ITEM 1. Business.
OVERVIEW
The American Bar Association Members/State Street Collective Trust (the “Collective Trust”) was organized on August 8, 1991. The Collective Trust is maintained exclusively for the collective investment of monies administered on behalf of the ABA Retirement Funds program (the “Program”). As of December 31, 2005, there were ten separate collective investment funds (the “Funds”) and three portfolios of a Structured Portfolio Service. The current Funds are as follows: Stable Asset Return Fund, Intermediate Bond Fund, Balanced Fund, Large-Cap Value Equity Fund, Large-Cap Growth Equity Fund, Index Equity Fund, Mid-Cap Value Equity Fund, Mid-Cap Growth Equity Fund, Small-Cap Equity Fund and International Equity Fund. Assets contributed under the Program may also be invested in the portfolios of the Structured Portfolio Service, which offers conservative, moderate or aggressive allocations of assets among the Funds listed above. The Funds and portfolios are Investment Options under the Program, which is sponsored by ABA Retirement Funds (formerly called the American Bar Retirement Association) (“ARF”). Effective on or about August 1, 2006, the Collective Trust intends to establish and offer five portfolios of the Retirement Date Funds as Investment Options under the Program.
The Collective Trust may offer and sell an unlimited number of units of beneficial interest (“Units”), representing interests in separate fund portfolios of the Collective Trust, each Unit to be offered and sold at the per Unit net asset value of the corresponding fund portfolio.
State Street Bank and Trust Company of New Hampshire (“State Street” or the “Trustee”), a trust company established under the laws of the state of New Hampshire and a wholly-owned subsidiary of State Street Bank and Trust Company (“State Street Bank”), serves as trustee of the Collective Trust.
State Street Bank is a trust company established under the laws of The Commonwealth of Massachusetts and is a wholly-owned subsidiary of State Street Corporation, a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956, as amended. State Street Bank assumed responsibility for administering and providing the Investment Options for the Program on January 1, 1992. State Street Bank served as trustee of the Collective Trust prior to December 1, 2004.
State Street Bank is responsible for certain recordkeeping and administrative services required by the Program. State Street Bank’s administrative and recordkeeping responsibilities include maintenance of individual account records or accrued benefit information for participants whose employers choose to
have State Street Bank maintain such account records. In addition, State Street Bank also provides account and investment information to employers and participants, receives all plan contributions, effects investment and transfer transactions and distributes benefits provided by the plans to the participants or, in the case of some individually designed plans, to the trustees of such plans.
In this Report, references to “State Street” or the “Trustee” refer, with respect to the period prior to December 1, 2004, to State Street Bank, and with respect to the period beginning December 1, 2004, to State Street. For additional information regarding the relationship between State Street and State Street Bank, see “-State Street and State Street Bank.”
THE PROGRAM
The Program is sponsored by ARF, an Illinois not-for-profit corporation organized by the ABA to sponsor retirement programs for self-employed individuals and employers who are members or associates of the ABA or other affiliated organizations. The Program is a comprehensive retirement program that provides Employers with tax-qualified employee retirement plans, a variety of Investment Options and related recordkeeping and administrative services. As of December 31, 2005, there were approximately 4,300 plans participating in the Program through which approximately 48,000 Participants participated in the Program.
As trustee of the Collective Trust, State Street is responsible for the operation and management of Funds and the portfolios of the Structured Portfolio Service under the Collective Trust. State Street Bank provides administrative and recordkeeping services required by the Program. State Street Bank has engaged CitiStreet to provide such recordkeeping and administrative services. State Street Bank also is the sole trustee of each of the ABA Members Trusts. For a more complete description of the relationship between State Street and State Street Bank, see “-State Street and State Street Bank.”
DESCRIPTION OF INVESTMENT OPTIONS
The Collective Trust offers ten collective investment funds and three portfolios of a Structured Portfolio Service. The Funds and the portfolios of the Structured Portfolio Service are Investment Options under the Program. It currently is anticipated, however, that the portfolios of the Structured Portfolio Service will be terminated and hence no longer available as investment options under the Program on or about January 1, 2008.
All proceeds received by the Collective Trust relating to the contribution, transfer or allocation of assets to a Fund or a portfolio of the Structured Portfolio Service are applied to the purchase of Units of such Fund or portfolio of the Structured Portfolio Service. Assets invested through the ABA Members Plans are held under the Retirement Trust, and assets invested through individually designed plans are held under the Pooled Trust. State Street Bank is the sole trustee of each of the ABA Members Trusts.
The Stable Asset Return Fund invests in high quality short-term instruments and investment contracts. The Intermediate Bond Fund invests in debt securities of varying maturities. The Balanced Fund invests in both equity and debt securities. The Index Equity Fund invests in common stocks included in the Russell 3000 Index. The Large-Cap Value Equity Fund, Large-Cap Growth Equity Fund, Mid-Cap Value Equity Fund, Mid-Cap Growth Equity Fund, Small-Cap Equity Fund and International Equity Fund invest in equity securities of various types. Assets contributed or held under the Program may also be invested in the portfolios of the Structured Portfolio Service, which offer three approaches to diversifying investments in the Program by providing the opportunity to select conservative, moderate or aggressive allocations of assets among the Program’s Funds. In addition, assets contributed under the Program may be invested in publicly traded debt and equity securities and shares of numerous mutual funds through Self-Managed Brokerage Accounts.
Interests in the respective Funds and portfolios of the Structured Portfolio Service are represented by Units, each of which represents an undivided pro rata share of the net assets of a Fund or a portfolio of the Structured Portfolio Service. Although the Funds and the portfolios of the Structured Portfolio Service are similar in some respects to registered open-end management investment companies (commonly referred to as “mutual funds”), the Funds and the portfolios of the Structured Portfolio Service are not required to be and are not registered as investment companies under the Investment Company Act. The Units representing interests in the Funds and the portfolios of the Structured Portfolio Service are held by State Street Bank, as trustee of the ABA Members Trusts. Neither the assets of the ABA Members Trusts nor the Investment Options are subject to the claims of the creditors of State Street or State Street Bank. The Investment Options are not insured by the Federal Deposit Insurance Corporation or any governmental agency. State Street’s activities as trustee of the Collective Trust and State Street Bank’s activities as trustee of the ABA Members Trusts are subject to the requirements of ERISA. There are no voting rights connected with the ownership of Units. No officer of the Collective Trust or officer or director of State Street owns, beneficially or of record, any Units of beneficial interest in the Collective Trust. Additionally, as of December 31, 2005, no person or entity vested with investment responsibility for the assets contributed to the Program owned more than 5% of the Units of beneficial interest in the Collective Trust or in any Investment Option offered thereunder.
Units in the Funds and the portfolios of the Structured Portfolio Service are not “redeemable securities” within the meaning of the Investment Company Act because the holder does not have an entitlement to receive approximately the holder’s proportionate share of the Collective Trust’s current net assets or the cash equivalent thereof (or the current net assets or cash equivalent thereof of any Investment Option) upon presentation of the Units to the Collective Trust. However, each Unit entitles its holder to exercise investment rights that are substantially similar to the rights of holders of “redeemable securities” issued by a mutual fund. Units in each Fund and in each portfolio of the Structured Portfolio Service may be liquidated on each Business Day (subject to applicable restrictions under the terms of the Program) for cash equal to the per Unit net asset value of the Fund or the portfolio in the Structured Portfolio Service, as applicable. In addition, transfers may be made among the Funds and the portfolios in the Structured Portfolio Service based on the relevant per Unit net asset values.
For purposes of the following descriptions of the Funds, investments by a Fund in collective investment funds maintained by State Street Bank, and investments by the Balanced Fund made in the Intermediate Bond Fund, are deemed to be investments in the underlying securities held by those funds.
STABLE ASSET RETURN FUND
Investment Objective. The investment objective of the Stable Asset Return Fund is to provide current income consistent with the preservation of principal and liquidity. There can be no assurance that the Stable Asset Return Fund will achieve its investment objective.
Strategy. The Stable Asset Return Fund invests in investment contracts and high-quality short-term instruments through the State Street Bank and Trust Company ABA Members/Pooled Stable Asset Fund Trust, a collective investment fund maintained by State Street Bank, which in turn invests the high-quality short-term instruments portion of its assets in the State Street Bank and Trust Company Yield Enhanced Short-Term Investment Fund, a collective investment fund maintained by State Street Bank. The Fund invests in obligations of the United States government and its agencies and instrumentalities (referred to as “U.S. Government Obligations”) and in other high quality instruments, including notes, bonds and similar debt instruments of corporations, commercial paper, certificates of deposit and time deposits, bankers’ acceptances, supranational and sovereign debt obligations (including obligations of foreign government sub-divisions), asset-backed securities, master notes, promissory notes, funding agreements, variable and indexed interest notes and repurchase agreements (collectively, “Short-Term
Investment Products”). The Stable Asset Return Fund may invest in U.S. Government Obligations and Short-Term Investment Products so long as the average weighted days to maturity of all such investments does not exceed 120 days. The Fund also invests in investment contracts, including “Synthetic GICs” issued by insurance companies, banks or other financial institutions. Synthetic GICs are arrangements comprised of an investment in one or more underlying securities and a contract issued by an insurance company, bank or other financial institution that provides for the return of principal and an agreed upon rate of interest for purposes of permitting the contract to be benefit responsive (that is, responsive to withdrawal, transfer and benefit payment requests by Program participants and beneficiaries). The underlying securities of Synthetic GICs generally consist of fixed income debt instruments. The average weighted maturity of the Fund’s Short-Term Investment Products and investment contracts may not exceed 2.25 years. As of December 31, 2005, approximately 20% of the Fund’s assets were invested in U.S. Government Obligations and Short-Term Investment Products and 80% of the Fund’s assets were invested in investment contracts. As of December 31, 2005, the duration of the Stable Asset Return Fund was 2.16 years. The Fund’s portfolio is structured to provide cash flow to assist liquidity management and to mitigate interest rate volatility while seeking to maximize rate of return.
Investment Guidelines and Restrictions and Risk Factors. The Fund may invest in a variety of U.S. Government Obligations, including bills and notes issued by the U.S. Treasury and securities issued by agencies of the U.S. government, such as the Farmers Home Administration, the Export Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association, the General Services Administration and the Maritime Administration. Not all U.S. Government Obligations are backed by the full faith and credit of the United States. For example, securities issued by the Federal Farm Credit Bank or by the Federal National Mortgage Association are supported by the agency’s right to borrow money from the U.S. Treasury under certain circumstances, and securities issued by the Federal Home Loan Bank are supported only by the credit of the issuing agency. There is no guarantee that the U.S. government will support these securities, and, therefore, they involve more risk than U.S. Government Obligations that are supported by the full faith and credit of the United States.
The Stable Asset Return Fund may enter into repurchase agreements with a variety of banks and broker-dealers. In a repurchase agreement transaction, the Fund acquires securities (usually U.S. Government Obligations) for cash and obtains a simultaneous commitment from the seller to repurchase the securities at an agreed upon price and date. The resale price is in excess of the acquisition price and reflects an agreed upon market rate of interest unrelated to the coupon rate on the purchased security. The difference between the sale and the repurchase price is, in effect, interest for the period of the agreement. In such transactions, the securities purchased by the Stable Asset Return Fund will have a total value at least equal to the amount of the repurchase price and will be held by State Street Bank until repurchased. State Street Bank monitors the value of the underlying securities to verify that their value, including accrued interest, always equals or exceeds the repurchase price.
The Stable Asset Return Fund may invest in U.S. dollar-denominated instruments issued by foreign banks and foreign branches of U.S. banks, which may involve special risks. Foreign banks may not be required to maintain the same financial reserves or capital that are required of U.S. banks. Restrictions on loans to single borrowers, prohibitions on certain self-dealing transactions and other regulations designed to protect the safety and solvency of U.S. banks may not be applicable to foreign banks. Furthermore, investments in foreign banks may involve additional risks similar to those associated with investments in foreign securities described in the following paragraph. Foreign branches of U.S. banks generally are subject to U.S. banking laws, but obligations issued by a branch, which sometimes are payable only by the branch, may be subject to country risks relating to actions by foreign governments that may restrict or even shut down the operations of some or all the country’s banks. The Stable Asset Return Fund may also invest in U.S. dollar-denominated instruments issued by foreign governments, their political subdivisions, governmental authorities, agencies and instrumentalities and supranational
organizations. A supranational organization is an entity designated or supported by the national government of one or more countries to promote economic reconstruction or development. Examples of supranational organizations include, among others, the European Investment Bank, the International Bank for Reconstruction and Development (World Bank) and the Nordic Investment Bank.
Investments in foreign securities may involve risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity in foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Stable Asset Return Fund may commit to purchasing securities on a “when-issued” basis, such that payment for and delivery of a security will occur after the date that the Fund commits to purchase the security. The payment obligation and the interest rate on the security are each fixed at the time of the purchase commitment. Prior to payment and delivery, however, the Stable Asset Return Fund will not receive interest on the security, and will be subject to the risk of a loss if the value of the when-issued security is less than the purchase price at the time of delivery.
The Stable Asset Return Fund is permitted to invest in asset-backed securities (including collateralized mortgage obligations (known as “CMOs”) and other derivative mortgage-backed securities), subject to the rating and quality requirements specified for the Fund. Asset-backed securities are issued by trusts and special purpose entities that securitize various types of assets, such as automobile and credit card receivables. Asset-backed securities may involve credit risks resulting primarily from the fact that asset-backed securities are issued by trusts or special purpose entities with no other assets and do not usually have the benefit of a complete security interest in the securitized assets. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. CMO residuals and other mortgage-related securities may be structured in classes with rights to receive varying proportions of principal and interest. The yield to maturity on an interest only class is extremely sensitive to the rate at which principal payments (including prepayments) are made on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on the Fund’s yield to maturity from these securities.
Except with respect to U.S. Government Obligations, the Stable Asset Return Fund may invest in a Short-Term Investment Product only if at the time of purchase, the instrument is (i) rated in one of the two highest rating categories applicable to corporate bonds by at least two nationally recognized statistical rating organizations, at least one of which must be Standard & Poor’s Corp. (“S&P”) or Moody’s Investors Service, Inc. (“Moody’s”), (ii) rated in the highest rating category applicable to commercial paper by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody’s, or (iii) if unrated, issued or guaranteed by an issuer that has other comparable outstanding instruments that are so rated or is itself rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody’s. For purposes of this restriction, an investment in a repurchase agreement will be considered to be an investment in the securities that are the subject of the repurchase agreement. Except with respect to U.S. Government Obligations backed by the full faith and credit of the United States, each instrument purchased will be subject to the risks of default by the issuer and the non-payment of interest or principal that are usually associated with unsecured borrowings.
The Stable Asset Return Fund may not invest in any investment contract unless, at the time of purchase, the investment contract or the issuer of the investment contract is rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody’s. Although these rating standards must be satisfied at the time an
investment contract is issued, the financial condition of an issuer may change prior to maturity. The Stable Asset Return Fund will generally be unable to dispose of an investment contract prior to its maturity in the event of the deterioration of the financial condition of the issuer.
Except for investment contracts and U.S. Government Obligations, the Fund may not invest more than 5% of its assets in securities of a single issuer, determined at the time of purchase. For purposes of this 5% limitation, investments in collective investment funds maintained by State Street Bank are considered to be investments in the underlying securities held by such collective investment funds, and investments in repurchase agreements are considered to be investments in the securities that are the subject of such repurchase agreements. Other than investment contracts, the Fund may not invest more than 10% of its net assets in illiquid securities, including repurchase agreements with maturities of greater than seven days or portfolio securities that are not readily marketable or redeemable, determined at the time of purchase. The proportion of the assets of the Fund invested in investment contracts of any one insurance company, bank or financial institution may generally not be greater than 15% of the aggregate value of investment contracts included in the Fund’s portfolio, and in no event greater than 20%, in each case determined at the time of purchase. To the extent that the assets of the Stable Asset Return Fund are committed to investment contracts of a single issuer, the Fund will be subject to a greater risk that a default by that issuer will have a material adverse effect on the Fund.
The Fund will utilize a tiered liquidity structure to satisfy withdrawal and transfer requests. In the unlikely event that the amount of liquid assets held by the Fund is insufficient to satisfy all withdrawal and transfer requests immediately, the Fund may limit or suspend withdrawals and transfers. For more information on these restrictions, including the priority to be given to withdrawals and transfers in such circumstances, see “-Transfers Between Investment Options and Withdrawals-Frequent Trading; Restrictions on Transfers.”
Valuation of Units. Unlike the other Funds, assets of the Stable Asset Return Fund are not valued at fair market value. The values of Short-Term Investment Products are determined according to “Amortized Cost Pricing.” Under Amortized Cost Pricing, when an instrument is acquired by the Fund, it is valued at its cost, and thereafter that value is increased or decreased by amortizing any discount or premium on a constant basis over the instrument’s remaining maturity. Investment contracts held by the Fund are benefit responsive (that is, responsive to withdrawal, transfer and benefit payment requests) and, hence, under generally accepted accounting principles applicable to employee benefit plans, are valued at their contract values (cost plus accrued interest). Any fluctuations in the market value of the Fund’s assets are not taken into account in determining the Fund’s Unit value. The Fund’s Unit value is increased each Business Day by the amount of net income accrued for that day, and such Unit value is then used to account for contributions or transfers to and withdrawals or transfers from the Fund. In accordance with accounting rules applicable to the methods used by the Fund to value its assets, no additional assets of defined benefit plans may be contributed or transferred to the Fund. However, any assets of defined benefit plans invested in the Fund prior to January 15, 2006 may remain so invested, including any earnings thereon.
The methods used to value assets of the Stable Asset Return Fund provide certainty in valuation but can result in the overvaluation or undervaluation of the value of a particular instrument or investment contract when compared to its market value, and the longer the maturity of a particular instrument or investment contract, the greater the exposure to the risk of such overvaluation or undervaluation. If a holder of Units in the Stable Asset Return Fund were to receive a distribution from, or make a transfer out of, the Stable Asset Return Fund at a time when the market value of the assets of the Stable Asset Return Fund was less than the value used to compute its Unit value, the holder would be overpaid (based on market price) and the market value of the Units in the Fund held by the remaining holders of Units in the Fund would be diluted. Conversely, if a holder were to receive a distribution from, or make a transfer out of, the Stable Asset Return Fund at a time when the market value of the assets of the Stable Asset Return Fund was more than the value used to compute its Unit value, the holder would be
underpaid (based on market price) and the value of interests in the Fund of the remaining holders of Units in the Fund would be increased. Along the same lines, if a purchaser of Units in the Stable Asset Return Fund were to acquire such Units at a time when the market value of the assets of the Stable Asset Return Fund was less than (more than) the value used to compute its Unit value, the purchaser would overpay (underpay) (based on market price) and the market value of the Units in the Fund held by the remaining holders of Units in the Fund would be enhanced (diluted). State Street Bank monitors the market value of the investment contracts and Short-Term Investment Products held by the Fund. If State Street Bank were to determine that the per Unit net asset value of the Stable Asset Return Fund has deviated from the net asset value determined by using available market quotations or market equivalents (market value) for investment contracts and Short-Term Investment Products to a large enough extent that it might result in a material dilution or other unfair result to holders of Units, State Street Bank might adjust the per Unit net asset value of the Fund or take other action that it deems appropriate to eliminate or reduce, to the extent reasonably practicable, the dilution or other unfair result. The Financial Accounting Standards Board has issued guidance that, effective for financial statements for annual periods ending after December 15, 2006, will require the Fund to make several modifications in its financial statement presentation and disclosure, including presentation of both the fair value and contract value of benefit-responsive investment contracts. State Street Bank does not expect the adoption of these changes to impact the use by the Fund of contract value accounting.
