
Zero Coupon Securities
X
X
X
 
 
Indexed Investments
X
X
X
 
 
Structured Notes
X
X
X
 
 
Firm Commitments, When-Issued Securities and TBAs
X
X
X
 
 
Loans, Loan Participations, and Assignments
X
X
X
 
 
Reverse Repurchase Agreements and Dollar Roll
Agreements
X
X
X
X
X
Commodity-Related Investments
X
 
 
 
 
Illiquid Investments, Private Placements, Restricted
Securities, and IPOs and Other Limited Opportunities
X
X
X
X
X
Investments in Other Investment Companies or Other
Pooled Investments
X
X
X
X
X
Investments in Other Investment Companies – Shares of Other GMO Trust
Funds
X
X
X
X
X
Investments in Subsidiary Companies – Shares of
Wholly-Owned Subsidiary5
 
 
 
 
 
Equity Funds (continued) 
 
Resources
Fund
Resource
Transition
Fund
Small
Cap
Quality
Fund
U.S.
Equity
Fund
U.S. Equity Securities1
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers2
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S. Exchanges)2
X
X
X
X
Non-U.S. Investments – Emerging Countries2
X
X
X
X
Securities Lending
X
X
X
X
Depositary Receipts
X
X
X
X
Convertible Securities
X
X
X
X
Preferred Stocks
X
X
X
X
Contingent Value Rights
X
X
X
X
Master Limited Partnerships
X
X
X
X
Income Trusts
X
X
X
X
Warrants and Rights
X
X
X
X
Non-Standard Warrants (GDP Warrants, LEPOs, and P-Notes)
X
X
X
X
Options, Futures, and Forward Contracts
X
X
X
X
Swap Contracts and Other Two-Party Contracts
X
X
X
X
Foreign Currency Transactions
X
X
X
X
Repurchase Agreements
X
X
X
X
Debt and Other Fixed Income Securities Generally
X
X
X
X
Debt and Other Fixed Income Securities – Long- and Medium-Term Corporate & Government
Bonds3
X
X
X
X
Debt and Other Fixed Income Securities – Short-Term Corporate & Government Bonds3
X
X
X
X
Debt and Other Fixed Income Securities – Municipal Securities4
 
 
 
X
Cash and Other High Quality Investments
X
X
X
X
U.S. Government Securities and Foreign Government Securities
X
X
X
X
Auction Rate Securities
 
 
X
X
Real Estate Investment Trusts and Other Real Estate-Related Investments
X
X
X
X
Asset-Backed and Related Securities
 
 
 
X
Variable Rate Securities
 
 
 
X
5
 
Resources
Fund
Resource
Transition
Fund
Small
Cap
Quality
Fund
U.S.
Equity
Fund
Mezzanine Securities
X
X
 
X
Below Investment Grade Securities
X
X
 
X
Distressed or Defaulted Debt Securities
 
 
 
X
Leveraged Companies
X
X
X
X
Brady Bonds
 
 
 
X
Euro Bonds
 
 
 
X
Zero Coupon Securities
 
 
 
X
Indexed Investments
 
 
 
X
Structured Notes
X
X
 
X
Firm Commitments, When-Issued Securities and TBAs
 
 
 
X
Loans, Loan Participations, and Assignments
 
 
 
X
Reverse Repurchase Agreements and Dollar Roll Agreements
X
X
X
X
Commodity-Related Investments
X
X
 
 
Illiquid Investments, Private Placements, Restricted Securities, and IPOs and Other Limited
Opportunities
X
X
X
X
Investments in Other Investment Companies or Other Pooled Investments
X
X
X
X
Investments in Other Investment Companies – Shares of Other GMO Trust Funds
X
X
X
X
Investments in Subsidiary Companies – Shares of Wholly-Owned Subsidiary5
 
 
 
 
Equity Funds (continued) 
 
U.S.
Opportunistic
Value
Fund
U.S. Small
Cap
Value
Fund
U.S. Equity Securities1
X
X
Non-U.S. Investments – Non-U.S. Issuers2
X
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S. Exchanges)2
X
X
Non-U.S. Investments – Emerging Countries2
X
X
Securities Lending
X
X
Depositary Receipts
X
X
Convertible Securities
X
X
Preferred Stocks
X
X
Contingent Value Rights
X
X
Master Limited Partnerships
X
X
Income Trusts
X
X
Warrants and Rights
X
X
Non-Standard Warrants (GDP Warrants, LEPOs, and P-Notes)
X
X
Options, Futures, and Forward Contracts
X
X
Swap Contracts and Other Two-Party Contracts
X
X
Foreign Currency Transactions
X
X
Repurchase Agreements
X
X
Debt and Other Fixed Income Securities Generally
X
X
Debt and Other Fixed Income Securities – Long- and Medium-Term Corporate & Government Bonds3
X
X
Debt and Other Fixed Income Securities – Short-Term Corporate & Government Bonds3
X
X
Debt and Other Fixed Income Securities – Municipal Securities4
X
X
Cash and Other High Quality Investments
X
X
U.S. Government Securities and Foreign Government Securities
X
X
Auction Rate Securities
X
X
Real Estate Investment Trusts and Other Real Estate-Related Investments
X
X
Asset-Backed and Related Securities
X
X
Variable Rate Securities
X
X
Mezzanine Securities
X
X
Below Investment Grade Securities
X
X
Distressed or Defaulted Debt Securities
X
X
Leveraged Companies
X
X
Brady Bonds
X
X
Euro Bonds
X
X
Zero Coupon Securities
X
X
Indexed Investments
X
X
Structured Notes
X
X
Firm Commitments, When-Issued Securities and TBAs
X
X
Loans, Loan Participations, and Assignments
X
X
Reverse Repurchase Agreements and Dollar Roll Agreements
X
X
Commodity-Related Investments
 
 
Illiquid Investments, Private Placements, Restricted Securities, and IPOs and Other Limited Opportunities
X
X
Investments in Other Investment Companies or Other Pooled Investments
X
X
6
 
U.S.
Opportunistic
Value
Fund
U.S. Small
Cap
Value
Fund
Investments in Other Investment Companies – Shares of Other GMO Trust Funds
X
X
Investments in Subsidiary Companies – Shares of Wholly-Owned Subsidiary5
 
 
Fixed Income Funds 
 
Emerging
Country
Debt
Fund
Emerging
Country
Debt
Shares
Fund
High Yield Fund
Multi-Sector Fixed Income Fund
Opportunistic
Income
Fund
U.S. Equity Securities1
X
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers2
X
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers
(Traded on U.S. Exchanges)2
X
X
X
X
X
Non-U.S. Investments – Emerging
Countries2
X
X
X
X
X
Securities Lending
X
X
X
X
X
Depositary Receipts
X
X
X
X
X
Convertible Securities
X
X
X
X
X
Preferred Stocks
X
X
X
X
X
Contingent Value Rights
 
 
 
 
 
Master Limited Partnerships
 
 
 
 
 
Income Trusts
 
 
 
 
 
Warrants and Rights
X
X
X
X
X
Non-Standard Warrants (GDP Warrants,
LEPOs, and P-Notes)
X
X
 
 
 
Options, Futures, and Forward Contracts
X
X
X
X
X
Swap Contracts and Other Two-Party
Contracts
X
X
X
X
X
Foreign Currency Transactions
X
X
X
X
X
Repurchase Agreements
X
X
X
X
X
Debt and Other Fixed Income Securities
Generally
X
X
X
X
X
Debt and Other Fixed Income Securities –
Long- and Medium-Term Corporate &
Government Bonds3
X
X
X
X
X
Debt and Other Fixed Income Securities –
Short-Term Corporate & Government
Bonds3
X
X
X
X
X
Debt and Other Fixed Income Securities –
Municipal Securities4
X
X
X
X
X
Cash and Other High Quality Investments
X
X
X
X
X
U.S. Government Securities and Foreign
Government Securities
X
X
X
X
X
Auction Rate Securities
X
X
X
X
X
Real Estate Investment Trusts and Other
Real Estate-Related Investments
 
 
X
 
X
Asset-Backed and Related Securities
X
X
X
X
X
Variable Rate Securities
X
X
X
X
X
Mezzanine Securities
X
X
X
X
X
Below Investment Grade Securities
X
X
X
X
X
Distressed or Defaulted Debt Securities
X
X
X
X
X
Leveraged Companies
 
 
X
 
 
Brady Bonds
X
X
X
X
X
Euro Bonds
X
X
X
X
X
Zero Coupon Securities
X
X
X
X
X
Indexed Investments
X
X
X
X
X
Structured Notes
X
X
X
X
X
Firm Commitments, When-Issued
Securities and TBAs
X
X
X
X
X
Loans, Loan Participations, and
Assignments
X
X
X
X
X
Reverse Repurchase Agreements and
Dollar Roll Agreements
X
X
X
X
X
Commodity-Related Investments
X
X
 
 
 
Illiquid Investments, Private Placements,
Restricted Securities, and IPOs and
Other Limited Opportunities
X
X
X
X
X
7
 
Emerging
Country
Debt
Fund
Emerging
Country
Debt
Shares
Fund
High Yield Fund
Multi-Sector Fixed Income Fund
Opportunistic
Income
Fund
Investments in Other Investment
Companies or Other Pooled
Investments
X
X
X
X
X
Investments in Other Investment
Companies – Shares of Other GMO
Trust Funds
X
X
X
X
X
Investments in Subsidiary Companies –
Shares of Wholly-Owned Subsidiary5
 
 
 
 
 
Alternative Fund 
 
Alternative
Allocation
Fund
U.S. Equity Securities1
X
Non-U.S. Investments – Non-U.S. Issuers2
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S. Exchanges)2
X
Non-U.S. Investments – Emerging Countries2
X
Securities Lending
X
Depositary Receipts
X
Convertible Securities
X
Preferred Stocks
X
Contingent Value Rights
X
Master Limited Partnerships
X
Income Trusts
X
Warrants and Rights
X
Non-Standard Warrants (GDP Warrants, LEPOs, and P-Notes)
X
Options, Futures, and Forward Contracts
X
Swap Contracts and Other Two-Party Contracts
X
Foreign Currency Transactions
X
Repurchase Agreements
X
Debt and Other Fixed Income Securities Generally
X
Debt and Other Fixed Income Securities – Long- and Medium-Term Corporate & Government Bonds3
X
Debt and Other Fixed Income Securities – Short-Term Corporate & Government Bonds3
X
Debt and Other Fixed Income Securities – Municipal Securities4
X
Cash and Other High Quality Investments
X
U.S. Government Securities and Foreign Government Securities
X
Auction Rate Securities
X
Real Estate Investment Trusts and Other Real Estate-Related Investments
X
Asset-Backed and Related Securities
X
Variable Rate Securities
X
Mezzanine Securities
X
Below Investment Grade Securities
X
Distressed or Defaulted Debt Securities
X
Leveraged Companies
 
Brady Bonds
X
Euro Bonds
X
Zero Coupon Securities
X
Indexed Investments
X
Structured Notes
X
Firm Commitments, When-Issued Securities and TBAs
X
Loans, Loan Participations, and Assignments
X
Reverse Repurchase Agreements and Dollar Roll Agreements
X
Commodity-Related Investments
X
Illiquid Investments, Private Placements, Restricted Securities, and IPOs and Other Limited Opportunities
X
Investments in Other Investment Companies or Other Pooled Investments
X
Investments in Other Investment Companies – Shares of Other GMO Trust Funds
X
Investments in Subsidiary Companies – Shares of Wholly-Owned Subsidiary5
X
 
 
8
Implementation Funds 
 
Asset
Allocation
Bond
Fund
Benchmark-Free
Fund
Implementation
Fund
Strategic
Opportunities
Allocation
Fund
U.S.
Treasury
Fund
U.S. Equity Securities1
X
X
X
X
 
Non-U.S. Investments – Non-U.S. Issuers2
X
X
X
X
X
Non-U.S. Investments – Non-U.S. Issuers (Traded on U.S.
Exchanges)2
X
X
X
X
 
Non-U.S. Investments – Emerging Countries2
X
X
X
X
 
Securities Lending
X
X
X
X
X
Depositary Receipts
X
X
X
X
 
Convertible Securities
X
X
X
X
 
Preferred Stocks
X
X
X
X
 
Contingent Value Rights
 
X
X
X
 
Master Limited Partnerships
 
X
X
X
 
Income Trusts
 
X
X
X
 
Warrants and Rights
X
X
X
X
X
Non-Standard Warrants (GDP Warrants, LEPOs, and
P-Notes)
 
X
X
X
 
Options, Futures, and Forward Contracts
X
X
X
X
X
Swap Contracts and Other Two-Party Contracts
X
X
X
X
X
Foreign Currency Transactions
X
X
X
X
X
Repurchase Agreements
X
X
X
X
X
Debt and Other Fixed Income Securities Generally
X
X
X
X
X
Debt and Other Fixed Income Securities – Long- and
Medium- Term Corporate & Government Bonds3
X
X
X
X
 
Debt and Other Fixed Income Securities – Short-Term
Corporate & Government Bonds3
X
X
X
X
X
Debt and Other Fixed Income Securities – Municipal
Securities4
X
X
X
X
 