Performance Information. The Stable Asset Return Fund may, from time to time, report its performance in terms of its yield and effective yield. The Fund’s yield is determined based upon historical earnings and is not intended to indicate future performance. The yield of the Fund refers to the income return for a day multiplied by the number of days in a year to show the one day return on an annualized basis. The effective yield is calculated similarly but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The effective yield will be slightly higher than the yield because of the compounding effect of this assumed reinvestment.
Investment Advisor. State Street Bank manages the Stable Asset Return Fund. State Street may, in the future, at its discretion and subject to consultation with ARF, employ other investment advisors to provide investment advice with respect to the Fund or portions thereof. The assets of the Fund are currently invested in units of the State Street Bank and Trust Company ABA Members/Pooled Stable Asset Fund Trust, a collective investment fund maintained by State Street Bank, which in turn invests the high-quality short-term instruments portion of its assets in the State Street Bank and Trust Company Yield Enhanced Short-Term Investment Fund, a collective investment fund maintained by State Street Bank.
INTERMEDIATE BOND FUND
Investment Objective. The investment objective of the Intermediate Bond Fund is to achieve a total return from current income and capital appreciation by investing primarily in a diversified portfolio of fixed income securities. There can be no assurance that the Intermediate Bond Fund will achieve its investment objective.
Strategy. The Intermediate Bond Fund seeks to achieve, over an extended period of time, total returns comparable or superior to broad measures of the domestic bond market. The Intermediate Bond Fund invests its assets in fixed income securities of varying maturities with a portfolio duration generally from three to six years. The level of investments in fixed income securities will vary, depending upon many factors, including economic conditions, interest rates and other relevant considerations. In selecting securities, economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting and other security selection techniques will be taken into account.
Duration is a measure of the expected life of a fixed income security that combines a bond’s yield, coupon interest payments, final maturity and call features into one measure. Traditionally, a debt security’s “term to maturity” has been used as a reference to the sensitivity of the security’s price to changes in interest rates (which is the “interest rate risk” or “volatility” of the security). However, “term to maturity” takes into account only the time until a debt security provides its final payment, without regard to the timing and frequency of the security’s payments prior to maturity. Duration is a measure of the expected life of a fixed income security based on a present value of all the payments of the security. In general, all other things being equal, the lower the stated or coupon rate of interest of a fixed income security, the longer the duration of the security; conversely, the higher the stated or coupon rate of interest of a fixed income security, the shorter the duration of the security.
The portion of the Fund’s assets committed to investment in debt securities with particular characteristics (such as maturity, type and coupon rate) will vary based on the outlook for the United States and foreign economies, the financial markets and other factors. The portfolio holdings will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) that are believed to be relatively undervalued.
Investment Guidelines and Restrictions. The Intermediate Bond Fund will invest primarily in the following types of securities, which may be issued by domestic or foreign entities and denominated in U.S. dollars or foreign currencies (subject to a 20% limit on foreign securities): U.S. Government Obligations; corporate debt securities; corporate commercial paper; mortgage-backed securities; asset-backed securities; variable and floating rate debt securities; bank certificates of deposit, fixed time deposits and bankers’ acceptances; repurchase agreements; obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies or supranational entities; and foreign currency denominated securities. The Intermediate Bond Fund also invests in convertible securities, preferred stock, inflation-indexed bonds issued by both governments and corporations, structured notes, including hybrid or “indexed” securities, catastrophe bonds, and loan participations, delayed funding loans and revolving credit facilities, reverse repurchase agreements, and debt securities issued by states or local governments and their agencies, authorities and other instrumentalities. The Intermediate Bond Fund may hold different percentages of the assets in these various types of securities. The Fund will seek to maintain a minimum average credit quality rating of “AA.” At least 90% of the Fund’s total fixed income portfolio will consist of bonds rated investment grade by at least one nationally recognized rating agency. No more than 1% of the fixed income portfolio’s non-investment grade investments will be securities of a single issuer, and all such non-investment grade investments will have a credit quality rating of at least “B” (or be determined by the Investment Advisor to be of comparable quality).
For the purpose of realizing income, the Intermediate Bond Fund may enter into repurchase agreements, but may not invest more than 15% of its total assets in repurchase agreements maturing more than seven days after purchase. In a repurchase agreement transaction, the Fund acquires securities (usually U.S. Government Obligations) for cash and obtains a simultaneous commitment from the seller to repurchase the securities at an agreed upon price and date. The resale price is in excess of the acquisition price and reflects an agreed upon market rate of interest unrelated to the coupon rate on the purchased security. The difference between the sale and the repurchase price is, in effect, interest for the period of the agreement. In such transactions, the securities purchased by the Fund will have a total value at least equal to the amount of the repurchase price and will be held by State Street until repurchased. State Street monitors the value of the underlying securities to verify that their value, including accrued interest, always equals or exceeds the repurchase price.
The Fund may invest in derivative instruments such as futures, forwards, swaps, options, collateralized mortgage obligations (CMOs) and interest-only (IO) and principal-only (PO) stripped mortgage-backed securities to the extent that they are used in a manner that does not materially increase
total portfolio volatility or relate to speculative activities. The Fund may invest up to 40% of its assets in CMOs at any time. Interest-only and principal-only stripped mortgage-backed securities are mortgage-backed bonds that are separated into the interest or principal portion of a pool of mortgage-backed bonds. The Fund may invest up to 5% of the Fund’s assets in interest-only and principal-only stripped mortgage-backed securities at any time, in addition to the investments in CMOs referred to above.
The Intermediate Bond Fund will limit its foreign investments to securities of issuers based in developed countries (including newly industrialized countries, such as Taiwan, South Korea and Mexico); provided that the Intermediate Bond Fund may invest up to 10% of its total assets in securities of issuers located in countries with emerging economies, as from time to time identified by the World Bank. Currently, these countries are located primarily in the Asia Pacific Region, Eastern Europe, Central and South America and Africa.
Risk Factors. The Intermediate Bond Fund, to the extent invested in longer-term fixed-income securities, is subject to the risks associated with investing in such instruments. Fixed-income securities such as bonds are issued to evidence loans that investors make to corporations and governments, either foreign or domestic. Over time, interest rates on debt securities change. If prevailing interest rates fall, the market value of fixed-income securities that trade on a yield basis tend to rise. On the other hand, if prevailing interest rates rise, the market value of fixed-income securities generally will fall. In general, the longer the maturity of a fixed- income security, the higher its yield and greater its price volatility. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. These factors may have an effect on the Unit price of the Fund. A change in the level of interest rates will tend to cause the net asset value per Unit of the Fund to change. If such interest rate changes are sustained over time, the yield of the Fund will fluctuate accordingly.
Fixed-income securities also are subject to credit risk. When a security is purchased, its anticipated yield is dependent on the timely payment by the borrower of each interest and principal installment. Credit analysis and bond ratings take into account the relative likelihood that such timely payment will result. Bonds with a lower credit rating tend to have higher yields than bonds of similar maturity with a better credit rating. Furthermore, as economic, political and business developments unfold, lower quality bonds, which possess more risk of failure of timely payment, usually exhibit more price fluctuation than do higher-quality bonds of like maturity.
The Intermediate Bond Fund may enter into “to be announced” (“TBA”) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price for a TBA has been established at the time of commitment, the principal amount has not been finalized. However, the amount of the TBA commitment will not fluctuate more than 1.0% from the principal amount. The Fund holds, and maintains until the settlement date, cash or liquid securities in an amount sufficient to meet the purchase price. TBA commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Risks may also arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts. During the period prior to settlement, the Fund will not be entitled to accrue interest or receive principal payments. Unsettled TBA commitments are valued at the current market value of the underlying securities. The Fund may dispose of a commitment prior to settlement if the Fund’s Investment Advisor deems it appropriate to do so. Upon settlement date, the Fund may take delivery of the securities or defer the delivery to the next month. The Intermediate Bond Fund may also purchase or sell securities on a when-issued or delayed delivery basis. For information regarding risks involved in these activities, see “-Stable Asset Return Fund-Investment Guidelines and Restrictions and Risk Factors.”
Mortgage-related securities include securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, such as collateralized mortgage
obligation residuals or stripped mortgage-backed securities, and may be structured in classes with rights to receive varying proportions of principal and interest. The yield to maturity on an interest-only class is extremely sensitive to the rate at which principal payments (including prepayments) are made on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on an investor’s yield to maturity from these securities. Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to the sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be incurred) may expose the Fund to a lower rate of return upon reinvestment of principal.
The risk factors with respect to investing in various short-term instruments are similar to those applicable to short-term investments held by the Stable Asset Return Fund.
Investing in the securities of issuers in any foreign country involves special risks and considerations not typically associated with investing in U.S. companies. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
Political and economic structures in many emerging markets countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Governments in many emerging market countries participate to a significant degree in the countries’ economics and securities markets. As a result, the risks of investing in the securities of foreign issuers generally, including the risks of nationalization or expropriation, may be heightened. The small size and inexperience of the securities markets, and a more limited volume of trading in securities, in certain of these countries may also make the Fund’s investments in securities of issuers located in such countries illiquid and more volatile than investments in more developed countries, and the Fund may be required to establish special custody or other arrangements before making certain investments in these countries. There may be little financial or accounting information available with respect to issuers located in certain of such countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers. Emerging markets often have provided significantly higher or lower rates of return than developed markets, and significantly greater risks, to investors.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund increase, which may adversely affect the Fund’s performance. Portfolio turnover depends on the types and proportions of the Intermediate Bond Fund’s assets and may change frequently in accordance with market conditions. Portfolio turnover was 458% for the twelve months ended December 31, 2005 and 453% for the twelve months ended December 31, 2004. The Fund’s portfolio turnover includes trades such as TBA rolls, futures transactions, buys/sells of commercial paper, and reverse repurchase agreements. The Fund believes that it is important to have the ability to seek higher returns using a diverse array of strategies and instruments, particularly in the highly sophisticated global market. Some of these strategies and instruments, particularly mortgages and derivatives, by their very nature necessitate a relatively high number of trades and trade entries.
Performance Information. The Fund’s total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Fund. The total return produced by the Intermediate Bond Fund will consist of interest and dividends from underlying securities, as well as capital changes reflected in unrealized increases or decreases in value of portfolio securities or realized from the purchase and sale of securities and futures and options. The Fund’s yield is calculated by dividing its net investment income per Unit earned during the specified period by its net asset value per Unit on the last day of such period and annualizing the result.
Investment Advisor. State Street has retained Pacific Investment Management Company LLC (“PIMCO”) to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the Intermediate Bond Fund.
PIMCO is an investment management company founded in 1971. PIMCO is registered as an investment advisor with the Securities and Exchange Commission and as a commodity trading advisor with the Commodity Futures Trading Commission. Its principal place of business is 840 Newport Center Drive, Newport Beach, CA 92660. PIMCO, a Delaware limited liability company, is a majority-owned subsidiary of Allianz Global Investors L.P. (“AllianzGI LP”). Allianz AG (“Allianz”) is the indirect majority owner of AllianzGI LP. Allianz is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company holds an indirect minority interest in AllianzGI LP. PIMCO had approximately $594.1 billion in assets under management as of December 31, 2005.
BALANCED FUND
Investment Objective. The investment objective of the Balanced Fund is to achieve both current income and long-term capital appreciation. There can be no assurance that the Balanced Fund will achieve its investment objective.
Strategy. The Balanced Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to an appropriate combination of broad measures of the domestic stock and bond markets. The Balanced Fund invests in publicly traded common stocks, other equity-type securities, medium- to long-term debt securities with varying maturities (including bonds, notes, debentures, equipment trust certificates, asset-backed securities and mortgage-related securities) and money market instruments. The Balanced Fund normally maintains at least 40%, but not more than 70%, of its total assets in common stocks and other equity-type instruments, including convertible securities, and at least 30%, but not more than 60%, of its total assets in nonconvertible debt securities and money market instruments. The Balanced Fund varies the portion of its assets invested in equity securities, debt securities and money market instruments to achieve the Fund’s investment objective based upon economic conditions, the general level of common stock prices, interest rates and other relevant considerations, including the risks associated with each investment medium.
Investment Guidelines and Restrictions. The Balanced Fund invests in equity securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. Many foreign securities are available through dollar-denominated American Depositary Receipts (known as “ADRs”), which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly or through ADRs. The Balanced Fund also invests in high quality short-term instruments. The Balanced Fund may enter into “to be announced” (“TBA”) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time.
For temporary defensive purposes, the Balanced Fund may invest without limitation in U.S. Government Obligations, commercial paper and other short-term instruments of the types purchased by the Stable Asset Return Fund. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of bond or equity markets, an extreme financial calamity or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
State Street directs the allocation of the Fund’s assets between debt and equity securities consistent with the Fund’s strategy. It obtains investment advice from separate advisors for the equity portion of the Fund and for the debt portion of the Fund. Under normal circumstances, approximately 40% of the Balanced Fund’s assets are expected to be allocated to debt securities and approximately 60% are expected to be allocated to equity securities. Contributions and transfers to, and withdrawals and
transfers from, the Fund are allocated so that the percentage of debt and equity securities will be as close to approximately 40% and 60%, respectively, as may be practical, taking into account the level of contributions, transfers and withdrawals and the Fund’s percentage of debt and equity securities at the time of each contribution, transfer or withdrawal. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the Balanced Fund which are allocated to, respectively, equity and debt securities. State Street may also, in its discretion, re-allocate assets in the Balanced Fund among equity and debt securities in order to avoid excessive deviation from the targeted allocation.
Risk Factors. To the extent invested in the equity markets, the Balanced Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Balanced Fund will fluctuate, and the holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, changes in the value of their investment.
The Balanced Fund, to the extent invested in longer-term fixed-income securities, is subject to the risks associated with investing in such instruments. Fixed-income securities such as bonds are issued to evidence loans that investors make to corporations and governments, either foreign or domestic. If prevailing interest rates fall, the market value of fixed-income securities that trade on a yield basis tend to rise. On the other hand, if prevailing interest rates rise, the market value of fixed-income securities generally will fall. In general, the longer the maturity of a fixed-income security, the higher its yield and greater its price volatility. Conversely, the shorter the maturity, the lower the yield but the greater the price stability. These factors may have an effect on the Unit price of the Fund. A change in the level of interest rates will tend to cause the net asset value per Unit of the Fund to change. If such interest rate changes are sustained over time, the yield of the Fund will fluctuate accordingly.
Fixed-income securities also are subject to credit risk. When a security is purchased, its anticipated yield is dependent on the timely payment by the borrower of each interest and principal installment. Credit analysis and bond ratings take into account the relative likelihood that such timely payment will result. Bonds with a lower credit rating tend to have higher yields than bonds of similar maturity with a better credit rating. Furthermore, as economic, political and business developments unfold, lower- quality bonds, which possess more risk of failure of timely payment, usually exhibit more price fluctuation than do higher-quality bonds of like maturity.
The Balanced Fund may enter into TBA commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price for a TBA has been established at the time of commitment, the principal amount has not been finalized. However, the amount of the TBA commitment will not fluctuate more than 1.0% from the principal amount. The Fund holds, and maintains until the settlement date, cash or liquid securities in an amount sufficient to meet the purchase price. TBA commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, and such risk is in addition to the risk of decline in the value of the Fund’s other assets. Risks may also arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts. During the period prior to settlement, the Fund will not be entitled to accrue interest or receive principal payments. Unsettled TBA commitments are valued at the current market value of the underlying securities. The Fund may dispose of a commitment prior to settlement if the Fund’s Investment Advisor deems it appropriate to do so. Upon settlement date, the Fund may take delivery of the securities or defer the delivery to the next month. The Balanced Fund may also purchase or sell securities on a when-issued or delayed delivery basis. For information regarding risks involved in these activities, see “-Stable Asset Return Fund-Investment Guidelines and Restrictions and Risk Factors.”
Mortgage-related securities include securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, such as collateralized mortgage obligation residuals or stripped mortgage-backed securities, and may be structured in classes with rights to receive varying proportions of principal and interest. The yield to maturity on an interest-only class is extremely sensitive to the rate at which principal payments (including prepayments) are made on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on an investor’s yield to maturity from these securities. Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to the sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be incurred) may expose the Fund to a lower rate of return upon reinvestment of principal.
The risk factors with respect to investing in various short-term instruments are similar to those applicable to the Stable Asset Return Fund.
Investments by the Balanced Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
Political and economic structures in many emerging markets countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Governments in many emerging market countries participate to a significant degree in the countries’ economies and securities markets. As a result, the risks of investing in the securities of foreign issuers generally, including the risks of nationalization or expropriation, may be heightened. The small size and inexperience of the securities markets, and a more limited volume of trading in securities, in certain of these countries may also make the Fund’s investments in securities of issuers located in such countries illiquid and more volatile than investments in more developed countries, and the Fund may be required to establish special custody or other arrangements before making certain investments in these countries. There may be little financial or accounting information available with respect to issuers located in certain of such countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers. Emerging markets often have provided significantly higher or lower rates of return than developed markets, and significantly greater risks, to investors.
The Balanced Fund is also subject to the risks associated with the use of derivatives and mortgage-backed securities to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. Portfolio turnover depends on the types and proportions of the Balanced Fund’s assets and may change frequently in accordance with market conditions. Portfolio turnover was 22% for the twelve months ended December 31, 2005 and 47% for the twelve months ended December 31, 2004.
Investment Advisors. State Street has retained Capital Guardian Trust Company (“Capital Guardian”) to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the Balanced Fund with respect to investments in equity securities. Since July 1, 2004, the portion of the Balanced Fund invested in debt securities and money market instruments has been so invested through the Intermediate Bond Fund, with respect to which State Street has retained Pacific Investment Management Company LLC (“PIMCO”) to serve as Investment Advisor. For information regarding the investment objectives, guidelines and restrictions of the Intermediate Bond Fund, see “-Intermediate Bond Fund.”