Cash and Other High Quality Investments
X
X
X
X
X
U.S. Government Securities and Foreign Government
Securities
X
X
X
X
X6
Auction Rate Securities
X
X
X
X
 
Real Estate Investment Trusts and Other Real Estate-
Related Investments
X
X
X
X
 
Asset-Backed and Related Securities
X
X
X
X
 
Variable Rate Securities
X
X
X
X
 
Mezzanine Securities
X
X
X
X
 
Below Investment Grade Securities
X
X
X
X
 
Distressed or Defaulted Debt Securities
X
X
X
X
 
Leveraged Companies
 
 
 
 
 
Brady Bonds
X
X
X
X
 
Euro Bonds
X
X
X
X
 
Zero Coupon Securities
X
X
X
X
 
Indexed Investments
X
X
X
X
 
Structured Notes
X
X
X
X
X
Firm Commitments, When-Issued Securities and TBAs
X
X
X
X
 
Loans, Loan Participations, and Assignments
X
X
X
X
 
Reverse Repurchase Agreements and Dollar Roll
Agreements
X
X
X
X
X
Commodity-Related Investments
X
X
X
X
 
Illiquid Investments, Private Placements, Restricted
Securities, and IPOs and Other Limited Opportunities
X
X
X
X
X7
Investments in Other Investment Companies or Other
Pooled Investments
X
X
X
X
X
Investments in Other Investment Companies – Shares of
Other GMO Trust Funds
X
X
X
X
 