Advisor to the equity portion of the Balanced Fund since June 1997, Capital Guardian, an indirect wholly-owned subsidiary of The Capital Group Companies, Inc., is a California state chartered non-depository trust company incorporated in 1968. Its principal place of business is 333 South Hope Street, Los Angeles, California 90071. Capital Guardian provides investment management, trust and other fiduciary services to corporate and public employee benefit accounts, nonprofit organizations and a number of personal clients. As of December 31, 2005, it had approximately $157.3 billion in assets under its management.
Advisor to the Intermediate Bond Fund, through which the debt portion of the Balanced Fund has been invested since July 1, 2004, PIMCO is an investment management company founded in 1971. PIMCO is registered as an investment advisor with the Securities and Exchange Commission and as a commodity trading advisor with the Commodity Futures Trading Commission. Its principal place of business is 840 Newport Center Drive, Newport Beach, CA 92660. PIMCO, a Delaware limited liability company, is a majority-owned subsidiary of Allianz Global Investors L.P. (“AllianzGI LP”). Allianz AG (“Allianz”) is the indirect majority owner of AllianzGI LP. Allianz is a European-based, multinational insurance and financial services holding company. Pacific Life Insurance Company holds an indirect minority interest in AllianzGI LP. PIMCO had approximately $594.1 billion in assets under management as of December 31, 2005.
LARGE-CAP VALUE EQUITY FUND
Investment Objective. The Large-Cap Value Equity Fund’s investment objective is to achieve long-term growth of capital and dividend income. There can be no assurance that the Large-Cap Value Equity Fund will achieve its investment objective.
Strategy. The Large-Cap Value Equity Fund seeks to outperform, over extended periods of time, broad measures of the domestic stock market. The Fund invests primarily in common stocks and other equity-type securities of companies with market capitalizations greater than $1 billion that in the opinion of State Street and the Fund’s Investment Advisor are undervalued in the marketplace. A portion of the Large-Cap Value Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Value Index, which is comprised of those stocks in the Russell 1000 Index that have a greater than average value orientation. The Russell 1000 Index is comprised of the 1,000 largest companies in the Russell 3000 Index. The remainder of the Fund is actively managed. The actively managed portfolio of the Large-Cap Value Equity Fund seeks to achieve growth of capital through investing primarily in common stocks of larger capitalization companies believed to be attractively priced relative to their future earnings power. The Investment Advisor for this portion of the Fund seeks to limit the Fund’s divergence from the market’s performance over full market cycles to moderate levels. The Large-Cap Value Equity Fund is broadly diversified and emphasizes sectors and securities that State Street and the Investment Advisor for this portion of the Fund consider undervalued. Frank Russell & Company, which maintains the Russell 1000 Index, does not sponsor the Large-Cap Value Equity Fund, and is not affiliated in any way with the Large-Cap Value Equity Fund or with State Street.
Investment Guidelines and Restrictions. Although the assets of the Large-Cap Value Equity Fund are generally invested in common stocks and other equity-type securities, including convertible securities, the Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments, when State Street and the Investment Advisor determine that such investments may contribute to the attainment of the Fund’s investment objective. The Fund will not invest more than 20% of its assets in non-equity securities or in companies that do not have large capitalizations, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Fund’s investment objective will not be met by buying equity securities. To the extent that the Fund’s assets are invested in non-equity securities, the Fund’s net asset value may be adversely affected by a rise in interest rates.
The Large-Cap Value Equity Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. Many foreign securities are available through dollar-denominated American Depositary Receipts (known as “ADRs”), which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly or through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the portion of the Fund’s assets for which a particular Investment Advisor’s advice is obtained to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other short-term instruments. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Risk Factors. By investing in the U.S. equity markets, the Large-Cap Value Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Large-Cap Value Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be a long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
Different types of equity securities tend to shift into and out of favor with equity market investors depending on market and economic conditions. Because the Fund focuses on equities which are believed to be undervalued, at times it may underperform funds that focus on other types of equities or that have a broader investment style. Value equities may not increase in price as anticipated or may decline if other investors fail to recognize the company’s value, other investors favor investing in faster-growing companies or the factors believed to lead to an increase in price do not occur.
Investments by the Large-Cap Value Equity Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Large-Cap Value Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. Although the Large-Cap Value Equity Fund generally holds its investments for an extended period, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Portfolio turnover was 20% for the twelve months ended December 31, 2005 and 24% for the twelve months ended December 31, 2004. With respect to the indexed portion of the Fund, this turnover reflects purchases and sales by the Fund of shares of the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund, the collective investment fund through which the indexed portion of the Fund invests, rather than the turnover of the underlying portfolio of the
collective investment fund. The portfolio turnover for the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund was 43% for the twelve months ended December 31, 2005 and 33% for the twelve months ended December 31, 2004. The portfolio turnover of the actively managed portion of the Large-Cap Value Equity Fund was 24% for the twelve months ended December 31, 2005 and 26% for the twelve months ended December 31, 2004.
Investment Advisor. State Street has retained Alliance Capital Management L.P. (“Alliance Capital”), acting through its Bernstein Investment Research and Management Unit, to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the actively managed portion of the Large-Cap Value Equity Fund. State Street Bank manages the indexed portion of the Fund’s assets through the Fund’s investment in the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund, a collective investment fund maintained by State Street Bank. State Street may, in the future at its discretion and subject to consultation with ARF, employ an investment advisor to provide investment advice with respect to the indexed portion of the Fund’s assets. State Street determines the percentage of the assets of the Fund to be allocated to the actively managed and indexed portions of the Fund. Unless altered by State Street, 75% of the assets of the Fund will be allocated to the actively managed portion and 25% will be allocated to the indexed portion. Income and gains attributable to the assets allocated to each portion remain allocated to that portion unless and until re-allocated by State Street, and any differences in relative investment performance of the actively managed and indexed portions of the Fund can change the percentage of total assets of the Fund comprising each portion. State Street allocates contributions and transfers to, and withdrawals and transfers from, the Large-Cap Value Equity Fund between the actively managed and indexed portions of the Fund in a manner intended to achieve the targeted allocations of the Fund’s assets to active and indexed management. State Street may also, in its discretion, re-allocate assets in the Fund among the actively managed and indexed portions in order to avoid excessive deviation from the targeted allocations.
Advisor to the Large-Cap Value Equity Fund since September 1995, Alliance Capital is a registered investment advisor founded in 1962. Investment management recommendations for the Large-Cap Value Equity Fund are made by the investment professionals of Alliance Capital’s Bernstein Investment Research and Management Unit (“Bernstein”). Bernstein, located at 1345 Avenue of the Americas, New York, New York 10105, carries on the former investment research and management business of Sanford C. Bernstein & Co., Inc., a registered investment advisor and broker-dealer acquired by Alliance Capital in October 2000 that managed value oriented investment portfolios from 1967 until its acquisition by Alliance Capital. Alliance Capital is a leading global investment advisor supervising client accounts with assets as of December 31, 2005 totaling approximately $579 billion.
LARGE-CAP GROWTH EQUITY FUND
Investment Objective. The Large-Cap Growth Equity Fund has a primary investment objective of achieving long-term growth of capital and a secondary investment objective of realizing income. There can be no assurance that the Large-Cap Growth Equity Fund will achieve its investment objectives.
Strategy. The Large-Cap Growth Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. The Fund invests primarily in common stocks and other equity-type securities issued by companies with market capitalizations greater than $1 billion at the time of purchase. The Fund seeks to achieve growth of capital through increases in the value of the securities it holds and to realize income principally from dividends. A portion of the Fund (approximately 33 1/3%) is invested to replicate the Russell 1000 Growth Index, which is comprised of those stocks in the Russell 1000 Index that have a greater than average growth orientation. The Russell 1000 Index is comprised of the 1,000 companies in
the Russell 3000 Index with the largest market capitalization. The remainder of the Fund is actively managed. The Fund may invest a portion of its assets in convertible securities. Convertible securities, which include convertible debt instruments and many preferred stocks, contain both debt and equity features. Convertible securities may provide some protection when stock prices generally decline, but may experience less appreciation in value when stock prices generally increase. Frank Russell & Company, which maintains the Russell 1000 Index, does not sponsor the Large-Cap Growth Equity Fund, and is not affiliated in any way with the Large-Cap Growth Equity Fund or with State Street.
Investment Guidelines and Restrictions. Although the assets of the Large-Cap Growth Equity Fund will generally be invested in equity securities, the Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments, when State Street, with the assistance of the Investment Advisor, determines that such investments may contribute to the Fund’s investment objectives. The Fund will not invest more than 20% of its assets in non-equity securities or in companies that do not have large capitalizations, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Fund’s investment objectives will not be met by buying equity securities. To the extent that the Fund’s assets are invested in non-equity securities, the Fund’s net asset value may be adversely affected by a rise in interest rates.
The Large-Cap Growth Equity Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. Many foreign securities are available through dollar-denominated American Depositary Receipts (known as “ADRs”), which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly or through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the portion of the Fund’s assets for which a particular Investment Advisor’s advice is obtained to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other short-term instruments. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objectives.
Risk Factors. By investing in the U.S. equity markets, the Large-Cap Growth Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Large-Cap Growth Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
Different types of equity securities tend to shift into and out of favor with equity market investors depending on market and economic conditions. Because the Fund focuses on equities which are believed to have a higher than average rate of growth, at times the Fund may underperform funds that focus on other types of equities or that have a broader investment style. Growth equities may not increase in price as anticipated or may decline in price if the company’s growth does not meet expectations, other investors favor investing in more value-oriented or lower-priced companies or the factors believed to sustain a high growth rate do not occur.
Investments by the Large-Cap Growth Equity Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Large-Cap Growth Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. Although the Large-Cap Growth Equity Fund generally holds its investments for an extended period, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Portfolio turnover was 36% for the twelve months ended December 31, 2005 and 43% for the twelve months ended December 31, 2004. With respect to the indexed portion of the Fund, this turnover reflects purchases and sales by the Fund of units of the State Street Bank and Trust Company Russell 1000 Growth Index Securities Lending Fund, the collective investment fund maintained by State Street Bank through which this portion of the Fund has invested since December 15, 2002, rather than the turnover of the underlying portfolio of the collective investment fund. The portfolio turnover for the State Street Bank and Trust Company Russell 1000 Growth Index Securities Lending Fund was 43% for the twelve months ended December 31, 2005 and 52% for the twelve months ended December 31, 2004. The portfolio turnover of the actively managed portions of the Large-Cap Growth Equity Fund was 52% for the twelve months ended December 31, 2005 and 61% for the twelve months ended December 31, 2004.
Investment Advisors. State Street has retained Capital Guardian and T. Rowe Price Associates, Inc. (“T. Rowe Price”) to serve as Investment Advisors to provide investment advice and arrange for the execution of purchases and sales of securities for the actively managed portion of the Large-Cap Growth Equity Fund. Immediately prior to March 1, 2006, the Investment Advisor with respect to the portion of the Large-Cap Growth Equity Fund managed by T. Rowe Price was RCM Capital Management LLC.
State Street determines the percentage of the assets of the Fund to be allocated to the actively managed and indexed portions of the Fund. Unless altered by State Street, the assets of the Fund will be allocated into three positions, two of which are actively managed portions of 33 1/3% each of the assets of the Fund and managed with the advice of, respectively, Capital Guardian and T. Rowe Price. The third portion consists of the remaining 33 1/3% of the assets of the Fund and is invested to replicate the Russell 1000 Growth Index. State Street Bank manages the indexed portion of the Fund’s assets through the Fund’s investment in the State Street Bank and Trust Company Russell 1000 Growth Index Securities Lending Fund, a collective investment fund maintained by State Street Bank. State Street may, in the future at its discretion and subject to consultation with ARF, employ an investment advisor to provide investment advice with respect to the indexed portion of the Fund’s assets. Income and gains attributable to the assets allocated to each of the three portions remain allocated to that portion unless and until re-allocated by State Street, and any differences in relative investment performance of the three portions of the Fund can change the respective percentages of total assets of the Fund allocated to the three portions of the Fund. State Street allocates contributions and transfers to, and withdrawals and transfers from, the Fund among the three portions in a manner intended to achieve the targeted allocations of the Fund’s assets. State Street may also, in its discretion, re-allocate assets among the portions in order to avoid excessive deviation from the targeted allocations.
Advisor to the Large-Cap Growth Equity Fund since January 1992, Capital Guardian, an indirect wholly-owned subsidiary of The Capital Group Companies, Inc., is a California state chartered non- depository trust company incorporated in 1968. Its principal place of business is 333 South Hope Street,
Los Angeles, California 90071. Capital Guardian provides investment management, trust and other fiduciary services to corporate and public employee benefit accounts, nonprofit organizations and a number of personal clients. As of December 31, 2005, it had approximately $157.3 billion in assets under its management.
Advisor to the Large-Cap Growth Equity Fund since March 2006, T. Rowe Price is a Maryland corporation located at 100 East Pratt Street, Baltimore, Maryland 21202. T. Rowe Price is a wholly-owned subsidiary of T. Rowe Price Group, Inc., a publicly traded financial services holding company. Founded in 1937, the firm has been in the investment management business for over 68 years and provides investment management services to individual and institutional investor accounts, including the T. Rowe Price family of mutual funds. Together with its affiliated entities, T. Rowe Price had approximately $241.3 billion in assets under management as of December 31, 2005.
INDEX EQUITY FUND
Investment Objective. The investment objective of the Index Equity Fund is to replicate the total return of the Russell 3000 Index by investing in stocks included in the Russell 3000 Index, with the overall objective of achieving long-term growth of capital. There can be no assurance that the Index Equity Fund will achieve its investment objective of replicating the total return of the Russell 3000 Index.
Strategy. The Index Equity Fund seeks to replicate the total return of the Russell 3000 Index by investing in all of the common stocks included in the Russell 3000 Index with the possible exception of the companies in the Russell 3000 Index with the smallest capitalization. The Russell 3000 Index represents approximately 98% of the U.S. equity market based on the market capitalization of the companies in the Russell 3000 Index. As of December 31, 2005, the largest company had a market capitalization of approximately $371.7 billion and the smallest company had a market capitalization of approximately $11 million. The Russell 3000 Index is reconstituted annually on June 30 based on index methodology and market capitalization rankings as of the preceding May 31. Frank Russell & Company, which sponsors the Russell 3000 Index, does not sponsor the Index Equity Fund, and is not affiliated in any way with the Index Equity Fund or with State Street. Deviation of the Fund’s performance from the performance of the Russell 3000 Index (known as “tracking error”) can result from various factors, including purchases and redemptions of Units of the Index Equity Fund, as well as from the expenses borne by the Index Equity Fund. Such purchases and redemptions may necessitate the purchase and sale of securities by the Index Equity Fund and the resulting transaction costs may be substantial because of the number and the characteristics of the securities held. Tracking error may also occur due to factors such as the size of the Index Equity Fund, changes made in the securities included in the Russell 3000 Index or the manner in which the performance of the Russell 3000 Index is calculated.
Investment Guidelines and Restrictions. The Index Equity Fund invests predominantly in common stocks of U.S. companies. However, the Index Equity Fund may invest temporarily and without limitation for defensive purposes in short-term fixed income securities. These securities may be used to invest uncommitted cash balances or to maintain liquidity to provide for redemptions. State Street will not cause the Index Equity Fund to make an investment if that investment would cause the Fund to purchase warrants or make any other investment that is inconsistent with the restrictions applicable to the Fund described under “Information with Respect to the Funds-Investment Prohibitions.” The Fund concentrates in particular industries to the extent the Russell 3000 Index concentrates in those industries. The Index Equity Fund will not borrow money except as a temporary measure for extraordinary or emergency purposes or to facilitate redemptions (not for leveraging or investment).
Risk Factors. By investing in the U.S. equity market, the Index Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an
equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long-term growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Index Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be a long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
In addition, companies with smaller capitalizations included in the Russell indices may have limited product lines, markets or financial resources, or may be dependent upon a small management group. Therefore, their securities may be subject to more abrupt or erratic market movements than larger, more established companies, both because their securities are typically traded in lower volume and because the issuers are typically subject to a greater degree of changes in their earnings and prospects.
The Index Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. Ordinarily, an index fund will sell securities only to reflect changes in the index in which it invests or to accommodate cash flows into and out of the fund. Portfolio turnover of the Fund was 7% for the twelve months ended December 31, 2005 and 7% for the twelve months ended December 31, 2004. This turnover reflects purchases and sales by the Fund of shares of the State Street Bank and Trust Company Russell 3000 Index Securities Lending Fund, the collective investment fund through which the Fund invests, rather than the turnover of the underlying portfolio of the collective investment fund. The portfolio turnover for the State Street Bank and Trust Company Russell 3000 Index Securities Lending Fund was 27% for the twelve months ended December 31, 2005 and 11% for the twelve months ended December 31, 2004.
Index funds seek to create a portfolio which substantially replicates the total return of the applicable index. Index funds are not managed through traditional methods of fund management, which typically involve frequent changes in a portfolio of securities on the basis of economic, financial and market analyses. Therefore, brokerage costs, transfer taxes and other transaction costs for index funds may be lower than those incurred by non-index, actively managed funds.
Investment Advisor. State Street Bank manages the Index Equity Fund through the Fund’s investment in the State Street Bank and Trust Company Russell 3000 Index Securities Lending Fund, a collective investment fund maintained by State Street Bank. State Street may, in the future at its discretion and subject to consultation with ARF, employ investment advisors to provide investment advice with respect to the Fund or portions thereof.
Information about the Russell Indices. The criteria used by Frank Russell & Company to determine the initial list of securities eligible for inclusion in the Russell indices is total market capitalization adjusted for large private holdings and cross-ownership. Companies are not selected for inclusion in the Russell indices because they are expected to have superior stock price performance relative to the U.S. stock market in general or other stocks in particular. Frank Russell & Company makes no representation or warranty, implied or express, to any member of the public regarding the advisability of investing in the Russell 3000 Index or the ability of the Russell 3000 Index to track general market performance of large and small capitalization stocks.
“Russell 3000 Index” is a trademark of Frank Russell & Company. The Russell 3000 Index is not sponsored, endorsed, sold or promoted by Frank Russell & Company, nor does Frank Russell & Company guarantee the accuracy and/or completeness of the Russell 3000 Index or any data included therein. Frank Russell & Company makes no warranty, express or implied, as to the results to be
obtained by the Fund, owners of the Fund, any person or any entity from the use of the Russell 3000 Index or any data included therein. Frank Russell & Company makes no express or implied warranties and expressly disclaims all such warranties of merchantability or fitness for a particular purpose for use with respect to the Russell 3000 Index or any data included therein.
MID-CAP VALUE EQUITY FUND
Investment Objective. The Mid-Cap Value Equity Fund’s investment objective is to achieve long-term growth of capital. There can be no assurance that the Mid-Cap Value Equity Fund will achieve its investment objective.
Strategy. The Mid-Cap Value Equity Fund seeks to outperform, over extended periods of time, broad measures of the domestic stock market. The Fund invests primarily in equity securities of companies with market capitalizations between $1 billion and $12 billion at the time of investment. The Fund seeks to achieve growth of capital through investing primarily in common stocks of medium-sized companies believed to be attractively priced relative to their future earnings power. The Fund seeks to emphasize sectors and securities State Street and the Investment Advisor consider undervalued.
Investment Guidelines and Restrictions. Although the assets of the Mid-Cap Value Equity Fund generally will be invested in common stocks and other equity-type securities, including convertible securities, the Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments, when State Street and the Investment Advisor determine that such investments may contribute to the attainment of the Fund’s investment objective. The Fund will not invest more than 20% of its assets in non-equity securities or in companies with capitalizations outside the mid-cap range, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Fund’s investment objective will not be met by buying equity securities. To the extent that the Fund’s assets are invested in non-equity securities, the Fund’s net asset value may be adversely affected by a rise in interest rates.
The Mid-Cap Value Equity Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. For many foreign securities, there are dollar-denominated ADRs, which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly and through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the Fund’s assets to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other short-term instruments. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Risk Factors. By investing in the U.S. equity markets, the Mid-Cap Value Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and
economic developments. The Unit price of the Mid-Cap Value Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
Different types of equity securities tend to shift into and out of favor with equity market investors depending on market and economic conditions. Because the Fund focuses on equities which are believed to be undervalued, at times it may underperform funds that focus on other types of equities or that have a broader investment style. Value equities may not increase in price as anticipated or may decline if other investors fail to recognize the company’s value, other investors favor investing in faster-growing companies or the factors believed to lead to an increase in price do not occur.
Typically, investments in medium-sized and smaller companies have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sectors. Consistent earnings for such companies may not be as likely as they would be for more established companies. These companies may not have adequate resources to react optimally to change or to exploit opportunities. Smaller companies may also be more dependent on access to equity markets to raise capital than larger companies that have a greater ability to support relatively larger debt burdens. The securities of smaller companies may be held primarily by insiders or institutional investors, which may have an impact on their marketability. These securities may be more volatile than the overall market. Relatively new companies and companies that have recently made an initial public offering may be perceived by the market as unproven.
Investments by the Mid-Cap Value Equity Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Mid-Cap Value Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. The Mid-Cap Value Equity Fund generally holds its investments for an extended period, and the average annual rate of portfolio turnover is expected to be under 25%. However, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 25%. Portfolio turnover was 32% for the twelve months ended December 31, 2005 and 13% for the twelve months ended December 31, 2004.
Investment Advisor. State Street has retained Ariel Capital Management, LLC (“Ariel”) to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the Mid-Cap Value Equity Fund.
Advisor to the Mid-Cap Value Equity Fund since July 2002, Ariel is registered as an investment advisor with the Securities and Exchange Commission and was founded in 1983. The firm’s sole office is located at 200 East Randolph Drive, Suite 2900, Chicago, Illinois 60601. Ariel manages separate account
portfolios in the small and mid cap value style and also serves as investment advisor for the Ariel Mutual Funds, which are comprised of three no-load, publicly traded mutual funds. Ariel is an independent limited liability company, does not participate in any joint ventures and has one affiliated company, Ariel Distributors, which is a limited purpose mutual fund broker/dealer organized solely to underwrite and distribute the Ariel Mutual Funds. As of December 31, 2005, Ariel had assets under management of approximately $19.4 billion.
MID-CAP GROWTH EQUITY FUND
Investment Objective. The investment objective of the Mid-Cap Growth Equity Fund is to achieve long-term growth of capital. There can be no assurance that the Mid-Cap Growth Equity Fund will achieve its investment objective.
Strategy. The Mid-Cap Growth Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. The Fund invests primarily in common stocks and other equity-type securities issued by companies with market capitalizations between $1 billion and $12 billion at the time of investment that State Street and the Fund’s Investment Advisor believe have strong earnings growth potential. The Fund may invest a portion of its assets in convertible securities. Convertible securities, including convertible debt instruments and many preferred stocks, contain both debt and equity features. Convertible securities may provide some protection when stock prices generally decline, but may experience less appreciation in value when stock prices generally increase.
Investment Guidelines and Restrictions. Although the assets of the Mid-Cap Growth Equity Fund will generally be invested in equity securities, the Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments or in companies with capitalizations outside of the mid-cap range, when State Street and the Investment Advisor determine that such investments may contribute to the attainment of the Fund’s investment objective. The Fund will not invest more than 20% of its net assets in non-equity securities, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Fund’s investment objective will not be met by buying equity securities. To the extent that the Fund’s assets are invested in non-equity securities, the Fund’s net asset value may be adversely affected by a rise in interest rates.
The Mid-Cap Growth Equity Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. For many foreign securities, there are dollar-denominated ADRs, which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly and through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the Fund’s assets to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other short-term instruments. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Risk Factors. By investing in the U.S. equity markets, the Mid-Cap Growth Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security,
represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Mid-Cap Growth Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be a long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
Different types of equity securities tend to shift into and out of favor with equity market investors depending on market and economic conditions. Because the Fund focuses on equities which are believed to have a higher than average rate of growth, at times it may underperform funds that focus on other types of equities or that have a broader investment style. Growth equities may not increase in price as anticipated or may decline in price if the company’s growth does not meet expectations, other investors favor investing in more value-oriented or lower-priced companies or the factors believed to sustain a high growth rate do not occur.
Typically, investments in medium-sized and smaller companies have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sector. Therefore, consistent earnings for such companies may not be as likely as they would be for more established companies. The smaller companies may not have adequate resources to react optimally to change or to exploit opportunities. Smaller companies may also be more dependent on access to equity markets to raise capital than larger companies that have a greater ability to support relatively larger debt burdens. The securities of smaller companies may be held primarily by insiders or institutional investors, which may have an impact on their marketability. These securities may be more volatile than the overall market. Relatively new companies and companies that have recently made an initial public offering may be perceived by the market as unproven.
Investments by the Mid-Cap Growth Equity Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Mid-Cap Growth Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. The Mid-Cap Growth Equity Fund generally holds its investments for an extended period, and the average annual rate of portfolio turnover is expected to be under 200%. However, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 200%. Portfolio turnover was 156% for the twelve months ended December 31, 2005 and 169% for the twelve months ended December 31, 2004.
Investment Advisor. State Street has retained Turner Investment Partners to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the Mid-Cap Growth Equity Fund.
Advisor to the Mid-Cap Growth Equity Fund since July 2002, Turner Investment Partners was founded in 1990 and is 100% employee owned. Its principal place of business is 1250 Westlakes Drive, Suite 100, Berwyn, Pennsylvania 19312. Turner Investment Partners provides investment management to institutional tax exempt and taxable investors, mutual funds, and individual investors. As of December 31, 2005, Turner Investment Partners had discretionary management authority with respect to approximately $18.3 billion of assets.
SMALL-CAP EQUITY FUND
Investment Objective. The investment objective of the Small-Cap Equity Fund is to maximize long-term growth of capital. There can be no assurance that the Small-Cap Equity Fund will achieve its investment objective.
Strategy. The Small-Cap Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. The Fund invests primarily in equity securities of companies with market capitalizations of $2.5 billion or less at the time of investment. These companies may include new companies and companies that may benefit from new technologies, new product or service developments or management changes. The Fund may also invest in newly issued securities and securities of seasoned, established companies that appear to have unusual value or appreciation potential. Industry diversification is not an objective of the Small-Cap Equity Fund and the Fund may, at times, be less diversified than the other Funds. A portion of the Fund is invested to replicate the Russell 2000 Index. The Russell 2000 Index is comprised of the 2,000 companies in the Russell 3000 Index with the smallest market capitalization. The remainder of the Fund is actively managed. Frank Russell & Company, which maintains the Russell 2000 Index, does not sponsor the Small-Cap Equity Fund, and is not affiliated in any way with the Small-Cap Equity Fund or with State Street.
Prior to July 1, 2002, the Fund invested in medium-sized as well as small companies. With the addition of the Mid-Cap Growth Equity Fund on July 15, 2002, the Fund has since focused on smaller capitalization companies.
Investment Guidelines and Restrictions. The Small-Cap Equity Fund invests primarily in common stocks and other equity-type securities, including convertible securities, that State Street and the Fund’s Investment Advisor believe have strong potential for appreciation.
Although the assets of the Fund will generally be invested in equity securities, the Fund may also invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments, when State Street and the Investment Advisors to the Fund determine that in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, such investments may contribute to the attainment of the Fund’s investment objective. See “-Stable Asset Return Fund.” The Fund will not invest more than 20% of its assets in non-equity securities or in companies that do not have small capitalizations, except for temporary defensive purposes. To the extent that the Fund’s assets are invested in non-equity securities, the Fund’s net asset value may be adversely affected by a rise in interest rates.
The Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on U.S. stock exchanges or over-the-counter markets. Many foreign securities are available through dollar-denominated American Depositary Receipts (known as “ADRs”), which are issued by domestic banks and represent interests in foreign securities. ADRs are traded on U.S. stock exchanges or over-the-counter markets. The Fund may invest in foreign securities directly or through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the Fund’s assets to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Small-Cap Equity Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other high quality instruments of the types purchased by the Stable Asset Return Fund. The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Risk Factors. By investing in the U.S. equity markets, the Small-Cap Equity Fund is subject to a variety of market and financial risks. Common stocks, the most familiar type of equity security, represent an equity (ownership) interest in a corporation. Although common stocks and other equity securities have a history of long term-growth in value, their prices may fluctuate dramatically in the short term in response to changes in market conditions, interest rates and other company, political and economic developments. The Unit price of the Small-Cap Equity Fund could be volatile, and holders of Units in the Fund should be able to tolerate sudden, sometimes substantial, fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be long-term investment vehicle and is not designed to provide a means to speculate on short-term U.S. stock market movements.
Generally, the Small-Cap Equity Fund poses a greater risk to principal than the other domestic Funds. Investors should consider their investments in the Fund as relatively long-term and involving high risk to principal commensurate with potential for substantial gains. There is no certainty regarding which companies and industries will in fact experience capital growth, and such companies and industries may lose their potential for capital growth at any time.
Most of the Fund’s investments will be in securities of small companies, which typically have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sector. Therefore, consistent earnings for such companies may not be as likely as they would be for more established companies. The smaller companies may not have adequate resources to react optimally to change or to exploit opportunities. Smaller companies may also be more dependent on access to equity markets to raise capital than larger companies that have a greater ability to support relatively larger debt burdens. The securities of small companies may be held primarily by insiders or institutional investors, which may have an impact on their marketability. These securities may be more volatile than the overall market. Relatively new companies and companies that have recently made an initial public offering may be perceived by the market as unproven. The Small-Cap Equity Fund’s focus on appreciation potential will result in an emphasis on securities of companies that may pay little or no dividends and reinvest all or a significant portion of their earnings. The low expected dividend level may also contribute to greater than average volatility.
Investments by the Small-Cap Equity Fund in foreign securities may involve special risks in addition to the risks associated with domestic securities generally. These include risks relating to political or economic conditions in foreign countries, potentially less stringent investor protection, disclosure standards and settlement procedures of foreign markets, potentially less liquidity of foreign markets, potential applicability of withholding or other taxes imposed by these countries, and currency exchange fluctuations. These factors could make foreign investments more volatile.
The Small-Cap Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s performance. Portfolio turnover of the Small-Cap Equity Fund may be high. Although it is not expected to exceed
75% per year on average, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 75%. The possibility of high turnover reflects, in part, the volatility of the securities in which the Fund invests and the probability that the circumstances prompting investment in some companies may change more rapidly than in the case of larger, more diversified companies. Portfolio turnover was 103% for the twelve months ended December 31, 2005 and 104% for the twelve months ended December 31, 2004. With respect to the indexed portion of the Fund, this turnover reflects purchases and sales by the Fund of units of the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund, the collective investment fund maintained by State Street Bank through which this portion of the Fund has invested since July 1, 2005, rather than the turnover of the underlying portfolio of the collective investment fund. The portfolio turnover for the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund was 56% for the six months ended December 31, 2005. The portfolio turnover of the actively managed portions of the Small-Cap Equity Fund was 21% for the twelve months ended December 31, 2005 and 104% for the twelve months ended December 31, 2004.
Investment Advisors. State Street has retained Wellington Management Company, LLP (“Wellington Management”) and Smith Asset Management Group, L.P. (“Smith Group”), to serve as Investment Advisors to provide investment advice and arrange for the execution of purchases and sales of securities for the actively managed portion of the Small-Cap Equity Fund. Prior to July 1, 2005, Capital Guardian served as an Investment Advisor to a portion of the Small-Cap Equity Fund.
State Street determines the percentage of the assets in the Fund to be allocated to the actively managed and indexed portions of the Fund. Unless altered by State Street, the assets of the Small-Cap Equity Fund will be allocated into three portions, two of which are actively managed with the advice of, respectively, Wellington Management and Smith Group. The third portion consists of the remainder of the Small-Cap Equity Fund’s assets and is invested to replicate the Russell 2000 Index. State Street Bank manages the indexed portion of the Small-Cap Equity Fund’s assets through its investment in the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund, a collective investment fund maintained by State Street Bank. State Street may, in the future at its discretion and subject to consultation with ARF, employ an investment advisor to provide investment advice with respect to the indexed portion of the Fund’s assets. As of December 31, 2005, the portion invested with the advice of Wellington Management consisted of approximately $153 million; the portion invested with the advice of Smith Group consisted of approximately $126 million; and the portion invested through the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund consisted of approximately $36 million.
As of December 31, 2005, approximately 49%, 40% and 11% of the assets of the Small-Cap Equity Fund were allocated to, respectively, Wellington Management, Smith Group and the indexed portion of the Small-Cap Equity Fund. Unless altered by State Street, net daily contributions and transfers to the Small-Cap Equity Fund and net daily withdrawals from and transfers out of the Fund will be allocated only to the indexed portion of the Fund. The portions of the Fund’s assets invested with the advice of Wellington Management and Smith Group are not expected to receive contributions and transfers to or to be the source of withdrawals from and transfers out of the Fund for the foreseeable future. Over time, the above-described treatment of the Small-Cap Equity Fund’s net daily cash flows may, depending on the respective levels of contributions or transfers to and withdrawals or transfers out of the Small-Cap Equity Fund, alter the respective proportions of the Small-Cap Equity Fund’s assets invested with the advice of Wellington Management or Smith Group and the indexed portion of the Fund. In addition, dividends, certain expenses and gains and losses attributable to the activities of each portion of the Small-Cap Equity Fund’s assets will be allocated to that portion, and any differences in relative investment performance of the two actively managed portions or the indexed portion of the Small-Cap Equity Fund’s assets will likely change the proportion of total assets of the Small-Cap Equity Fund
comprising each portion. Although State Street reserves the right, in its discretion, to reallocate assets in the Small-Cap Equity Fund among the actively managed portions and/or indexed portion of the Small-Cap Equity Fund, State Street does not expect to effect any such reallocations for the foreseeable future. Thus, over time, allocations to the respective portions of the Small-Cap Equity Fund’s assets are likely to differ from those described above.
Advisor to the Small-Cap Equity Fund since December 2004, Wellington Management traces its roots to 1928 and focuses its resources on managing investments for institutional clients. It employs a broad range of investment approaches that cover the major liquid asset classes and a multitude of currencies. Wellington Management is an independent, private partnership, with ten offices around the world. Its principal place of business is 75 State Street, Boston, Massachusetts 02109. As of December 31, 2005, Wellington Management had approximately $520.7 billion of client assets under management.
Advisor to the Small-Cap Equity Fund since December 2004, and founded in 1995, Smith Group is a registered investment adviser specializing in equity investment management services. The firm manages assets among a diverse list of clients, which includes foundations, endowments, corporate pensions, public funds, multi-employer plans and high net worth individuals. It seeks attractively valued companies that it believes will generate earnings which exceed investor expectations. Its principal place of business is 200 Crescent Court, Suite 850, Dallas, Texas 75201. As of December 31, 2005, Smith Group had approximately $3.4 billion of assets under management.
INTERNATIONAL EQUITY FUND
Investment Objective. The International Equity Fund’s investment objective is to seek long-term growth of capital through investment primarily in common stocks of established non-U.S. companies. The Fund will seek to achieve growth of capital through capital appreciation, dividend income and currency gains. There can be no assurance that the International Equity Fund will achieve its investment objective.
Strategy. The International Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to broad measures of the international (non-U.S.) stock market. Investing abroad increases the opportunities available to investors. Common stocks of foreign companies offer a way to seek long-term growth of capital. Many foreign countries may have greater potential for economic growth than the United States. Foreign investments also provide effective diversification for an all-U.S. portfolio, since historically their returns have not moved together with U.S. stocks over long time periods. Investing a portion of a portfolio in foreign stocks may enhance diversification while providing the potential to increase long-term capital appreciation.
The International Equity Fund seeks to diversify investments broadly among developed and emerging countries and generally to have at least three different countries represented in the portfolio. As of December 31, 2005, the International Equity Fund was invested in securities of issuers domiciled in approximately 23 countries. It may invest in countries throughout the world. Under exceptional economic or market conditions abroad, the International Equity Fund may temporarily invest all or a major portion of its assets in U.S. Government Obligations or debt obligations of U.S. companies of the type described under “-Stable Asset Return Fund.” The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. If the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Investment Guidelines and Restrictions. In seeking to accomplish its objective, the International Equity Fund will invest primarily in common stocks of established foreign companies that State Street
and the Fund’s Investment Advisor believe have the potential for growth of capital and in a variety of other equity-related securities, such as preferred stocks, warrants and convertible securities of such foreign companies, as well as foreign corporate and governmental debt securities (when considered consistent with its investment objective). The securities of non-U.S. companies may be held by the Fund directly or indirectly through ADRs, Global Depositary Receipts or European Depositary Receipts. The International Equity Fund may invest in fixed income securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the International Equity Fund’s investment objective will not be met by buying equity securities. Under normal conditions, the International Equity Fund’s investments in securities other than common stocks and other equity-related securities are limited to no more than 20% of total assets. Within this limitation, the Fund will also maintain a small cash reserve which will be invested in Short-Term Investment Products. See “-Stable Asset Return Fund.”
The International Equity Fund will normally conduct its foreign currency exchange transactions, if any, either on a cash basis at the spot rate prevailing in the foreign currency exchange market or through entering into forward contracts to purchase or sell foreign currencies. See “-Derivative Instruments.”
Risk Factors. The Fund’s share price can fall because of weakness in one or more of its primary equity markets, a particular industry, or specific holdings. Equity markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment assessment of companies held in the Fund may prove incorrect, resulting in losses or poor performance even in rising markets.