Investments in Subsidiary Companies – Shares of Wholly-
Owned Subsidiary5
 
 
X
 
 
Footnotes to Fund Investments Charts
1
For more information, see, among other sections, “Description of Principal Risks — Market Risk — Equities” in the Prospectus.
2
For more information, see, among other sections, “Description of Principal Risks — Non-U.S. Investment Risk” in the Prospectus and “Descriptions and Risks of Fund Investments — Risks of Non-U.S. Investments” herein.
3
For more information, see, among other sections, “Descriptions and Risks of Fund Investments — U.S. Government Securities and Foreign Government Securities” herein.
9
4
For more information, see, among other sections, “Descriptions and Risks of Fund Investments — Municipal Securities” herein.
5
For more information, see, among other sections, “Descriptions and Risks of Fund Investments — Investments in Wholly-Owned Subsidiaries” herein.
6
U.S. Treasury Fund is not generally permitted to invest in Foreign Government Securities.
7
U.S. Treasury Fund is not generally permitted to invest in Private Placements, Restricted Securities, and IPOs and Other Limited Opportunities.
(Note: Some of the footnotes to the above charts refer investors to various risks described in the “Description of Principal Risks” section of the Prospectus for more information relating to a particular type of investment listed in the charts. The presence of such a risk cross-reference for a particular Fund investment is not intended to indicate that such risk is a principal risk of that Fund, and instead is intended to provide more information regarding the risks associated with the particular investment. Please refer to the “Fund Summaries” and “Description of Principal Risks” sections of the Prospectus for a description of each Fund’s principal risks.)
10
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a description of investment practices in which the Funds may engage and the risks associated with their use. Benchmark-Free Allocation Fund, Benchmark-Free Fund, Global Asset Allocation Fund, Global Developed Equity Allocation Fund, Global Equity Allocation Fund, International Developed Equity Allocation Fund, International Equity Allocation Fund, and Strategic Opportunities Allocation Fund (collectively, the “Asset Allocation Funds”), as well as Implementation Fund, Alternative Allocation Fund and other Funds that may invest in wholly-owned subsidiaries, other Funds, or other investment companies (such other Funds and other investment companies, “Underlying Funds”), as noted in the Prospectus or in “Fund Investments” above, are indirectly exposed to the investment practices of the subsidiaries and Underlying Funds in which they invest, and are therefore subject to all risks associated with the practices of the subsidiaries and Underlying Funds. UNLESS OTHERWISE NOTED HEREIN, THE INVESTMENT PRACTICES AND ASSOCIATED RISKS DETAILED BELOW ALSO INCLUDE THOSE TO WHICH A FUND INDIRECTLY MAY BE EXPOSED THROUGH ITS INVESTMENT IN SUBSIDIARIES AND THE UNDERLYING FUNDS. ANY REFERENCES TO INVESTMENTS MADE BY A FUND INCLUDE THOSE THAT MAY BE MADE BOTH DIRECTLY BY THE FUND AND INDIRECTLY BY THE FUND (E.G., THROUGH ITS INVESTMENTS IN SUBSIDIARIES AND THE UNDERLYING FUNDS OR THROUGH ITS INVESTMENTS IN DERIVATIVES OR SYNTHETIC INSTRUMENTS). Not all Funds may engage in all practices described below. Please refer to “Fund Summaries” in the Prospectus and “Fund Investments” above for additional information regarding the practices in which a particular Fund may engage.
Portfolio Turnover
Based on GMO’s assessment of market conditions, GMO may trade a Fund’s investments more frequently at some times than at others, resulting in a higher portfolio turnover rate. Increased portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which will be borne directly by a Fund and which may adversely affect the Fund’s performance. It also may give rise to additional taxable income for shareholders, including through the realization of capital gains or other types of income that are taxable to Fund shareholders when distributed by a Fund to them, unless those shareholders are themselves exempt from taxation or otherwise investing in the Fund through a tax-advantaged account. If portfolio turnover results in the recognition of short-term capital gains, those gains typically are taxed to shareholders at ordinary income tax rates when distributed to shareholders. The after-tax impact of portfolio turnover is not considered when making investment decisions for a Fund. See “Distributions and Taxes” in the Prospectus and “Distributions” and “Taxes” below for more information.
The historical portfolio turnover rate for each Fund (except for Emerging Country Debt Shares Fund) is shown under the heading “Financial Highlights” in the Fund’s Prospectus. The portfolio turnover rate for each of Implementation Fund and Alternative Allocation Fund includes each Fund’s wholly-owned subsidiary. The portfolio turnover rate for each Fund excludes transactions in U.S. Treasury Fund, which the Funds use as a short-term cash management vehicle. Including transactions in U.S. Treasury Fund, each Fund’s portfolio turnover rate (excluding short-term investments) could be different. Changes in portfolio turnover rates were generally the result of active trading strategies employed by such Fund’s portfolio manager(s) in response to market conditions, and not reflective of a material change in investment strategy.
Diversified and Non-Diversified Portfolios
As set forth in “Investment Restrictions” below, Funds that are “diversified” funds are required to satisfy the diversified fund requirements under the Investment Company Act of 1940, as amended (the “1940 Act”). At least 75% of the value of a diversified fund’s total assets must be represented by cash and cash items (including receivables), government securities, securities of other investment companies, and other securities that for the purposes of this calculation are limited in respect of any one issuer to not greater than 5% of the value of the fund’s total assets and not more than 10% of the outstanding voting securities of any single issuer.
As stated in the Prospectus, Funds that are “non-diversified” funds under the 1940 Act are not required to satisfy the requirements for diversified funds. A non-diversified Fund is permitted (but is not required) to invest a higher percentage of its assets in the securities of fewer issuers. That concentration could increase the risk of loss to a Fund resulting from a decline in the market value of particular portfolio securities. Investment in a non-diversified fund may entail greater risks than investment in a diversified fund.
All Funds, whether diversified or non-diversified, must meet diversification standards to qualify as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”). See the “Taxes” section for a description of these diversification standards.
Accelerated Transactions
For a Fund to take advantage of certain available investment opportunities, GMO may need to make investment decisions on an expedited basis. In such cases, the information available to GMO at the time of an investment decision may be limited. GMO may not, therefore, have access to the detailed information necessary for a full analysis and evaluation of the investment opportunity.
Risks of Non-U.S. Investments
General. Investment in non-U.S. issuers or securities principally traded outside the United States may involve special risks due to non-U.S. economic, political, and legal developments, including favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization or confiscatory taxation of assets, other government involvement in the economy or in the affairs of specific companies or industries (including in the case of wholly or partially state-owned enterprises) and possible difficulty in obtaining and enforcing judgments against non-U.S. entities. Economic or other sanctions imposed on a non-U.S. country or issuer by the U.S., or on the U.S. by a non-U.S. country, could impair a Fund’s ability to buy, sell, hold, receive, deliver, or otherwise transact in certain securities. Sanctions could also affect the value and/or liquidity of a non-U.S. security.
A Fund may be subject to non-U.S. taxes, including potentially on a retroactive basis, on (i) capital gains it realizes or dividends, interest or other amounts it realizes or accrues in respect of non-U.S. investments; (ii) transactions in those investments; and (iii) repatriation of proceeds generated from the sale or other disposition of those investments. Certain foreign jurisdictions also impose withholding tax on certain payments made to non-residents when payments are attributable to local debt or other similar instruments. Any taxes or other charges paid or incurred by a Fund in respect of its non-U.S. investments will reduce its return thereon. A Fund may seek a refund in respect of taxes paid to a foreign country. The process of seeking a refund could take several years, subject the Fund to various
11
administrative and judicial proceedings, and cause the Fund to incur expenses in its efforts to collect the refund, which will reduce the benefit of any recovery. A Fund’s efforts to collect a refund may not be successful, in which case the Fund will have incurred additional expenses for no benefit. In addition, a Fund’s pursuit of a tax refund may subject the Fund to various administrative and judicial proceedings in the country where it is seeking the refund. GMO’s decision to seek a refund on behalf of a Fund is in its sole discretion, and it may decide not to seek a refund, even if it is entitled to one. The outcome of a Fund’s efforts to obtain a refund is inherently uncertain. Accordingly, a refund (less related estimated or actual tax liabilities, if applicable) is not typically reflected in the Fund’s net asset value until GMO believes that the refund is collectible and free from significant contingencies. In some cases, the amount of such refunds, less related estimated or actual tax liabilities, could be material to a Fund’s net asset value. If a shareholder redeems shares of a Fund before a refund (as finally determined) is reflected in the Fund’s net asset value, the shareholder will not realize the benefit of that refund.