Currency Risk. Currency risk refers to a decline in the value of a foreign currency versus the value of the U.S. dollar, which reduces the U.S. dollar value of securities denominated in that currency. The overall impact on the Fund’s holdings can be significant, unpredictable and long-lasting, depending on the currencies represented in the Fund’s portfolio and how each one appreciates or depreciates in relation to the U.S. dollar and whether currency positions are hedged. Under normal conditions, the Fund will not engage in extensive foreign currency hedging programs. Exchange rate movements are unpredictable and it is not possible to effectively hedge the currency risks of many developing countries.
Political and Economic Factors. The economic and political structures of developing nations, in most cases, do not compare favorably with the United States or other developed countries in terms of wealth and stability and their financial markets often lack liquidity. Therefore, investments in these emerging countries are riskier, and may be subject to erratic and abrupt price movements. Even investments in countries with highly developed economies are subject to risk. For example, prices of Japanese stocks suffered a steep decline during much of the 1990s. Moreover, while some countries have made progress in economic growth, liberalization, fiscal discipline and political and social stability, there is no assurance these trends will continue. Investment in these markets is, therefore, significantly riskier than investment in other markets.
The economies of some of the countries in which the Fund may invest may rely heavily on particular industries and be more vulnerable to the ebb and flow of international trade, trade barriers and other protectionist or retaliatory measures. Some countries have legacies of hyperinflation and currency devaluations versus the U.S. dollar, particularly Russia, many Latin American nations, and more recently, several Asian countries. Investments in countries that have recently begun moving away from central planning and state-owned industries toward free markets should be regarded as speculative.
Some of the countries in which the Fund may invest have histories of instability and upheaval that could cause their governments to act in a detrimental or hostile manner toward private enterprise or foreign investment. Governmental actions such as capital or currency controls, nationalization of an industry or company, expropriation of assets, or imposition of high taxes could have an adverse effect on security prices and impair the International Equity Fund’s ability to repatriate capital or income. Significant external risks currently affect some emerging countries. Governments in many emerging market countries participate to a significant degree in the countries’ economies and securities markets.
Other Risks of Foreign Investing. Some of the countries in which the Fund may invest lack uniform accounting, auditing and financial reporting standards, have less governmental supervision of financial markets than in the United States, do not honor legal rights enjoyed in the United States and have settlement practices which may subject the International Equity Fund to risks of loss not customary in U.S. markets. In addition, securities markets in some countries have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the United States.
Pricing. Portfolio securities may be listed on foreign exchanges that are open on days (such as Saturdays or U.S. legal holidays) when the International Equity Fund does not compute its prices. As a result, the Fund’s net asset value may be significantly affected by trading on days when transactions in Units of the Fund do not occur.
Investing in International Stocks. Like U.S. stock investments, common stocks of foreign companies offer investors a way to build capital over time. Nevertheless, the long-term rise of foreign stock prices as a group has been punctuated by periodic declines. Share prices of all companies, even the best managed and most profitable, whether U.S. or foreign, are subject to market risk, which means they can fluctuate widely. The volatility of emerging markets may be heightened by actions of a few major investors. For example, substantial increases or decreases in cash flows of mutual funds investing in these markets could significantly affect stock prices and, therefore, Fund share prices. For this reason, investors in foreign stocks should have a long-term investment horizon and be willing to wait out declining markets. The International Equity Fund should not be relied upon as a complete investment program or used as a means to speculate on short-term swings in the stock or foreign exchange markets.
The values of foreign fixed income securities fluctuate in response to changes in U.S. and foreign interest rates. Income received by the International Equity Fund from sources within foreign countries may also be reduced by withholding and other taxes imposed by those countries, although tax conventions between some countries and the United States may reduce or eliminate these taxes. Any taxes paid by the International Equity Fund will reduce the net income earned by the Fund. State Street will consider available yields, net of any required taxes, in selecting foreign dividend paying securities.
In addition, short-term movements in currency exchange rates could adversely impact the availability of funds to pay for redemptions of Units of the International Equity Fund. For example, if the exchange rate for a currency declines after a security has been sold to provide funds for a redemption from the Fund but before those funds are translated into U.S. dollars, it could be necessary to liquidate additional portfolio securities in order to finance the redemption.
The International Equity Fund is also subject to the risks associated with the use of derivatives to the extent the Fund is permitted to use them.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the International Equity Fund, such as brokerage commissions, increase, which may adversely affect the Fund’s overall performance. Although the International Equity Fund generally will hold its investments for an extended period of time, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions, and securities may be purchased and sold without regard to
the length of time held when circumstances warrant. Portfolio turnover was 35% for the twelve months ended December 31, 2005 and 25% for the twelve months ended December 31, 2004.
Investment Advisors. State Street has retained JPMorgan Asset Management (London) Limited (“JPMAM”) to be an Investment Advisor for the International Equity Fund for approximately half of the assets in the International Equity Fund, and Philadelphia International Advisors, LP (“PIA”) to serve as Investment Advisor for the other half of the assets in the International Equity Fund.
State Street determines the portion of the International Equity Fund’s assets for which advice is obtained from each Investment Advisor. Unless altered by State Street, the assets of the International Equity Fund will be allocated equally to each of the two Investment Advisors. Income and gains attributable to the assets allocated to each portion remain allocated to that portion unless and until reallocated by State Street, and any differences in relative investment performance of the two portions of the Fund can change the percentage of total assets of the International Equity Fund for which State Street obtains investment advice from each Investment Advisor. State Street allocates contributions and transfers to, and withdrawals and transfers from, the International Equity Fund between the two portions in a manner intended to achieve the targeted allocations of the Fund’s assets. State Street may also, in its discretion, re-allocate assets in the International Equity Fund among the two portions in order to avoid excessive deviation from the targeted allocations.
Advisor to the International Equity Fund since April 1, 2003, JPMAM was founded on December 31, 2000, following the merger of J.P. Morgan & Co. Inc. and The Chase Manhattan Corporation. This followed the aquisistion of Robert Fleming Holdings Limited by The Chase Manhattan Corporation in August 2000. In July 2004, JPMorgan Chase & Co. merged with Bank One Corporation. As part of JPMorgan Chase, JPMAM is a global asset management firm providing investment advice to corporations, governments, institutions, endowments, foundations and individuals. The principal place of business of JPMAM is 522 Fifth Avenue, New York, New York 10036. As of December 31, 2005, JPMAM had over $846 billion of assets under management.
Advisor to the International Equity Fund since April 1, 2003, PIA is an investment management firm serving primarily corporate, public and endowment/foundation markets. Founded in 2002, PIA, a limited partnership owned by Glenmede Trust Company and Glenmede’s former international investment management team, is focused solely on international equities. PIA’s principal place of business is 1650 Market Street, One Liberty Place, Suite 1400, Philadelphia, Pennsylvania 19103. As of December 31, 2005, PIA had approximately $6.6 billion in assets under its management.
Transfer Restrictions. The International Equity Fund maintains a transfer policy that restricts a Participant’s ability to make more than one transfer into the International Equity Fund within any 45 calendar day period. There is no restriction on a Participant’s ability to make transfers out of the Fund. State Street has adopted this policy for the International Equity Fund to prevent disruptions to the Fund that could potentially affect the investment performance of the Fund. For more information regarding this policy, see “Transfers Between Investment Options and Withdrawals-Frequent Trading; Restrictions on Transfers.”
CERTAIN INFORMATION WITH RESPECT TO THE FUNDS
Investment Prohibitions.
No Fund will:
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trade in foreign currency, except for transactions incidental to the settlement of purchases or sales of securities for the Fund;
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make an investment in order to exercise control or management over a company;
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make short sales, unless the Fund has, by reason of ownership of other securities, the right to obtain securities of a kind and amount equivalent to the securities sold, which right will continue so long as the Fund is in a short position;
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issue senior securities or trade in commodities or commodity contracts, other than options or futures contracts (including options on futures contracts) with respect to securities or securities indices, except as described under “-Derivative Instruments;”
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write uncovered options;
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purchase real estate or mortgages, provided that a Fund may buy shares of real estate investment trusts listed on U.S. stock exchanges or reported on Nasdaq National Market if such purchases are consistent with the investment objective and restrictions set forth in the fund declaration for the Fund;
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invest in the securities of registered investment companies;
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invest in oil, gas or mineral leases;
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purchase any security on margin or borrow money, except for short-term credit necessary for clearance of securities transactions or, in the case of the Index Equity Fund, for redemption purposes;
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make loans, except by (i) the purchase of marketable bonds, debentures, commercial paper and similar marketable evidences of indebtedness, (ii) engaging in repurchase agreement transactions and (iii) making loans of portfolio securities; or
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underwrite the securities of any issuer.
State Street has directed the Investment Advisors not to recommend an investment, and State Street will not cause any Fund to make an investment:
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if that investment would cause (1) more than 5% of the portion of the Fund’s net assets allocated to the Investment Advisor to be invested in warrants generally, or more than 2% of the Fund’s net assets allocated to the Investment Advisor to be invested in warrants not listed on a nationally recognized U.S. securities exchange, or (2) more than 10% of the portion of the Fund’s net assets allocated to the Investment Advisor to be invested in illiquid securities, including repurchase agreements with maturities in excess of seven days or portfolio securities that are not readily marketable, in each case determined at the time of purchase,
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in an industry if that investment would cause more than 25% of the portion of the Fund’s net assets allocated to the Investment Advisor to be invested in that industry, determined at the time of purchase, or
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in the securities of an issuer (other than the U.S. government and its agencies and, with respect to certain Funds, other than short-term investment funds maintained by the Investment Advisor or State Street or its affiliates) if that investment would cause more than 5% of the portion of the Fund’s net assets allocated to the Investment Advisor to be invested in the securities of that issuer, determined at the time of purchase.
The foregoing restrictions with respect to industry and issuer concentration do not apply to the Index Equity Fund or the indexed portions of the Large-Cap Value Equity Fund, the Large-Cap Growth Equity Fund or the Small-Cap Equity Fund to the extent that the replicated index is concentrated in a specific industry or issuer.
Except as described under “-Derivative Instruments,” State Street has no present intention of causing any Fund to invest in options and financial futures contracts and other derivatives, and will not do so without prior notification to investors in the Funds.
The Funds that invest in fixed income securities may also purchase such securities for future delivery on a “to be announced” or “TBA” basis where the price and coupon are determined at the time of purchase but the collateral for such securities is not determined until immediately before the securities are delivered. Investing in TBA securities carries risks similar to investing in “when-issued” securities. See “-Stable Asset Return Fund-Investment Guidelines and Restrictions and Risk Factors”, “-Intermediate Bond Fund-Risk Factors” and “-Balanced Fund-Risk Factors.”
Loans of Portfolio Securities. For the purpose of achieving income, the Funds may lend a portion of their portfolio securities to brokers, dealers and other financial institutions, provided that these activities are conducted in accordance with the applicable requirements of ERISA, including:
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the loan is secured continuously by collateral consisting of cash, U.S. government securities or irrevocable letters of credit maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned;
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the Fund may at any time call the loan and obtain the return of the securities loaned; and
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the Fund will receive any interest or dividends paid on the loaned securities.
When a Fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the Fund will also receive a fee for lending its securities (which may include interest on the collateral). State Street Bank administers the securities lending activities of the respective Funds. A portion of the income generated by securities lending activities will be paid to the administrator as a fee and the remaining income will be reinvested in the relevant Fund. The portion of the income from securities lending activities paid to it will be in an amount that is expected to offset its cost of administering these activities. The remaining amount will be reinvested in the relevant Fund.
Valuation of Units. The following discussion relates to all the Funds other than the Stable Asset Return Fund: An investor’s interest in a Fund is represented by the value of the Units credited to the investor’s account for that Fund. The number of Units purchased with a contribution or transfer or allocation of assets to a Fund is the quotient of the amount so allocated to the Fund divided by the per Unit value of the Fund calculated as of the end of the regular trading session of the New York Stock Exchange on the Business Day the contribution is credited to the Fund by State Street Bank (normally, 4:00 p.m. Eastern time). Once a number of Units has been credited to an investor’s account, this number will not vary because of any subsequent fluctuation in the Unit value. The value of each Unit, however, will fluctuate with the investment experience of the particular Fund, which reflects the investment income and realized and unrealized capital gains and losses of that Fund. Unit values for the Funds are determined as of the close of the regular trading session of the New York Stock Exchange on each Business Day. The Unit value for each Fund is the value of all assets of the Fund, less all liabilities of the Fund, divided by the number of outstanding Units of the Fund prior to adjustment for any contributions, transfers or withdrawals with respect to the Fund. State Street has delegated to State Street Bank the responsibility to determine the value of each Fund based on the market value of each Fund’s portfolio of securities. Consistent with the SEC’s rules applicable to the periodic determination of the net asset value of redeemable securities, in the determination of Unit values for the Funds, State Street Bank reflects changes in holdings of portfolio securities no later than the first Business Day following the trade date.
State Street Bank generally values each Fund’s portfolio of securities based on closing market prices or readily available market quotations. When closing market prices or market quotations are not readily available or are considered by State Street Bank to be unreliable, the fair value of the particular securities or assets is determined in good faith by State Street. For market prices and quotations, as well as some fair value methods of pricing, State Street Bank and State Street may rely upon securities prices provided by pricing services, the Investment Advisor(s) or independent dealers.
All methods of determining the value of a security used by State Street, including those discussed below, on a basis other than market value, are forms of fair value. All valuations of securities on a fair value basis are made pursuant to fair value procedures adopted by State Street. The use of fair value pricing with respect to the securities of any Fund may cause the value of the Units of that Fund to differ from the Unit value that would be calculated using only market prices.
State Street, acting through a valuation committee, uses the fair value of a security, including a non-U.S. security, when State Street Bank determines that the closing market price on the primary exchange where the security is traded is not readily available or no longer accurately reflects the value of the security at the time of calculation of its net asset value. This may occur for a variety of reasons that affect either the relevant securities markets generally or the specific issuer. In making the fair value determination, State Street endeavors to value the security at the amount the owner might reasonably expect to receive upon the security’s current sale. In so doing, the valuation committee considers all factors it deems appropriate, including, if relevant, external factors such as general market developments and news events.
With respect to non-U.S. securities, if a significant event has occurred between the closing of the foreign exchange or market on which such securities trade and the calculation of net asset value, fair valuation may be appropriate. Specifically, under appropriate circumstances, State Street will utilize a fair value model for the International Equity Fund to make fair value adjustments to the prices of non-U.S. securities based on movements in the U.S. markets after the close of foreign markets. If a significant event occurs other than general movements in the U.S. markets, State Street Bank will determine whether that event might affect the value of the non-U.S. securities and whether, if so, the securities should be valued in accordance with State Street’s fair value procedures.
Certain other types of securities, including those discussed below in this paragraph, may be priced using fair value rather than market prices. For instance, State Street Bank may use a pricing matrix to determine the value of fixed income securities that do not trade daily. A pricing matrix is a means of valuing a debt security on the basis of current market prices for other debt securities and historical trading patterns in the market for fixed income securities. To the extent that a Fund invests in the shares of bank collective trust funds or of other registered open-end investment companies that are not traded on an exchange (mutual funds), such shares are valued at their net asset values per share as reported by the funds. Each of these funds may, under certain circumstances, use fair value pricing in determining their net asset values.
For a discussion of the valuation of units in the Stable Asset Return Fund, see “-Stable Asset Return Fund-Valuation of Units.”
Transfers. Transfers to and withdrawals from any of the Funds, as well as transfers to and withdrawals from the portfolios of the Structured Portfolio Service and the Self-Managed Brokerage Accounts, will be effective on the day instructions are received if such instructions are received on a Business Day prior to 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading). For additional information relating to transfers to and withdrawals from the Investment Options, and special restrictions on transfers in some cases, see “-Transfers Between Investment Options and Withdrawals.” It currently is anticipated that, effective on or about January 1, 2008, the portfolios of the Structured Portfolio will be terminated and hence no longer available for transfers.
Performance Information. Each Fund may, from time to time, report its performance in terms of the Fund’s total return. A Fund’s total return is determined based on historical results and is not intended to indicate future performance. A Fund’s total return is computed by determining the average annual compound rate of return for a specified period which, when applied to a hypothetical $1,000 investment in the Fund at the beginning of the period, would produce the redeemable value of that
investment at the end of the period. Each Fund may also report a total return computed in the same manner but without annualizing the result. A recorded message providing per Unit values for the Funds as of the close of business on the previous Business Day is available at (800) 826-8905.
DERIVATIVE INSTRUMENTS
The Funds will not engage in investments in derivative instruments, except as described in this paragraph. Derivatives, which are financial instruments the value of which is derived from the value of other instruments or assets, include futures, options, swaps, swaptions, caps or floor contracts or foreign currency hedging contracts. Collateralized mortgage obligations (known as “CMOs”) and other mortgage-backed securities, as well as asset-backed securities, could be considered derivative securities because their value is derived from the cash flows from their underlying assets, such as the mortgages or accounts receivable.
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The Index Equity Fund and the indexed portions of the Large-Cap Value Equity Fund, the Large-Cap Growth Equity Fund and the Small-Cap Equity Fund may engage in limited transactions in stock index futures and options for hedging purposes and as a substitute for comparable market positions in the securities held by such Fund (with respect to the portion of its portfolio that is held in cash items, for example, pending investment or to pay for redemption requests).
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The International Equity Fund and, to a lesser extent, the other Funds that invest in securities denominated in foreign currencies may enter into foreign currency hedging transactions in connection with their purchase or sale of foreign securities as described in the next paragraph.
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The Intermediate Bond Fund (which includes the debt portion of the Balanced Fund) may, subject to limitations, invest in futures, options, swaps, swaptions, forwards, mortgage-backed securities, including asset-backed securities, CMOs, Interest Only (IO) and Principal Only (PO) strips. Interest-only and principal-only stripped mortgage-backed securities are considered derivatives because their value is derived from that of the underlying mortgage-backed bonds.
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The Stable Asset Return Fund may invest in asset-backed securities, including CMOs and other derivative mortgage-backed securities.
All of the Funds that may invest in securities denominated in foreign currencies may enter into forward foreign currency exchange contracts to hedge against the U.S. dollar price of the security. In addition, the International Equity Fund may sell or buy a particular foreign currency (or another currency that acts as a proxy for that currency) when the Investment Advisor believes that the currency of a particular foreign country may move substantially against another currency. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific amount of a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. A Fund can use such contracts to reduce its exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency into which it will be exchanged. The effect on the value of a Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another. U.S. dollar-denominated American Depositary Receipts (known as “ADRs”), which are issued by domestic banks and are traded in the United States on exchanges or over-the-counter, are available with respect to many foreign securities. ADRs do not lessen the foreign exchange risk inherent in investment in the securities of foreign issuers; however, by investing in ADRs rather than directly in the foreign issuers’ stock, a Fund can avoid currency risks during the settlement period for purchases or sales without having to engage in separate foreign currency hedging transactions.