In addition, the tax laws of some non-U.S. jurisdictions in which a Fund may invest are unclear and interpretations of such laws can change over time, including on a retroactive basis in which case a Fund could potentially incur non-U.S. taxes on a retroactive basis. Similarly, provisions in or official interpretations of the tax treaties with such non-U.S. jurisdictions may change over time, which changes could impact a Fund’s eligibility for treaty benefits, if any. As a result, in order to comply with guidance related to the accounting and disclosure of uncertain tax positions under U.S. generally accepted accounting principles (“GAAP”), a Fund may be required to accrue for book purposes certain non-U.S. taxes in respect of its non-U.S. securities or other non-U.S. investments that it may or may not ultimately pay. Such tax accruals will reduce a Fund’s net asset value at the time accrued, even though, in some cases, the Fund ultimately will not pay the related tax liabilities. Conversely, a Fund’s net asset value will be increased by any tax accruals that are ultimately reversed.
See the “Taxes” section for more information about other special tax considerations applicable to non-U.S. investments. In addition, for information on possible Australian tax consequences of an investment in Alternative Allocation Fund or Implementation Fund or possible United Kingdom tax consequences of an investment in Funds managed by the Systematic Equity and Focused Equity Teams, see “Distributions and Taxes” in those Funds’ Prospectus.
Issuers of non-U.S. securities are subject to different, often less comprehensive, accounting, custody, recordkeeping, reporting, and disclosure requirements than U.S. issuers. The Public Company Accounting Oversight Board, which regulates auditors of U.S. public companies, is unable to inspect audit work papers in certain non-U.S. countries. Investors in non-U.S. countries often have limited rights and few practical remedies to pursue shareholder claims, including class actions or fraud claims, and the ability of the SEC, the U.S. Department of Justice and other authorities to bring and enforce actions against non-U.S. issuers or non-U.S. persons is limited. The securities of some foreign governments, companies, and securities markets are less liquid, and at times more volatile, than comparable U.S. securities and securities markets. Non-U.S. brokerage commissions and related fees also are generally higher than in the United States. Funds that invest in non-U.S. securities also may be affected by different custody and/or settlement practices or delayed settlements in some non-U.S. markets. The laws of some foreign countries may limit a Fund’s ability to invest in securities of certain issuers located in those countries. Foreign countries may have reporting requirements with respect to the ownership of securities, and those reporting requirements may be subject to interpretation or change without prior notice to investors. While the Funds make reasonable efforts to stay informed of foreign reporting requirements relating to the Funds’ non-U.S. portfolio securities (e.g., through the Funds’ brokerage contacts, external service providers, publications of the Investment Company Institute, which is the national association of U.S. investment companies, the Funds’ custodial network, and, to the extent deemed appropriate by the Funds under the circumstances, local counsel in the relevant foreign country), no assurance can be given that the Funds will satisfy applicable foreign reporting requirements at all times.
Emerging Countries. The risks described above apply to an even greater extent to investments in emerging countries. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the United States and other developed countries, and accounting, auditing, disclosure, corporate governance, recordkeeping, reporting, and regulatory standards and practices vary from country to country and in many respects are less stringent. In addition, the securities markets of emerging countries are typically subject to a lower level of monitoring and regulation. Government enforcement of existing securities regulations is limited, and any such enforcement may be arbitrary and the results may be difficult to predict. In addition, reporting requirements of emerging countries with respect to the ownership of securities are more likely to be subject to interpretation or changes without prior notice to investors than more developed countries. In addition, securities markets of emerging countries may be subject to potential market closures due to market, economic, political, regulatory, geopolitical, environmental, public health, or other conditions.
Many emerging countries have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on such countries’ economies and securities markets.
Economies of emerging countries generally are heavily dependent on international trade and, accordingly, have been and may 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. Economies of emerging countries also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The economies of emerging countries may be predominantly based on only a few industries or dependent on revenues from particular commodities. In many cases, governments of emerging countries continue to exercise significant control over their economies, and government actions relative to the economy, as well as economic developments generally, may affect the capacity of creditors in those countries to make payments on their debt obligations, regardless of their financial condition.
Custodial services are often more expensive and other investment-related costs higher in emerging countries than in developed countries, which could reduce a Fund’s income from investments in securities or debt instruments of emerging country issuers. In some non-U.S. securities markets, custody arrangements for securities provide significantly less protection than custody arrangements in U.S. securities markets, and prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) expose a Fund to credit and other risks it does not have in the United States.
Emerging countries are more likely than developed countries to experience political uncertainty and instability, including the risk of war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments that affect U.S. investments in these countries. No assurance can be given that adverse political changes will not cause a Fund to suffer a loss of any or all of its investments (or, in the case of fixed income securities, interest) in emerging countries.
Special Risks of Investing in Asian Securities. In addition to the risks of non-U.S. investments and emerging countries investments described above, investments in Asia are subject to other risks. The economies of Asian countries are at varying levels of development. Markets of countries whose economies are in the early stages of development typically exhibit a high concentration of market capitalization and have less trading volume, lower liquidity, and more volatility than more developed markets. Some Asian countries depend heavily on foreign trade and can be adversely affected by trade barriers, exchange controls, and other measures imposed or negotiated by the countries with which they trade. The economies of some Asian countries are not diversified and are based on only a few commodities or industries.
12
Financial imbalances among various economic sectors, fueled by rising asset prices, strong credit growth, and relatively easy financing conditions in certain economies in Asia also may negatively impact those economies.
Investments in Asia also are susceptible to social, political, legal, and operational risks. Some countries have authoritarian or relatively unstable governments. Certain Asian countries have experienced violence, terrorism, armed conflict, epidemics, or pandemics, geopolitical conflicts (such as trade disputes) and social instability, which have negatively impacted their economies. Some governments in the region provide less supervision and regulation of their financial markets and in some countries less financial information is available than is typical of more developed markets. Some governments in the region exercise considerable influence on their respective economies and, as a result, companies in the region may be subject to government interference and nationalization. Some Asian countries restrict direct foreign investment in securities markets, and investments in securities traded on those markets may be made, if at all, only indirectly (e.g., through Depositary Receipts, as defined below under “Depositary Receipts,” derivatives, etc.). For example, Taiwan permits foreign investment only through authorized qualified foreign institutional investors (“FINI”). Each of Alternative Allocation Fund, Benchmark-Free Fund, Climate Change Fund, Emerging Markets Fund, Emerging Markets ex-China Fund, Implementation Fund, International Opportunistic Value Fund, Quality Fund, Resources Fund, and Strategic Opportunities Allocation Fund is registered with the Securities and Futures Commission of Taiwan as a FINI and is therefore authorized to invest directly in the Taiwanese securities market, subject to certain limitations. Each Fund’s ability to continue to invest directly in Taiwan is subject to the risk that its license may be terminated or suspended by the Securities and Futures Commission.
Some Asian countries require foreign investors to be registered with local authorities prior to investing in the securities markets and impose limitations on the amount of investments that may be made by foreign investors and the repatriation of the proceeds from investments.
Asian countries periodically experience increases in market volatility and declines in foreign currency exchange rates. Currency fluctuations affect the value of securities because the prices of these securities are generally denominated or quoted in currencies other than the U.S. dollar. Fluctuations in currency exchange rates can also affect a country’s or company’s ability to service its debt. The governments of certain Asian countries also maintain their currencies at artificial levels in relation to the U.S. dollar rather than at levels determined by the market, which may have an adverse impact on foreign investors.