The purchase and writing of options involve risks. During the option period, a writer of a covered call option gives up, in return for the premium on the option, the opportunity to profit from a price
increase in the underlying security above the exercise price but retains, as long as its obligations as a writer continues, the risk of loss should the price of the underlying security decline. The writer of an option traded on an option exchange in the United States has no control over the time when it may be required to fulfill the writer’s obligation. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. The writer of an uncovered option bears the risk of having to purchase the security subject to the option at a price higher than the exercise price of the option. As the price of a security could appreciate substantially, the option writer’s loss could be significant. If a put or call option is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the investor will lose its entire investment in the option. Also, when a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. Furthermore, there can be no assurance that a liquid market will exist when an investor seeks to close out an option position. If trading restrictions or suspensions are imposed on the options markets, an investor may be unable to close out a position.
Because swap agreements are two-party contracts and may have terms of greater than seven days, such agreements may be considered to be illiquid. Moreover, an investor bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The swaps market is a relatively new market and is largely unregulated, and it is possible that developments in the swaps market, including potential government regulation, could adversely affect an investor’s ability to terminate existing swap agreements or to realize amounts to be received under these agreements.
There are several risks associated with the use of futures and futures options. Futures and options contracts may not always be successful hedges and their prices can be highly volatile. Using these contracts could lower a fund’s total return and the potential loss from their use can exceed a fund’s initial investment in these contracts. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. An incorrect correlation could result in a loss on both the hedged securities and the hedging vehicle so that the portfolio return might have been greater had hedging not been attempted. There can be no assurance that a liquid market will exist at a time when an investor seeks to close out a futures contract or a futures option position. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single day; once the daily limit has been reached on a particular contract, no trades may be made that day at a price beyond that limit. In addition, some of these instruments are relatively new and without significant trading history. As a result, there is no assurance that an active secondary market will develop or continue to exist. Lack of a liquid market for any reason may prevent an investor from liquidating an unfavorable position even though the investor would remain obligated to meet margin requirements until the position is closed.
INVESTMENT ADVISORS
State Street has retained the services of various persons or entities (“Investment Advisors”) to advise it on its investment responsibility with respect to several Funds. Each Investment Advisor recommends to State Street investments and reinvestments of the assets allocated to it in accordance with the investment policies of the applicable Fund or Funds. State Street exercises discretion with respect to the selection and retention of the Investment Advisors and may remove an Investment Advisor at any time upon consultation with ARF. State Street may also change at any time the allocation of assets among Investment Advisors where a Fund has more than one Investment Advisor, subject to consultation with ARF.
Recommendations to buy and sell securities for the Funds are made by each Investment Advisor in accordance with the investment policies and restrictions of the Funds and subject to monitoring and approval by State Street. Investment recommendations for the Funds are not necessarily made consistently with those of other investment accounts managed by the Investment Advisors. Occasions may arise, however, when the same investment recommendation is made for more than one client’s account. It is the practice of each Investment Advisor to allocate these purchases or sales to be executed in connection with these recommendations insofar as feasible among its several clients in a manner it deems equitable. The principal factors which the Investment Advisors consider in making these allocations are the relative investment objectives of the clients, the relative size of the portfolio holdings of the same or comparable securities and the then remaining availability in the particular account of funds for investment. Portfolio securities held by one client of an Investment Advisor may also be held by one or more of its other clients. When two or more of its clients are engaged in the simultaneous sale or purchase of securities, transactions are allocated as to amount in accordance with formulas deemed to be equitable as to each client. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Transactions on stock exchanges on behalf of the Funds involve the payment of negotiated brokerage commissions. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price of those securities includes an undisclosed commission or mark-up. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer’s mark-up or mark-down.
In executing portfolio transactions, the Investment Advisors seek the most favorable execution available. The agreements between State Street and the Investment Advisors provide that, in assessing the best overall terms available for any transaction, the Investment Advisor may consider factors it deems relevant, including the brokerage and research services, as those terms are defined in section 28(e) of the Securities Exchange Act, provided to the Funds, viewed in terms of either that particular transaction or the broker-dealer’s overall responsibilities to the Fund.
State Street periodically reviews the brokerage commissions paid by the Funds to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits inuring to each Fund. It is possible that some of the services received from a broker or dealer in connection with the execution of transactions will primarily benefit one or more other accounts for which the Investment Advisor exercises discretion, or a Fund other than that for which the transaction was executed. Conversely, any given Fund may be the primary beneficiary of the service received as a result of portfolio transactions effected for those other accounts or Funds. The fees of the Investment Advisors are not reduced by reason of receipt of brokerage and research services.
STRUCTURED PORTFOLIO SERVICE
Investment Objective. The Structured Portfolio Service provides investment diversification by utilizing the Funds available in the Program. The Conservative, Moderate and Aggressive portfolios offer three distinct approaches to diversifying investments in the Program. Each portfolio has a different investment strategy and represents different risk and reward characteristics that reflect an investor’s tolerance for investment risk. There can be no assurance that any of the portfolios of the Structured Portfolio Service will achieve their investment objective. The portfolios collectively utilize all of the Program’s Funds other than the Balanced Fund. Fund allocations within each portfolio are established from time to time by State Street. For information regarding the investment objectives, guidelines and restrictions of each of the Funds in the respective portfolios of the Structured Portfolio Service, refer to the description of those Funds in this Report.
Strategy. The overall volatility of the three portfolios may be reduced by spreading investments over several types of assets, although there can be no guarantee that this will be the case. However, the volatility of the Aggressive Portfolio may be greater than that of the other two portfolios, and the volatility of the Moderate Portfolio may be greater than that of the Conservative Portfolio. As prices of stocks and bonds may respond differently to changes in economic conditions and interest rate levels, a rise in bond prices, for example, could help offset a fall in stock prices. Short-term securities, which are held in varying percentages by all the portfolios, have a stabilizing influence in comparison to stocks since their price fluctuations are expected to be small. In addition, the income provided by bonds and money market securities is expected to contribute positively to a portfolio’s total return, cushioning the impact of price declines or enhancing the effect of price increases.
The Conservative Portfolio emphasizes shorter-term and fixed income securities and is intended for investors with lower risk tolerance who seek returns based primarily on higher current investment income. Funds in the Conservative Portfolio are currently allocated as follows:
The Moderate Portfolio takes a more balanced approach (in comparison to the Conservative Portfolio) and is intended for investors who seek returns based upon relatively stable investment income but who also desire an increased potential for growth. Funds in the Moderate Portfolio are currently allocated as follows:
The Aggressive Portfolio emphasizes stocks and is intended for investors who have a higher degree of risk tolerance and seek capital appreciation. Funds in the Aggressive Portfolio are currently allocated as follows:
Allocations of investor funds to the portfolios of the Structured Portfolio Service are readjusted by State Street on the first Business Day of each month to maintain the percentage allocations indicated above.
Risk Factors. For information and risk factors associated with each of the Funds utilized in the Structured Portfolio Service, refer to the descriptions in this Report for each particular Fund.
Valuation of Units. Units in the portfolios of the Structured Portfolio Service are valued based upon the aggregate values of the Units of the included Funds credited to an investor’s account in the Structured Portfolio Service.
Liquidity and Transfers. Transfers to or withdrawals from any of the three portfolios may be made on any Business Day prior to 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading). For additional information relating to transfers to and withdrawals from the Investment Options, and special restrictions on transfers in some cases, see “-Transfers Between Investment Options and Withdrawals.”
Investment Advisors. The portfolios of the Structured Portfolio Service utilize exclusively the other Funds in the Program (other than the Balanced Fund). Therefore, the Investment Advisors or managers of these respective portfolios correspond with those of the underlying Funds.
Performance Information. For the year ended December 31, 2005, the Structured Portfolio Service experienced a total return, net of expenses, of 4.46% for the Conservative Portfolio, 5.83% for the Moderate Portfolio, and 7.19% for the Aggressive Portfolio. A recorded message providing current values for Units in each portfolio in the Structured Portfolio Service is available at (800) 826-8905. The Structured Portfolio Service may, from time to time, report the performance of each of the portfolios in terms of total return. This reported performance will be determined based on historical results and will not be intended to indicate future performance.
Expected Termination of Structured Portfolio Service. It currently is anticipated that the portfolios of the Structured Portfolio Service will be terminated and hence no longer available as investment options under the Program on or about January 1, 2008. It currently is anticipated that any assets remaining in the portfolios of the Structured Portfolio Service as of that date, to the extent not directed into other Investment Options by Participants, will be transferred to the various Funds in which such portfolios are then invested in the same allocation percentages that comprise such portfolios.
SELF-MANAGED BROKERAGE ACCOUNTS
Self-Managed Brokerage Accounts are not included in the Collective Trust and are not registered under the Securities Act. They are described in this Report for information purposes only.
As an additional Investment Option under the Program, State Street Bank makes available a Self-Managed Brokerage Account. The Self-Managed Brokerage Account is available for all plans unless the Employer elects not to make it available for its plan. State Street and State Street Bank permit an Investor whose plan includes the Self-Managed Brokerage Account as an Investment Option to authorize, at the Investor’s own cost, a third party “investment manager,” as defined in Section 3(38) of ERISA, to trade that Investor’s Self-Managed Brokerage Account. Contributions may not be allocated directly to the Self-Managed Brokerage Account, but must first be allocated to one or more of the other available Investment Options and then transferred to the Self-Managed Brokerage Account. Assets in a Self-Managed Brokerage Account may be invested in publicly traded debt and equity securities and mutual funds. Some types of investments, such as options, futures, commodities, foreign securities (other than American Depositary Receipts), initial public offerings (“IPOs”), bulletin board stocks, privately traded limited partnerships, commercial paper, bank investments and insurance investments, cannot be made in a Self-Managed Brokerage Account. Margin trading and short selling are not permitted in Self-Managed Brokerage Accounts. For more information regarding the Self-Managed Brokerage Account, please call (800) 348-2272.
The Self-Managed Brokerage Account generally is funded, in accordance with Program rules established by State Street Bank, through a “Base Plan,” which is defined as all Investment Options, but excluding the Self-Managed Brokerage Account. To establish a Self-Managed Brokerage Account, an Investor must transfer initially a minimum of $2,500 from the Investor’s Base Plan to the Self-Managed Brokerage Account, provided that the Investor must at all times maintain in the Investor’s Base Plan the greater of $1,000 and 5% of the Investor’s entire account balance (including, for purposes of the 5% calculation, the assets in the participant’s Self-Managed Brokerage Account). After the initial transfer, an Investor may make transfers of not less than $500 from the Base Plan to the Self-Managed Brokerage Account. No transfer from the Base Plan will be permitted to the extent that such transfer would cause the Investor’s Base Plan to fall below the required minimum.
Satisfaction of the requirement for maintenance of a minimum account balance of an Investor’s Base Plan will be based on the most recent valuations of the Investment Options, which are valued daily. If the value of an Investor’s Base Plan falls below the greater of $1,000 and 5% of the Investor’s aggregate account balances in all Investment Options (including, for purposes of the 5% calculation, the assets in the Participant’s Self-Managed Brokerage Account), the Investor will not be permitted to transfer assets to the Self-Managed Brokerage Account until the required minimum in the Investor’s Base Plan is again met.
At the discretion of State Street Bank, a Self-Managed Brokerage Account may be funded through in-kind transfers from other tax-qualified retirement plans. The foregoing account balance minimums and transfer restrictions with regard to the Base Plan remain in effect.
CONTRIBUTIONS AND INVESTMENT SELECTION
Contributions
Contributions are credited on the day of receipt if they are accompanied or preceded by proper allocation instructions and are received by 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading) on a Business Day. Contributions received after that time will be credited on the following Business Day. Remittance of a contribution which State Street believes to be incorrect or failure to provide instructions as to the particular Investor account to which a contribution should be deposited may result in a delay in crediting contributions.
Contributions allocated to the Funds or to any of the portfolios of the Structured Portfolio Service are used to purchase Units in the Funds or in the portfolios of the Structured Portfolio Service at the per Unit values of the Fund or the portfolios of the Structured Portfolio Service, calculated as of the close of the regular trading session of the New York Stock Exchange on the Business Day on which the contributions are credited. Contributions may not be made directly to the Self-Managed Brokerage Account.
TRANSFERS BETWEEN INVESTMENT OPTIONS AND WITHDRAWALS
Transfers between Investment Options may be authorized at any time, subject to the terms and restrictions applicable to each Investment Option as discussed below under “-Frequent Trading; Restrictions on Transfers.” A specified whole percentage or whole dollar amount or the total investment in an Investment Option may be transferred. Transfers will be made on the day State Street Bank receives properly authorized instructions from the Investor, provided that these instructions are received not later than 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading) on a Business Day. Transfer requests received after that time will be made on the next Business Day. Transfers involving Funds are effected based upon the relative Unit values of the Funds, as determined at the close of the regular trading session of the New York Stock Exchange on the effective date of the transfer. There is no fee for transfers between Investment Options.
Transfer requests may be made by telephone through the Voice Response Unit or a Participant services representative or via the Internet Web site. Call State Street Bank at (800) 348-2272 to make telephone transfers. All telephone transfer instructions are recorded. By authorizing telephone transfers, the Investor consents to such recording. State Street Bank will accept telephone transfer instructions from any person who provides the correct identifying information. Consequently, this service may entail additional risks. State Street Bank reserves the right, subject to the approval of ARF, to cancel telephone transfer services at any time without advance notice to Investors. Transfer requests may also be made through the Program’s Internet Web site by accessing http://www.abaretirement.com. The Investor must use the correct identifying information in order to gain access to his or her account through the Internet. Transfers will be effective as of a particular Business Day if confirmed on the Internet no later than 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading) on that Business Day. Transfers confirmed after that time will be made on the next Business Day. In addition, a “Transfer Between Investment Options” form may be sent to State Street Bank, ABA Retirement Funds program, P.O. Box 5142, Boston, Massachusetts 02206-5142.
Frequent Trading; Restrictions on Transfers. Short-term or other excessive trading into and out of a Fund may harm its performance by disrupting portfolio management strategies and by increasing expenses. The policy of State Street, as trustee, is to discourage such trading. The International Equity Fund has adopted a specific excessive transfer restriction with respect to an Investor’s ability to make transfers into the International Equity Fund. Under this restriction, Investors may make not more than one transfer into the International Equity Fund within any 45 calendar day period. There are no restrictions on an Investor’s ability to make transfers out of the Fund on any Business Day. The International Equity Fund has adopted this restriction to reduce potential disruptions to this Fund that could potentially affect its investment performance. An Investor who is unable to make a transfer into the International Equity Fund as a result of this restriction will not achieve the investment results, whether gain or loss, that would have been achieved if the transfer were implemented. The International Equity Fund and its other Investors do not incur any gain or loss as a result of such inability to make a transfer.
State Street, as trustee, reserves the right to take such additional actions with respect to excessive trading activity in the International Equity Fund or other Investment Options, such as the rejection of transfer requests, as it may, in its discretion, deem appropriate and in the best interests of all Investors to curtail excessive trading. In addition, to discourage short-term trading, State Street Bank, as State Street’s agent, may use fair value pricing in certain circumstances, as discussed under “Certain Information With Respect to the Funds-Valuation of Units.”
State Street reserves the right to suspend withdrawals from or transfers to any Fund, any portfolio of the Structured Portfolio Service or a Self-Managed Brokerage Account at any time during which any market or stock exchange on which a significant portion of the investments of a Fund, a portfolio of the Structured Portfolio Service or a Self-Managed Brokerage Account are quoted is closed or during which dealings thereon are restricted or suspended. In addition, State Street reserves the right to suspend withdrawals or transfers to or from any Fund (including indirect withdrawals or transfers by means of withdrawals or transfers to or from any portfolio of the Structured Portfolio Service) at any time during which (a) there exists any state of affairs which, in the reasonable opinion of State Street, constitutes an emergency as a result of which disposition of the assets of a Fund would not be reasonably practicable or would be seriously prejudicial to the holders of Units of a Fund or portfolio, (b) there has been a breakdown in the means of communication normally employed in determining the price or value of any of the investments of a Fund or portfolio, or of current prices on any stock exchange on which a significant portion of the direct or indirect investments of such Fund or portfolio are quoted, or when for any reason the prices or values of any investments owned by such Fund cannot reasonably be promptly and accurately ascertained, or (c) the transfer of funds involved in the realization or acquisition of any investment cannot, in the reasonable opinion of State Street, be effected at normal rates of exchange. In addition, transfers and withdrawals from the Stable Asset Return Fund may be
suspended or limited temporarily if the amount of liquid assets in the Stable Asset Return Fund is insufficient to satisfy all withdrawal or transfer requests.
With respect to the Stable Asset Return Fund, State Street will utilize a tiered liquidity structure in the following sequence to satisfy withdrawal and transfer requests: cash flows (contributions, transfers-in, maturities and interest); and sales of Short-Term Investment Products. In the unlikely event that the amount of liquid assets held by the Stable Asset Return Fund is insufficient to satisfy all withdrawal and transfer requests immediately, State Street may be forced to limit or suspend withdrawals and transfers from the Stable Asset Return Fund. In such cases, withdrawals by Participants from the Program because of death, disability, retirement or termination of employment will be given priority and will be honored from available liquid assets, including the benefit responsive features of the investment contracts, in the order in which withdrawal instructions were received by State Street. Subject to any applicable legal requirements, after all such withdrawals have been effected, transfers to other allowable Investment Options will be honored from available liquid assets in the order that transfer instructions were received by State Street. The length of any suspension or limitation on withdrawals or transfers could vary and would depend, on the one hand, on the aggregate amount of assets that Participants have requested to withdraw or transfer and, on the other hand, on the rate at which assets become available for withdrawal or transfer through the exercise of permitted withdrawal rights under the investment contracts and through the maturity of investment contracts and the rate at which additional monies are contributed to the Stable Asset Return Fund by Participants. See “-Stable Asset Return Fund.”
Withdrawals. Withdrawals from the Funds and the portfolios of the Structured Portfolio Service are made at such time and in such manner as is prescribed by the various plans which participate in the Program.
BENEFITS AND DISTRIBUTIONS
A Participant’s eligibility for benefits depends on the terms of the applicable plan through which he or she participates. For information regarding the terms of a plan, a Participant should contact his or her Employer.
PARTICIPANT ADVISOR SERVICE
Participant Advisor Service
The Program, with the approval of ARF, has engaged CitiStreet Advisors LLC (“CitiStreet Advisors”), an investment adviser registered under the Investment Advisers Act of 1940, as amended, and a subsidiary of CitiStreet LLC, to make available to Participants through its call center the services of its investment advisor representatives for the telephonic delivery of investment advice and account maintenance and an Internet-based personalized defined contribution plan asset allocation investment advisor service (the “Online Advisor Service”).