Investment in particular Asian countries is subject to unique risks, yet the political and economic prospects of one country or group of countries can affect other countries in the region. For example, the economies of some Asian countries are directly affected by Japanese capital investment in the region and by Japanese consumer demands. In addition, a recession, debt crisis, or decline in currency valuation in one Asian country may spread to other Asian countries. The economies of Asian countries are also vulnerable to effects of natural disasters occurring within the region, including droughts, floods, tsunamis, and earthquakes. Disaster recovery in Asia can be poorly coordinated, and the economic impact of natural disasters is significant at both the country and company levels.
A Fund may, directly or indirectly (through, for example, participation notes or other types of equity-linked notes), purchase shares in mainland China-based companies that trade on Chinese stock exchanges such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange (“China A-Shares”) or debt securities traded on the China Interbank Bond Market (“CIBM Bonds” and with “China A-Shares, “China Connect Securities”), through a variety of mutual market access programs (collectively, “China Connect”) that enable foreign investment in PRC exchange-traded securities via investments made in Hong Kong or other locations that may in the future have China Connect programs with the PRC. Examples of China Connect programs include the Shanghai and Shenzhen-Hong Kong Stock Connect (collectively, “Stock Connect”) and the China Bond Connect (the “Bond Connect”). Trades do not cross between the Shanghai and Shenzhen stock exchanges and a separate broker is assigned for each exchange. If a Fund rebalances across both exchanges, the Fund must trade out of stocks listed on one exchange with a broker and trade into stocks on the other exchange with a separate broker. As a result, the Fund may incur additional fees.
There are significant risks inherent in investing in China Connect Securities through China Connect. The China Connect programs are relatively new. There can be no assurance that China Connect programs will not be discontinued without advance notice or that future developments will not restrict or adversely affect a Fund’s investments or returns through China Connect. The less developed state of PRC’s investment and banking systems with respect to foreign investment subjects the settlement, clearing, and registration of China Connect Securities transactions to heightened risks. China Connect program restrictions could also limit the ability of a Fund to sell its China Connect Securities in a timely manner, or to sell them at all. For instance, China Connect programs involving Hong Kong can only operate when both PRC and Hong Kong markets are open for trading and when banking services are available in both markets on the corresponding settlement days. As such, if Hong Kong markets are closed but China Connect Securities are trading in the PRC, or where China Connect programs are closed for extended periods of time because of subsequent Hong Kong and PRC holidays (or for other reasons), a Fund may not be able to dispose of its China Connect Securities when it wants to in a timely manner, which could adversely affect the Fund’s performance. Additionally, certain China Connect programs are subject to daily quota limitations on purchases of certain China Connect Securities (such as China A-Shares). Once the daily quota is reached, orders to purchase additional China A-Shares through Stock Connect will be rejected. Investment quotas are subject to change, and although the current quotas do not place limits on sales of China A-Shares or other China Connect Securities through China Connect programs, there can be no guarantee that capital controls would not be implemented that could adversely affect a Fund’s ability to remove money out of China and use it for other purposes, including to meet redemptions.
China Connect Securities purchased through a China Connect program are held through a nominee structure by a Hong Kong-based depository as nominee (the “Nominee”) on behalf of investors. Thus, a Fund’s investments will be registered on the books of the PRC clearinghouse in the name of a Hong Kong clearinghouse, and on the books of a Hong Kong clearinghouse in the name of the Fund’s Hong Kong sub-custodian, and may not be clearly designated as belonging to the Fund. The precise nature and rights of a Fund as the beneficial owner of China Connect Securities through the Nominee is not well defined under PRC law and it is not yet clear how such rights will recognized or enforced under PRC law. If PRC law does not fully recognize a Fund as the beneficial owner of its China Connect Securities, this may limit GMO’s ability to effectively manage a Fund. The use of the nominee system also exposes a Fund to the credit risk of the depository intermediaries, and to greater risk of expropriation. Different fees, costs, and taxes are imposed on foreign investors acquiring China Connect Securities acquired through China Connect programs, and these fees, costs, and taxes may be higher than comparable fees, costs, and taxes imposed on owners of other securities providing similar investment exposure. Furthermore, the securities regimes and legal systems of the PRC and Hong Kong differ significantly from each other and issues may arise based on these differences. Loss of Hong Kong independence or legal distinctiveness, for example, related to the Hong Kong protests that started in 2019, could undermine significant benefits of the China Connect programs. Political, regulatory and diplomatic events, such as the U.S.-China “trade war” has intensified since 2018, could have an adverse effect on the Chinese or Hong Kong economies and on investments made through China Connect programs, and thus could adversely impact the Funds investing through China Connect programs.
CIBM Bonds may also be purchased through the CIBM Direct Access Program, which is also relatively new. The CIBM Direct Access Program, established by the People’s Bank of China, allows eligible foreign institutional investors to conduct trading in the CIBM, subject to other rules and regulations as promulgated by Chinese authorities. Eligible foreign institutional investors who wish to invest directly in the CIBM through the CIBM Direct Access Program may do so through a
13
settlement agent located in China, who would be responsible for making the relevant filings and account opening with the relevant authorities. A Fund is therefore subject to the risk of default or errors on the part of such agent. Many of the same risks that apply to investments in the PRC through China Connect programs also apply to investments through the CIBM Direct Access Program.
Many Chinese companies have used complex organizational structures to address Chinese restrictions on foreign investment whereby foreign persons, through another entity domiciled outside of China (a “non-Chinese affiliate”), have limited contractual rights, including economic benefits, with respect to the Chinese company. Chinese regulators have permitted such arrangements to proliferate even though such arrangements are not formally recognized under Chinese law. If Chinese regulators’ tacit acceptance of these arrangements ceases, the value of such holdings would be negatively impacted. Moreover, since such arrangements are not recognized under Chinese law, remedies available to an investor through a non-Chinese affiliate would be limited. Furthermore, many Chinese companies have circumvented Chinese restrictions on foreign investments by using variable interest entities (“VIEs”), which enable foreign persons to contractually impose some control, albeit less than direct equity ownership, on such Chinese companies while accessing their economic benefits without formal ownership. While Chinese law does not formally recognize VIEs, Chinese regulators have permitted such arrangements to proliferate. Tacit acceptance of VIEs by Chinese regulators may cease in the future. Moreover, VIEs are not formally recognized under Chinese law, which may cause Chinese courts to not enforce the contracts related thereto, thus limiting the remedies and rights of investors, such as a Fund, who is invested in such company via a VIE. Future regulatory action may prohibit the ability of a VIE to receive the economic benefits of a Chinese company with which it has a contractual arrangement, which would cause the market value of such holding to lose substantial value.
Significant portions of the Chinese securities markets may become rapidly illiquid, as Chinese issuers have the ability to suspend the trading of their equity securities, and have shown a willingness to exercise that option in response to market volatility, epidemics, pandemics, adverse economic, market or political events, and other events.
Unexpected political, regulatory and diplomatic events within the United States and abroad, such as the U.S.-China “trade war” that intensified in 2018 and 2019, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. The current political climate and the renewal or escalation of a trade war between China and the United States may have an adverse effect on both the U.S. and Chinese economies, including as the result of one country’s imposition of tariffs on the other country’s products. In addition, U.S. sanctions or other investment restrictions could preclude a Fund from investing in certain Chinese issuers or cause a Fund to sell investments at disadvantageous times. . Events such as these and their impact on the Funds are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
Special Risks of Investing in Russian Securities. Certain of the Funds may invest directly in the securities of Russian issuers. Certain other Funds may have indirect exposure to Russian securities through their investment in one or more of the Funds with direct investments in Russia. Investment in those securities presents many of the same risks as investing in the securities of emerging country issuers, as described in the preceding sections.