CitiStreet Advisors provides to Investors who are Participants (or beneficiaries) in the ABA Members Retirement Plan (and certain individually designed defined contribution plans) individualized investment advice regarding the investment options under the Collective Trust over the telephone through its investment advisor representatives or via the Internet through access to the Online Advisor Service Web site. This service provides retirement forecasts and advice, utilizing the computer program of Financial Engines, Inc.® (“FE”), to analyze market conditions and the Investment Options available under the Collective Trust, as well as information provided by the Investor through an electronic questionnaire or through discussions with an investment advisor representative over the telephone. Based on this analysis, the FE computer program will generate specific portfolio recommendations to
the Investor as to the allocation of account balances among the Investment Options. The computer program is based upon the application of economic models and formulae developed by FE that are not specific to CitiStreet Advisors or its affiliated companies, or the Investment Options, but are based on generally accepted financial planning and investment principles. Hence, neither CitiStreet Advisors nor FE have any discretion regarding the allocation recommendations generated by the computer program.
The investment advice and recommendations provided to Investors by CitiStreet Advisors are required by law to be unbiased and solely in the best interest of Investors. CitiStreet Advisors’ recommendations of specific Investment Options are prepared and provided without consideration to revenues received by CitiStreet Advisors for the delivery of its services or the advisory fees it charges for the services it provides.
Investors are solely responsible for determining whether to use or follow the investment advice provided by CitiStreet Advisors. Additional information regarding this service may be obtained from State Street Bank at (800) 348-2272.
The fees for the Online Advisor Service are included in the program expense fee payable to State Street Bank. Because the program expense fee is charged against the Unit values of the Funds, all Participants investing in the Funds effectively bear the cost of the Online Advisor Service, regardless of whether they actually use the service.
An Investor who elects to receive advice through a call center investment advisor representative and to have the Investor’s account advised by CitiStreet Advisors will incur a monthly charge for this service, payable directly from the Investor’s account as of the last day of each month for which the Investor has elected to receive such advice, based upon the following fee schedule:
Any Investor who has elected to use this service may elect to discontinue such use as of any month-end by making a request by telephone to a call center investment advisor representative no later than five business days prior to the applicable month-end.
In 1999, State Street Bank made a $5 million equity investment in FE, representing less than 1.3% of FE’s total equity, and entered into an agreement with FE to build a technology link (data transfer protocols and interfaces) between State Street Bank’s recordkeeping database and the FE Internet-based advisor service. Thus, any client of State Street Bank for whom State Street Bank provides recordkeeping services may select FE as a provider of its Internet-based asset allocation advisor service and State Street Bank will build a link between its recordkeeping system and the FE system. Except with respect to the Program, State Street Bank is paid a fee for such data transfer service equal to a percentage of the fees paid to FE.
ADDITIONAL INFORMATION
Persons who are Employers or who are responsible for allocating assets under a particular plan may obtain administrative, investment allocation and transfer forms or additional information by:
·
calling State Street Bank at (800) 348-2272 between 8:00 a.m. and 8:00 p.m. Eastern time;
·
calling the Program’s FaxBack line at (877) 202-3930; or
·
accessing the Program’s Website at http://www.abaretirement.com.
A Participant may also obtain forms from his or her Employer, or by using one of the methods outlined above.
For information regarding enrollment in the Program, Eligible Employers may call State Street Bank at (800) 826-8901 between 9:00 a.m. and 5:00 p.m. Eastern time or write to State Street Bank and Trust Company, P.O. Box 5142, Boston, Massachusetts 02206-5142.
For Unit values for the current Investment Options, and for the 30-day yield of the Intermediate Bond Fund, call State Street Bank at (800) 826-8905.
For a recorded message providing current account information, call State Street at (800) 348-2272.
ADOPTION OF PROGRAM
Sole practitioners, partnerships (including limited liability companies) and professional corporations engaged in the practice of law may adopt the Program if they or at least one of their partners or shareholders, as the case may be, is a member or associate of the ABA or of a state or local bar association that is represented in the ABA’s House of Delegates. State or local bar associations represented in the ABA’s House of Delegates may also adopt the Program for their own employees subject to limitations imposed by the Internal Revenue Code. An organization that is not engaged in the practice of law may also be eligible to adopt the Program if it is closely associated with the legal profession, receives the approval of ARF, and has, as an owner or a member of its governing board, a member or associate of the ABA. The retirement program specialists engaged by State Street Bank are available to help individuals and organizations determine whether they are eligible to adopt the Program.
Eligible Employers which elect to participate in the Program may do so either through their own individually designed plans or by adopting one or both of the American Bar Association Members Defined Benefit Plan and the American Bar Association Members Retirement Plan, the two ABA Members Plans sponsored by ARF. The ABA Members Plans are master plans designed to qualify under section 401(a) of the Internal Revenue Code.
Under the American Bar Association Members Retirement Plan, an Eligible Employer may adopt a SIMPLE 401(k) plan, a profit sharing plan, a money purchase pension plan or a target benefit plan. The Internal Revenue Service has issued an opinion letter dated November 30, 2001, stating that the available forms of the ABA Members Plans are qualified under section 401(a) of the Internal Revenue Code for use by employers for the benefit of their employees. Since then there have been several amendments to the American Bar Association’s Members Retirement Plan. The American Bar Association Members Retirement Plan, as amended, has been submitted to the Internal Revenue Service for a determination that it continues to qualify under section 401(a) of the Internal Revenue Code.
Assets contributed under master plans are held by State Street Bank as trustee of the Retirement Trust. Assets invested through individually designed plans are held by State Street Bank as trustee of the
Pooled Trust. Assets contributed to each of these trusts are invested in the Investment Options available under the Program in accordance with the instructions of the person or entity vested with responsibility for determining the investment allocation of the assets of each plan. In accordance with the plans, assets of the trusts are held for the benefit of the Participants. The Internal Revenue Service has determined each of the Retirement Trust and the Pooled Trust to be tax-exempt trusts under section 501(a) of the Internal Revenue Code.
To adopt either the American Bar Association Members Defined Benefit Plan or the American Bar Association Members Retirement Plan, an Eligible Employer must complete and execute an adoption agreement. The adoption agreement contains the basic features that must be considered in designing an appropriate master plan under the Program and effects the Eligible Employer’s adoption of the Retirement Trust to hold assets of the master plan. The retirement program specialists will assist Eligible Employers in the preparation of an adoption agreement. However, State Street Bank is not authorized to give tax or legal advice and Eligible Employers should consult with their tax advisors prior to executing an adoption agreement. Depending on the form of adoption agreement adopted by an Eligible Employer and the other retirement plans, if any, maintained by the Eligible Employer, it may be necessary for an Eligible Employer to apply to the Internal Revenue Service for a determination of the qualified status of the master plan as adopted by the Eligible Employer.
An Eligible Employer which maintains an individually designed plan that is qualified under section 401(a) of the Internal Revenue Code may also participate in the Program and make use of the Investment Options, and in some cases the recordkeeping services, available under the Program by causing an adoption agreement for the Pooled Trust to be executed by the trustee of the individually designed plan. The trustee must demonstrate to State Street Bank that the participating trust is exempt from tax under section 501(a) of the Internal Revenue Code and that the related individually designed plan is qualified under section 401(a) of the Internal Revenue Code. State Street Bank’s retirement program specialists will assist in preparation of an adoption agreement. However, State Street Bank is not authorized to give tax or legal advice and Eligible Employers and the trustees of an individually designed plan should consult with their tax advisors prior to executing an adoption agreement. Only plans qualified under section 401(a) of the Internal Revenue Code may participate in the Program. Eligible Employers should note that the Internal Revenue Code and related regulations place limits on the amount of assets that may be contributed to the plans, as well as on withdrawals from the plans.
For copies of the appropriate adoption agreements and further information concerning the steps to be taken to adopt the Program, call State Street Bank at (800) 826-8901 between 9:00 a.m. and 5:00 p.m. Eastern time or write to State Street Bank and Trust Company, P.O. Box 5142, Boston, Massachusetts 02206-5142.
STATE STREET AND STATE STREET BANK
State Street is a wholly-owned subsidiary of State Street Bank, which, in turn, is a wholly owned subsidiary of State Street Corporation, a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956. Effective as of December 1, 2004, State Street was substituted for State Street Bank as trustee of the Collective Trust. State Street was formed as a New Hampshire nondepository trust company as a result of a conversion of the charter of State Street Bank and Trust Company of New Hampshire, N.A. (the “National Bank”) on October 25, 2004. As part of the conversion, State Street succeeded to the assets and liabilities of the National Bank and performs the operations previously performed by the National Bank and those relating to service as trustee of the Collective Trust. State Street’s principal office is located at 20 Trafalgar Square, Suite 449, Nashua, New Hampshire 03063.
State Street Bank is a highly capitalized Massachusetts trust company and, as of the year ended December 31, 2005, had a total risk-based capital ratio of 14.0%, which is in excess of applicable regulatory requirements. State Street Corporation is the world’s leading specialist in providing institutional investors with investment servicing, investment management and investment research and trading. With $10.1 trillion in assets under custody and $1.4 trillion in assets under management as of December 31, 2005, State Street operates in 26 countries and more than 100 geographic markets worldwide. State Street Bank’s principal offices are located at One Lincoln Street, Boston, Massachusetts 02111.
State Street is responsible for all the functions formerly performed by State Street Bank as trustee of the Collective Trust. State Street Bank has guaranteed to ARF, the Collective Trust and those persons who from time to time have an interest in the Collective Trust the obligations of State Street as trustee of the Collective Trust, and the Collective Trust’s declaration of trust, as amended, provides that (i) in the event of an issuance or entry of a decree or order by an applicable state or federal bank regulator or court of competent jurisdiction declaring State Street a bankrupt or insolvent, (ii) in the event State Street is prevented from serving as trustee of the Collective Trust by regulatory order or (iii) upon the seizure of State Street or any substantial part of its property by an applicable state or federal bank regulator or pursuant to an order of a court of competent jurisdiction, State Street Bank automatically will again become the trustee of the Collective Trust.
State Street Bank has entered into a master services agreement with State Street pursuant to which State Street Bank provides custodial, participant recordkeeping and related services with respect to the Collective Trust and the Funds. State Street Bank serves as trustee of the Retirement Trust and the Pooled Trust and operates and administers the portfolios of the Structured Portfolio Service and continues to make available the Self-Managed Brokerage Account option as described in this Report.
ABA RETIREMENT FUNDS
As sponsor of the Program, ARF is responsible for the design of the Program, the maintenance of the American Bar Association Members Defined Benefit Plan, the American Bar Association Members Retirement Plan, the Retirement Trust and the Pooled Trust, and the designation of Investment Options to be made available under the Program. ARF has engaged State Street Bank to provide administrative, marketing, communications and investment services and to make the Investment Options available under the Program. Under the current agreement between ARF and State Street Bank dated January 1, 2003, as amended, ARF has engaged State Street Bank for a term ending December 31, 2008. ARF may terminate this agreement with State Street Bank prior to the end of its term upon six months’ written notice. State Street Bank may terminate this agreement prior to the end of its term in certain circumstances, including the offering to Employers by ARF of any investment product that is not offered pursuant to the terms of the agreement. Also, State Street Bank may terminate the agreement at the end of any quarter after December 31, 2006 upon 12 months’ written notice. As discussed above, ARF amended such agreement to permit State Street Bank to substitute a wholly-owned subsidiary of State Street Bank as trustee of the Collective Trust, effective as of December 1, 2004.
Pursuant to the above-described agreement, ARF has designated State Street Bank to be the investment manager of the Stable Asset Return Fund. ARF also has approved the engagement of State Street Bank to manage the Index Equity Fund and the indexed portions of the Large-Cap Growth Equity Fund, the Large-Cap Value Equity Fund and Small-Cap Equity Fund.
ARF retains the right to make recommendations to State Street regarding the addition or deletion of Funds as Investment Options. ARF, with or without the assistance of a consultant, will monitor the performance of State Street, State Street Bank and the Investment Advisors and may make
recommendations to State Street regarding the engagement and termination of Investment Advisors. State Street is required to give full good faith consideration to all such recommendations from ARF, although State Street retains exclusive management and control over the Funds and the Investment Advisors. ARF may direct State Street to establish or terminate Investment Options that are not Funds. In specified cases when State Street fails to satisfy minimum investment performance standards, ARF may discontinue a Fund as an Investment Option or direct the establishment of another Investment Option that is not a Fund.
State Street, State Street Bank and ARF have reviewed and negotiated the terms and conditions of the documents establishing the respective rights and obligations of the parties, including fees payable to State Street Bank in connection with the Program. ARF will monitor State Street’s and State Street Bank’s administration and marketing of the Program and will approve the hiring by State Street and State Street Bank of certain other major service providers, such as actuaries.
ARF has retained an investment consultant to assist with the monitoring of the performance of State Street, State Street Bank and the Investment Advisors and in making recommendations to State Street regarding the engagement and termination of Investment Advisors.
DEDUCTIONS AND FEES
Program Expense Fee
A program expense fee is paid to each of State Street Bank and ARF for their services in connection with the Program. For all Investment Options other than the Self-Managed Brokerage Account, the fee is paid directly from the assets of the Funds. State Street does not receive any fees or payments in respect of expenses (including indemnification) from the Collective Trust, the ABA Members Trusts or ARF for services provided in connection with the Program, but is entitled to payment for such services from State Street Bank.
For the year ended December 31, 2005, the program expense fee payable to State Street Bank was $11,410,316, which included a one-time base charge of $506,000 accrued over the period October 1, 2005 through December 31, 2005.
Since October 1, 2005, the program expense fee payable to State Street Bank has been based on the total assets in the Program (other than assets in Self-Managed Brokerage Accounts) at the following annual rate:
This program expense fee is accrued daily and paid monthly based on the level of assets in the Program as of the end of the last Business Day of the preceding month.
Prior to October 1, 2005, State Street Bank received a monthly program expense fee equal to one-twelfth of the sum of (i) $800,000, plus (ii) $194 multiplied by the number of Participants in the Program, other than active Participants without account balances, as of the last Business Day of the preceding month, plus (iii) $194 multiplied by the excess, if any, of the number of active Participants of the Program without account balances as of the last Business Day of the preceding month over the number of such Participants as of December 31, 2003. This fee accrued daily and was paid monthly.
Benefit payments under the Program generally are made by check. Within two Business Days before the check is payable, funds for the payment of benefits are transferred to a non-interest bearing account with State Street Bank. There is no separate fee charged for benefit payments; rather, State Street Bank retains any earnings attributable to outstanding benefit checks, which has been taken into account in setting State Street Bank’s fees under the Program.
The program expense fee payable to State Street Bank is subject to reduction based on the amount of retirement plan assets held by State Street Bank on behalf of law firm and law-related clients identified by State Street and ARF that do not participate in the Program. For the year ended December 31, 2005, the amount of this reduction was $33,339.
The program expense fee payable to ARF is based on the total assets in the Program (other than assets in Self-Managed Brokerage Accounts) at the following annual rates:
The fee is accrued daily and is paid to ARF monthly based on the level of assets in the Program as of the end of the last Business Day of the preceding month. The fee schedule set forth above may be increased only by written notification of such increase to all Employers, and shall become effective after a minimum of 60 days from such notice.
The program expense fee paid to ARF for the year ended December 31, 2005 was $1,663,209.
Trust, Management and Administration Fees
A fee is paid to State Street Bank for its management, administration and custody of the assets in the Investment Options (other than Self-Managed Brokerage Accounts). This fee is accrued on a daily basis and paid monthly from the assets of the Funds. The trust, management and administration fees attributable to the Funds held by the Structured Portfolio Service are also accrued and paid from the Funds, and such fees attributable to the portion of the Balanced Fund invested in the Intermediate Bond Fund are accrued and paid from the Intermediate Bond Fund, not from such portion of the Balanced Fund. Since October 1, 2005, the fees have been payable at the following annual rates:
*
From April 1, 2005 to September 30, 2005, the annual fee rate on the first $1.0 billion was .1835%, on the next $1.8 billion was .0580% and over $2.8 billion was .0250%. Prior to April 1, 2005, the annual fee rate on the first $1.0 billion was .1560%, on the next $1.8 billion was .0580% and over $2.8 billion was .0250%.
The fee paid to State Street Bank for trust, management, administration and custody services for the year ended December 31, 2005 was $3,189,209.
Self-Managed Brokerage Account Fees
Transaction fees for the purchase or sale of securities for the Self-Managed Brokerage Account of a Participant are charged in accordance with the schedule of rates communicated from time to time to Participants with Self-Managed Brokerage Accounts.
Actuarial and Consulting Services and Fees
State Street Bank has retained a third-party consulting firm to provide actuarial services and other services related to individually designed plan features for each Employer that adopts or has adopted the American Bar Association Members Defined Benefit Plan or any other plan requiring either actuarial or other such special plan related services. The fees and expenses of the consulting firm will be charged to the Employer based on the amount of such services provided by the consulting firm. If the fee is not paid directly by the Employer, such fee, if permissible, will be deducted from the Employer’s plan’s assets.
Investment Advisor Fees
A fee is paid to each Investment Advisor based on the value of the assets allocated to that Investment Advisor, as set forth below. These fees are accrued on a daily basis and paid monthly from the assets of the respective Funds.
(1)
Investment Advisor fees payable to Capital Guardian Trust Company are subject to fee reductions estimated to be 5% of the aggregate Investment Advisor fees payable to Capital Guardian Trust Company assuming the aggregate value of assets allocated to Capital Guardian Trust Company exceeds approximately $515 million.
(2)
Effective June 30, 2005, Capital Guardian Trust Company ceased to serve as an Investment Advisor to the Small-Cap Equity Fund.
(3)
The assets of the debt portion of the Balanced Fund are invested in the Intermediate Bond Fund. Pacific Investment Management Company LLC receives an Investment Advisor fee according to this fee schedule and based on the aggregate value of all assets allocated to the Intermediate Bond Fund, including those so allocated through the debt portion of the Balanced Fund.
(4)
Effective February 28, 2006, RCM Capital Management LLC ceased to serve as an Investment Advisor to the Large-Cap Growth Equity Fund.
(5)
The Investment Advisor fee payable to T. Rowe Price for the portion of the Large-Cap Growth Equity Fund for which it serves as Investment Advisor is at an annual rate of .35% of the value of the assets of such Fund allocated to T. Rowe Price, so long as the value of such assets remains above $200 million (as of December 31, 2005, the value of such assets was $293 million). Should the value of the assets in the Large-Cap Growth Equity Fund allocated to T. Rowe Price fall to or below $200 million but remain above $100 million, the Investment Advisor fee payable
to T. Rowe Price will change to an annual rate of .40% of such value, and should the value of such assets fall to or below $100 million, the Investment Advisor fee will change to an annual rate of .50% of the first $50 million of such value and .45% of such value in excess of $50 million (subject possibly to certain transitional credits in favor of the Large-Cap Growth Equity Fund as asset levels in the portion of such Fund allocated to T. Rowe Price approach the relevant breakpoints).