The social, political, legal, and operational risks of investing in Russian issuers, and of having assets held in custody within Russia, however, may be particularly pronounced relative to investments in more developed countries.
Russia’s system of share registration and custody creates certain risks of loss (including the risk of total loss) that are not normally associated with investments in other securities markets. The fairly recent formation of the Russian securities markets and the underdeveloped state of Russia’s banking system subjects settlement, clearing, and registration of securities transactions to significant risks. Prior to 2013, there was no central registration system for equity share registration in Russia and registration was carried out by either the issuers themselves or by registrars located throughout Russia. Such registrars were not necessarily subject to effective state supervision, nor were they licensed with any governmental entity, thereby increasing the risk that a Fund could lose ownership of its securities through fraud, negligence, or even mere oversight. With the implementation of the National Settlement Depository (“NSD”) in Russia as a recognized central securities depository, title to most Russian equities is now based on the records of the NSD and not the registrars. Although the implementation of the NSD is generally expected to decrease the risk of loss in connection with recording and transferring title to securities, issues resulting in loss still may occur. In addition, issuers and registrars are still prominent in the validation and approval of documentation requirements for corporate action processing in Russia. Because the documentation requirements and approval criteria vary between registrars and/or issuers, there remain unclear and inconsistent market standards in the Russian market with respect to the completion and submission of corporate action elections. To the extent that a Fund suffers a loss relating to title or corporate actions relating to its portfolio securities, it may be difficult for the Fund to enforce its rights or otherwise remedy the loss.
Russia’s invasion of Ukraine beginning in late February 2022 has had, and could continue to have, severe adverse effects on regional and global economic markets for securities and commodities. For example, in response to Russia’s actions, various governments, including the United States, issued a series of broad-ranging economic sanctions against Russia that, among other things (i) prohibit doing business with certain Russian companies, financial institutions and individuals (e.g., officials); (ii) the removal of Russian banks from the Society for Worldwide Interbank Financial Telecommunications (commonly referred to as “SWIFT”), the electronic banking network that connects banks globally; and (iii) restrict the Russian Central Bank from undermining the impact of the sanctions. In retaliation for the sanctions and other actions by the U.S. and other countries, Russia has imposed strict capital controls limiting the ability of foreigners to trade on the Moscow Stock Exchange and to sell, receive or deliver assets held in the custody of local Russian banks (such as equities of Russian companies and Rubles). These actions by the United States and other countries have adversely affected (and similar actions in the future could adversely affect) the Russian economy and the value and liquidity of Russian securities. In particular, where a Fund holds securities of a Russian issuer that is subject to blocking sanctions imposed by the U.S. Department of the Treasury's Office of Foreign Assets Control, those securities will be frozen and consequently unable to be sold or transferred. Moreover, the Russia/Ukraine conflict and related actions (such as those described above) have, and could continue to have, an adverse effect on global markets and liquidity, thereby negatively affecting the value of a Fund’s investments beyond any direct exposure to Russian issuers.
Securities Lending
A Fund may make secured loans of its portfolio securities amounting to not more than one-third of its total assets (one-quarter in the case of International Equity Fund). For these purposes, total assets include the collateral received from such loans. Securities loans will be made to borrowers that GMO believes to be of relatively high credit standing pursuant to agreements requiring that the loans be collateralized by cash, securities, letters of credit or such other collateral as may be permitted under a Fund’s securities lending program in an amount at least equal to the securities loaned (marked to market daily). Daily market fluctuations could cause the value of loaned securities to be more or less than the value of the collateral received. When this occurs, the collateral is adjusted and settled on the following business day. If a loan is collateralized by U.S. government or other securities, the Fund receives a fee from the borrower. If a loan is collateralized by cash, the Fund typically invests the cash collateral for its own account in GMO U.S. Treasury Fund or one or more money market funds (in which case the Fund will bear its pro rata share of GMO
14
U.S. Treasury Fund’s or such money market fund’s fees and expenses), or directly in interest-bearing, short-term securities, and typically pays a fee to the borrower. GMO may retain lending agents on behalf of several of the Funds that would be compensated based on a percentage of the Fund’s return on its securities lending. State Street Bank and Trust Company currently serves as the Funds’ securities lending agent. The Funds also may pay various fees in connection with securities loans, including shipping fees and custodian fees.
Securities loans must be fully collateralized at all times, but involve some credit/counterparty risk to the Funds if the borrower or the party (if any) guaranteeing the loan should default on its obligation and the Funds are delayed in or prevented from recovering or applying the collateral. Applicable regulations require certain bank-regulated counterparties and certain of their affiliates to include in certain financial contracts, including many securities lending agreements, terms that delay or restrict the rights of counterparties, such as the Funds, to terminate such agreements, foreclose upon collateral, exercise other default rights or restrict transfers of credit support in the event that the counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings. It is possible that these requirements, as well as potential additional government regulation and other developments in the market, could adversely affect a Fund’s ability to terminate existing securities lending agreements or to realize amounts to be received under such agreements in the event the counterparty or its affiliate becomes subject to a resolution or insolvency proceeding. See “Legal and Regulatory Risk” below.
As with other extensions of credit, a Fund that lends its portfolio securities bears the risk of delay in the recovery of loaned securities, including possible impairment of the Fund’s ability to vote the securities, the inability to invest proceeds from the sales of such securities and of loss of rights in the collateral should the borrower fail financially. A Fund also bears the risk that the value of investments made with collateral may decline. A Fund bears the risk of total loss with respect to the investment of collateral. Any income or gains and losses from investing and reinvesting any cash collateral delivered by a borrower pursuant to a loan generally are at the Fund’s risk, and to the extent any such losses reduce the amount of cash below the amount required to be returned to the borrower upon the termination of any loan, the Fund may be required by the securities lending agent to pay or cause to be paid to such borrower an amount equal to such shortfall in cash, possibly requiring it to liquidate other portfolio securities to satisfy its obligations.
Voting rights or rights to consent with respect to the loaned securities pass to the borrower. A Fund has the right to call loans at any time on reasonable notice to exercise voting rights associated with the security and expects to do so if both (i) GMO receives adequate notice of a proposal upon which shareholders are being asked to vote, and (ii) GMO believes that the benefits to the Fund of voting on that proposal outweigh the benefits to the Fund of having the security remain out on loan. However, as noted above, a Fund bears the risk of delay in the return of the security, impairing the Fund’s ability to vote on such matters. GMO may use third-party service providers to assist it in identifying and evaluating proposals, and to assist it in recalling loaned securities for proxy voting purposes. For a discussion of the Funds’ securities lending activities through a “prime services” program to facilitate short selling activities, see “Additional Investment Strategies – Short Sales” below.
For financial information related to the Funds’ securities lending activities during their most recent fiscal year, see “Investment Advisory and Other Services – Securities Lending Activities” below.
Depositary Receipts
Many of the Funds invest in American Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”), and European Depositary Receipts (“EDRs”) or other similar securities representing ownership of non-U.S. securities (collectively, “Depositary Receipts”) if issues of such Depositary Receipts are available that are consistent with the Fund’s investment objective. Depositary Receipts generally evidence an ownership interest in a corresponding non-U.S. security on deposit with a financial institution. Transactions in Depositary Receipts usually do not settle in the same currency as the underlying non-U.S. securities are denominated or traded. Generally, ADRs are designed for use in the U.S. securities markets and EDRs are designed for use in European securities markets. GDRs may be traded in any public or private securities market and may represent securities held by institutions located anywhere in the world. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they may be issued by U.S. financial institutions, and evidence ownership interests in a security or pool of securities issued by either a U.S. or foreign corporation.
Depositary Receipts may be issued as sponsored or unsponsored programs. An unsponsored Depositary Receipt is created independently of the issuer of the underlying security, and the depositary of an unsponsored Depositary Receipt frequently is under no obligation to distribute shareholder communications received from the issuer of the underlying security or to pass through voting rights to the holders of the Depositary Receipts with respect to the underlying security. As a result, available information concerning the issuer may not be as current as for sponsored Depositary Receipts, and the prices of unsponsored Depositary Receipts may be more volatile than if such instruments were sponsored by the issuer.
Because the value of a Depositary Receipt is dependent upon the market price of an underlying non-U.S. security, Depositary Receipts are subject to most of the risks associated with investing in non-U.S. securities directly. See “Risks of Non-U.S. Investments.” In addition, a depositary or issuer may unwind its Depositary Receipt program, or the relevant exchange may require Depositary Receipts to be delisted, which could require a Fund to sell its Depositary Receipts (potentially at disadvantageous prices) or to convert them into shares of the underlying non-U.S. security (which could adversely affect their value or liquidity). Depositary Receipts also may be subject to illiquidity risk, and trading in Depositary Receipts may be suspended by the relevant exchange.
Convertible Securities
A convertible security is a security (a bond or preferred stock) that may be converted at a stated price within a specified period into a specified number of shares of common stock of the same or a different issuer. Convertible securities are senior to common stock in a corporation’s capital structure but are usually subordinated to senior debt obligations of the issuer. Convertible securities provide holders, through their conversion feature, an opportunity to participate in increases in the market prices of their underlying securities. The price of a convertible security is influenced by the market price of the underlying security and tends to increase as the market price rises and decrease as the market price declines. GMO regards convertible securities as a form of equity security.
The value of a convertible security is a function of its “investment value” (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its “conversion value” (the security’s worth, at market value, if converted into the underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, as in the case of “broken” or “busted” convertibles (convertible securities for which the market price of the common stock has fallen significantly below the
15
conversion price of the convertible and, as a result, the conversion feature holds little value), the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying common stock while holding a fixed income security. Generally, the amount of the premium decreases as the convertible security approaches maturity.
A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party.
Preferred Stocks
Preferred stocks include convertible and non-convertible preferred and preference stocks that are senior to common stock. Preferred stocks are equity securities that are senior to common stock with respect to the right to receive dividends and a fixed share of the proceeds resulting from the issuer’s liquidation. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of the issuer’s common stock, and thus represent an ownership interest in the issuer. Depending on the features of the particular security, holders of preferred stock may bear the risks disclosed in the Prospectus or this SAI regarding equity or fixed income securities.
Investment in preferred stocks involves certain risks. Certain preferred stocks contain provisions that allow an issuer under certain conditions to skip or defer distributions. If a Fund owns a preferred stock that is deferring its distribution, it may be required to report income for tax purposes despite the fact that it is not receiving current income on this position. Preferred stocks often are subject to legal provisions that allow for redemption in the event of certain tax or legal changes or at the issuer’s call. In the event of redemption, a Fund may not be able to reinvest the proceeds at comparable rates of return. Preferred stocks are subordinated to bonds and other debt securities in an issuer’s capital structure in terms of priority for corporate income and liquidation payments, and therefore will be subject to greater credit risk than those debt securities. Preferred stocks may trade less frequently and in a more limited volume and may be subject to more abrupt or erratic price movements than many other securities, such as common stocks, corporate debt securities, and U.S. government securities.
Contingent Value Rights
A Fund may invest in contingent value rights (“CVRs”). A CVR gives the holder the right to receive an amount (which may be a fixed amount or determined by a formula) in the event that a specified corporate action, business milestone, or other trigger occurs (or does not occur) which is often subject to an expiration date. CVRs often are awarded to shareholders in the context of a corporate acquisition or major restructuring. For example, shareholders of an acquired company may receive a CVR that enables them to receive additional shares of the acquiring company in the event that the acquiring company’s share price falls below a certain level by a specified date. Risks associated with the use of CVRs are generally similar to risks associated with the use of options, such as the risk that the required trigger does not (or does) occur prior to a CVR’s expiration, causing the CVR to expire with no value. CVRs also present illiquidity risk, as they may not be registered securities or may otherwise be non-transferable or difficult to transfer, as well as counterparty risk and credit risk. Further, because CVRs are valued based on the likelihood of the occurrence of a trigger, valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation.
Master Limited Partnerships
A master limited partnership (“MLP”) generally is a publicly traded company organized as a limited partnership or limited liability company and treated as a partnership for U.S. federal income tax purposes. MLPs may derive income and gains from, among other things, the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. The general partner of an MLP is typically owned by one or more of the following: a major energy company, an investment fund, or the direct management of the MLP. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an up to 2% equity interest in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership through ownership of common units and have a limited role in the partnership’s operations and management. For purposes of qualifying as a RIC under the Code, the extent to which a Fund can invest in MLPs may be limited. See the “Taxes” section for more information about these and other special tax considerations that can arise in respect of a Fund’s investments in MLPs.
MLP securities in which a Fund may invest can include, but are not limited to: (i) equity securities of MLPs, including common units, preferred units or convertible subordinated units; (ii) debt securities of MLPs, including debt securities rated below investment grade; (iii) securities of MLP affiliates; (iv) securities of open-end funds, closed-end funds or exchange-traded funds (“ETFs”) that invest primarily in MLP securities; or (v) exchange-traded notes whose returns are linked to the returns of MLPs or MLP indices.
The risks of investing in an MLP are generally those inherent in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded investors in an MLP than investors in a corporation. Additional risks involved with investing in an MLP are risks associated with the specific industry or industries in which the partnership invests.
Income Trusts
Income trusts are investment trusts that hold income-producing assets and distribute income generated by such assets to the “unitholders” of the trust, which are entitled to participate in the trust’s income and capital as its beneficiaries.
Income trusts generally invest in assets that provide a return to the trust and its unitholders based on the cash flows of an underlying business. Such assets may include equity and debt instruments, royalty interests or real properties. The income trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.
Income trusts also may include royalty trusts, a particular type of income trust whose securities are listed on a stock exchange and which controls an underlying company whose business relates to, without limitation, the acquisition, exploitation, production and sale of oil and natural gas.
16
Investments in income trusts (including royalty trusts) are subject to operating risk based on the income trust’s underlying assets and their respective businesses. Such risks may include lack of or limited operating histories. Income trusts are particularly subject to interest rate risk and increases in interest rates offered by competing investments may diminish the value of trust units. Changes in the interest rate also may affect the value of future distributions from the income trust’s underlying assets or the value of the underlying assets themselves. Interest rate risk is also present within the income trusts themselves because they often hold very long-term capital assets, and much of the excess distributable income is derived from a maturity (or duration) mismatch between the life of the asset and the life of the financing associated with it. In an increasing interest rate environment, the income trust’s distributions to its unitholders may decrease. Income trusts also may be subject to additional risk, including, without limitation, limited access to debt markets.
Income trusts do not guarantee minimum distributions or returns of capital to unitholders. The amount of distributions paid on a trust’s units will vary from time to time based on production levels, commodity prices, royalty rates and certain expenses, deductions and costs, as well as on the distribution payout ratio policy adopted.