Operational and Offering Costs
Recurring expenses incurred in connection with operating the Collective Trust, such as printing, legal, registration, consulting and auditing expenses, are considered operational expenses and are accrued throughout the year. For the year ended December 31, 2005, these expenses totaled $3,783,969. A fee in the amount of $53,500 for the registration of $500 million of Units with the SEC was paid in March 2006 and will be an operational cost. These operational costs will be allocated to all of the Funds based on net asset value and will be accrued over the year ending December 31, 2006. For purposes of this allocation, assets of the Balanced Fund invested through the Intermediate Bond Fund are included only under the Intermediate Bond Fund and not under the Balanced Fund.
Fee Recipients
The following table summarizes the fees paid to Investment Advisors for services for the year ended December 31, 2005:
(1)
The Index Equity Fund, the Stable Asset Return Fund and the portfolios of the Structured Portfolio Service do not have applicable Investment Advisor fees.
The following information with respect to estimated fees for 2006 is based on the approximate amount of assets of the Program on December 31, 2005, which was $3,869 million.
State Street Bank, in its capacity as administrator of the Program, would receive fees of $12,295,000 on an annual basis (after fee discounts of $41,000 related to law firm and law-related client assets not invested in the Program). ARF would receive fees of $1,672,000 on an annual basis in its capacity as sponsor of the Program.
The following table summarizes the fees estimated to be payable to each Investment Advisor in 2006. The summary is based on the approximate allocation of the Program’s assets among the Investment Options as of December 31, 2005 and reflects the respective allocations of assets invested in the portfolios of the Structured Portfolio Service to the Funds as of that date:
(1)
Assumes that the allocation of the assets of the Funds among the Investment Advisors is as set forth in the table below.
(2)
Acting through its Bernstein Investment Research and Management Unit.
(3)
After an applicable fee discount of $66,000.
The table above is based on the following approximate allocations of the Program’s assets among the Investment Options:
(1)
The table is based on approximate amount of assets of the Program on December 31, 2005, which totaled $3,869 million, and the approximate allocations of the Program’s assets among the Investment Options as of December 31, 2005. For purposes of this table, the debt portion of the Balanced Fund invested through the Intermediate Bond Fund, which totaled $173 million as of December 31, 2005, is included under the Balanced Fund and not under the Intermediate Bond Fund.
The following table shows the amount of assets for which each Investment Advisor provided investment advice at December 31, 2005 based on the allocation of the assets of the Program as shown in the table above.
(1)
The table is based on the approximate assets of the Program on December 31, 2005, which totaled $3,869 million.
(2)
Acting through its Bernstein Investment Research and Management Unit.
Each Employer, by electing to participate in the Program, agrees to the fees payable to State Street Bank, for itself and for further payment to State Street, and ARF as described in this Report and that such fees are reasonable compensation for the services performed by State Street Bank, State Street and ARF, respectively, for the Program.
ITEM 1A.
ITEM 1A. Risk Factors.
For a discussion of the risk factors applicable to investment in the Units of the respective Funds, please refer to page 4 (Stable Asset Return Fund), page 9 (Intermediate Bond Fund), page 12 (Balanced Fund), page 15 (Large-Cap Value Equity Fund), page 17 (Large-Cap Growth Equity Fund), page 19 (Index Equity Fund), page 21 (Mid-Cap Value Equity Fund), page 23 (Mid-Cap Growth Equity Fund), page 26 (Small-Cap Equity Fund) and page 29 (International Equity Fund) in Item 1, “Business-Description of Investment Options.”
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2.
ITEM 2. Properties.
Not applicable. The Collective Trust does not have any physical properties as contemplated by this Item.
ITEM 3.
ITEM 3. Legal Proceedings.
None.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)
Market Information.
Units of beneficial interest in the Funds are not transferable and, therefore, are not traded on any market. Participants in certain employer plans receive distributions of benefits upon retirement or disability, or upon termination of employment with a vested benefit. A participant may withdraw from the plans the contributions and earnings thereon at any age, subject to the withdrawal restrictions applicable therein. Participants in the individually designed plans receive distributions based upon the terms and provisions of the respective employer plan. Prior to distribution, assets in the various plans may be transferred among the Funds and the portfolios of the Structured Portfolio Service, subject to the restrictions that apply to each Fund or portfolio of the Structured Portfolio Service, by the person or entity vested with the responsibility for determining the investment allocation of the assets of the plan.
(b)
Holders.
Eligible employers which elect to participate in the Program may do so by adopting a master plan under one or both of the ABA Members Plans. The ABA Members Plans consist of the American Bar Association Members Retirement Plan, a defined contribution master plan, and the American Bar Association Members Defined Benefit Plan, a defined benefit master plan. Employers maintaining individually designed plans may also participate in some of the aspects of the Program through those individually designed plans. Assets contributed under the Program are held by State Street as trustee of the American Bar Association Members Retirement Trust and the American Bar Association Members Retirement Pooled Trust for Retirement Plans. Assets contributed under the Program are allocated among the Investment Options available under the Program in accordance with the instructions of the person or entity vested with responsibility for determining the investment allocation of the assets of a Plan held in the American Bar Association Members Retirement Trust or the American Bar Association Members Pooled Trust for Retirement Plans. Under the Program, certain participants, employers or plan trustees may also direct State Street to purchase and sell a wide variety of publicly traded debt and equity securities and shares of numerous mutual funds for the participant’s, employer’s or plan trustee’s Self-Managed Brokerage Account. The Self-Managed Brokerage Account is available only to participants in the American Bar Association Members Retirement Plan and to employers with respect to the American Bar Association Members Defined Benefit Plan, provided that in either case the employer has designed the Self-Managed Brokerage Account as an Investment Option for its plan. The Self-Managed Brokerage Account is also available for participants, employers and trustees of certain individually designed plans. Assets contributed to the plans are allocated among the Funds and the portfolios in accordance with the instructions of the person or entity vested with the responsibility for determining the investment allocation of the assets of the plans held in the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans.
(c)
Dividends.
Income or gains on contributions are automatically reinvested in the respective Funds.
ITEM 6.
ITEM 6. Selected Financial Data.
The selected financial data below provides information with respect to income, expenses and capital changes for each Fund and each portfolio of the Structured Portfolio Service attributable to each Unit outstanding for the periods indicated. The summary financial data for each of the periods ended December 31 have been derived from financial statements audited by PricewaterhouseCoopers LLP, registered public accounting firm. The summary financial data should be read in conjunction with the financial statements of the Funds and the portfolios of the Structured Portfolio Service, including the related Notes thereto, which appear in Item 8 of this Report. Per Unit calculations of investment income and net expense have been prepared using the monthly average number of Units outstanding during the period.
Stable Asset Return Fund:
Intermediate Bond Fund:

Effective July 15, 2002, the Stable Asset Return Fund ceased maintaining a net asset value of $1.00 per unit, and the Fund commenced retaining net income and realized gains, if any. The units of the Stable Asset Return Fund were subject to a reverse split (27.4 for 1) effective July 15, 2002. The per unit data for all periods prior to July 15, 2002 have been restated to reflect the reverse split.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses charged to the collective investment fund in which the Fund invests a portion of its assets.
*
Net expenses includes only those expenses charged directly to the Fund. For periods commencing on or after July 1, 2002, net expenses does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets and for periods prior to July 1, 2002, net expenses does not include expenses relating to the registered investment company in which the Fund then invested a portion of its assets.
**
For periods prior to July 1, 2002, portfolio turnover reflected purchases and sales by the Fund of shares of the registered investment company in which the Fund was then invested rather than the turnover of the underlying portfolio of such registered investment company.
Balanced Fund:
Large-Cap Value Equity Fund:

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets and, with respect to periods commencing on or after July 1, 2004, does not include expenses relating to the Intermediate Bond Fund in which the Fund invests a portion of its assets.

With respect to the portion of the Fund’s assets invested in a collective investment fund commencing July 1, 2004, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests a portion of its assets rather than turnover of the underlying portfolio of such collective investment fund.
*
Effective January 1, 2001, the Fund began amortizing premium/discount on all debt securities. Had this change in accounting policy not been adopted, the per unit investment income would have been $2.23 in 2001.
**
Net expenses includes only those expenses charged directly to the Fund and does not include expenses charged to the collective investment funds in which the Fund invests a portion of its assets.
***
With respect to the portion of the Fund’s assets invested in a collective investment fund, portfolio turnover reflects purchases and sales by the Fund of units of the collective investment fund in which the Fund invests rather than the turnover of the underlying portfolio of such collective investment fund. The unaudited turnover of the separately managed portion of the Fund was 24% for the year ended December 31, 2005 and the unaudited turnover of the collective investment fund was 43% for the same period.
Large-Cap Growth Equity Fund:
Index Equity Fund:

The units of the Large-Cap Growth Equity Fund were split 10-for-1, effective February 2, 2001. The per unit data for the period prior to February 2, 2001 has been restated to reflect the split.

Net expenses include only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.

With respect to the portion of the Fund’s assets invested in a collective investment fund after December 15, 2002, portfolio turnover reflects purchases and sales by the Fund of units of the collective investment fund in which the Fund invests rather than the turnover of the underlying portfolio of such collective investment fund. The unaudited portfolio turnover of the separately managed portion of the portfolio was 52% for the year ended December 31, 2005 and the unaudited portfolio turnover of the collective investment fund was 43% for the same period.
*
Amounts less than $.005 per unit are rounded to zero.
**
Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets.
***
Portfolio turnover reflects purchases and sales by the Fund of units of the collective investment fund in which the Fund invests rather than the turnover of the underlying portfolio of such collective investment fund. The unaudited turnover of the collective investment fund was 27% for the year ended December 31, 2005.
Mid-Cap Value Equity Fund:
Mid-Cap Growth Equity Fund:

Commencement of operations.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
*
Commencement of operations.
**
Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
Small-Cap Equity Fund:
International Equity Fund:

With the addition of the Mid-Cap Growth Equity Fund effective July 15, 2002, the Small-Cap Equity Fund changed its investment strategy, removing medium capitalization companies from its portfolio and investing more exclusively in smaller capitalization companies.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets.

With respect to the portion of the Fund’s assets invested in a collective investment fund since July 1, 2005, portfolio turnover reflects purchases and sales by the Fund of the collective investment fund in which the Fund invests rather than the turnover of the underlying portfolio of such collective investment fund. The unaudited turnover of the separately managed portions of the Fund was 21% for the year ended December 31, 2005 and the unaudited turnover of the collective investment fund was 56% for the six months ended December 31, 2005.
*
Net expenses includes only those expenses charged directly to the Fund. For periods commencing on or after April 1, 2003, net expenses does not include expenses charged to the collective investment fund in which the Fund invests a portion of its assets, and for periods ended on or before March 31, 2003, net expenses does not include expenses charged to the registered investment company in which the Fund then invested a portion of its assets.
**
Through March 31, 2003, net expenses reflects a reduction in the Program Expense Fee payable to State Street Bank and an administrative service credit from the T. Rowe Price International Stock Fund. If the fees had not been reduced and the credit had not been made, the annualized ratio of net expenses to average net assets would have been .65%, .71% and 1.02%, for the years ended December 31, 2001, 2002 and 2003, respectively.
***
Through March 31, 2003, portfolio turnover reflects purchases and sales by the Fund of shares of the registered investment company in which the Fund was then invested rather than turnover of the underlying portfolio of the registered investment company.
Structured Portfolio Service-Conservative Portfolio:
Structured Portfolio Service-Moderate Portfolio:**

Net expenses includes only those expenses charged directly to the Portfolio and does not include expenses relating to the Funds in which the Portfolio invests.
*
Portfolio turnover reflects purchases and sales by the Portfolio of units of the Funds in which the Portfolio invests rather than the turnover of such underlying Funds.
**
As a result of the addition of the Mid-Cap Value Equity Fund and the Mid-Cap Growth Equity Fund on July 15, 2002, the allocations of the Moderate Portfolio of the Structured Portfolio Service were adjusted as of that date to include these Funds. Specifically, allocations to each of the Large-Cap Value Equity Fund and the Large-Cap Growth Equity Fund were reduced from 11% to 9%, and allocations of 2% were made to each of the Mid-Cap Value Equity Fund and the Mid-Cap Growth Equity Fund.
Structured Portfolio Service-Aggressive Portfolio:

As a result of the addition of the Mid-Cap Value Equity Fund and the Mid-Cap Growth Equity Fund on July 15, 2002, the allocations of the Aggressive Portfolio of the Structured Portfolio Service were adjusted as of that date to include these Funds. Specifically, allocations to each of the Large-Cap Value Equity Fund and the Large-Cap Growth Equity Fund were reduced from 15% to 13%, the allocation to the Small-Cap Equity Fund was reduced from 5% to 3%, and allocations of 3% were made to each of the Mid-Cap Value Equity Fund and the Mid-Cap Growth Equity Fund.

Net expenses includes only those expenses charged directly to the Portfolio and does not include expenses relating to the Funds in which the Portfolio invests.
*
Portfolio turnover reflects purchases and sales of units of the Funds in which the Portfolio invests rather than turnover of such underlying Funds.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Stable Asset Return Fund
The Stable Asset Return Fund invests primarily in investment contracts issued by insurance companies, banks or other financial institutions. The Stable Asset Return Fund also invests in high quality money market instruments, including obligations of the United States government, notes, bonds and similar debt instruments of corporations, commercial paper, certificates of deposit and time deposits, bankers’ acceptances, variable and indexed notes and repurchase agreements.
For the year ended December 31, 2005, the Stable Asset Return Fund experienced a total return, net of expenses, of 3.47%. By comparison, the Ryan Labs Three Year GIC Index and the iMoneyNet MFR Prime Institutional Money Market Fund average, weighted 70%/30%, respectively, produced an investment record of 3.11% for the same period. The Ryan Labs Three Year GIC Index portion of the combination benchmark does not include an allowance for the fees that an investor would pay for investing in the instruments that comprise that index or for fund expenses.
The Stable Asset Return Fund outperformed the combination benchmark by 36 basis points for the year ended December 31, 2005. During the year, the Fund maintained an average allocation of 28.5% money market instruments and 71.5% investment contracts. The money market segment of the Fund outperformed the iMoneyNet MFR Prime Institutional Money Market Fund benchmark by 45 basis points, contributing approximately 13 basis points to the Fund’s outperformance, while the investment contract segment of the Fund also outperformed the Ryan Labs Three Year GIC Index by 32 basis points, adding 23 basis points to the Fund’s outperformance.
The money market segment returned 3.36% for the year ended December 31, 2005, outperforming the iMoneyNet MFR Prime Institutional Money Market Fund index, which returned 2.91%. Throughout the year, the money market segment was structured in anticipation of the Federal Funds rate increases that occurred at the eight Federal Open Market Committee meetings. While the majority of fixed rate securities were invested from meeting to meeting of the Board of Governors of the Federal Reserve, the remainder was invested out the curve where break-even yields made sense for the segment. A large percentage of the segment, 60% on average, was invested in floating rate securities. All the floating rate securities purchased for the segment were subject to reset based on one month and three month LIBOR, with one month LIBOR averaging 18 basis points and three month LIBOR averaging 34 basis points above the Federal Funds target during 2005. The weighted average maturity of the segment averaged between 35 and 40 days for most of the year.
For the year ended December 31, 2005, the investment contract segment of the Fund returned 3.51%, compared to the Ryan Labs Three Year GIC Index return of 3.19%. During the third quarter, the investment guidelines of the Fund were amended to allow the money market segment of the Fund (cash equivalents) to be reduced to as low as 20%. This change allowed an increase in investments in the synthetic portion of the Fund, allowing for continuation of the theme during the year of increased diversification. By year-end, the allocation to collateralized mortgage obligations (CMOs) increased by 6.2%, commercial mortgage-backed securities (CMBS) by 3.9% and units in SSgA passive portfolios by 2.9%. The strategic allocation to guaranteed investment contracts was maintained by replacing maturing assets. Over the course of the year, outperformance versus the benchmark was derived primarily from two sources: investments in longer maturing assets versus the benchmark while the yield curve exhibited traditional upward sloping characteristics, and spread tightening across the structured product sectors of CMBS, CMOs and home equity securities.
Intermediate Bond Fund
The Intermediate Bond Fund’s investment objective is to achieve a total return from current income and capital appreciation by investing in a portfolio of fixed income securities.
For the year ended December 31, 2005, the Intermediate Bond Fund experienced a total return, net of expenses, of 2.00%. By comparison, the Lehman Brothers Aggregate Bond Index produced an investment record of 2.43% for the same period. The Lehman Brothers Aggregate Bond Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index or for fund expenses.
For the year ended December 31, 2005, the Intermediate Bond Fund, which is advised with the assistance of Pacific Investment Management Company LLC, underperformed the Lehman Brothers Aggregate Bond Index.
Bonds gained ground in 2005, leaning against the headwinds of Federal Reserve tightening and concern that higher energy prices would fuel inflation pressure. Initially, in the first quarter of 2005, bonds lost ground as volatile interest rates and weakness in credit markets stemming from concerns about the auto industry weighed on fixed income securities. Short-term interest rates continued to rise during the quarter as the Fed tightened, while strong demand from speculative investors and Asian central banks supported longer maturity bonds. However, in the second quarter bonds rallied worldwide as interest rates fell as signs of an economic slowdown emerged and risk appetites for credit-sensitive assets revived.
The third quarter was essentially a reversal of the previous three months, as most bond sectors lost ground in a rising rate environment. Rates were volatile intra-quarter, as investor sentiment shifted about the direction of Federal Reserve policy, the impact of Gulf Coast hurricanes, and the potential for a pullback in the U.S. housing market. The Federal Reserve continued to increase the Federal Funds
rate during the last quarter of the year, raising the rate twice in 25 basis point increments to a level of 4.25%. As the year drew to a close, some optimism arose that the Federal Reserve might be near the end of its rate increases, as a fall in energy prices calmed fears about inflation. Signs that higher mortgage rates and lofty valuations could finally be affecting affordability in surging property markets also helped placate bond markets.
Interest rate strategies were negative for performance during the year. An above benchmark duration for most of the year was slightly negative for performance as interest rates rose. An emphasis on short and intermediate maturities was negative as the yield curve flattened. Mortgage security and coupon selection added to returns. An underweight to corporates was also positive for returns as this sector underperformed due to auto sector concerns and a potential slowdown among consumers. A tactical allocation to real return (inflation protected) and municipal bonds added value, as these less volatile asset classes typically outperform in a rising rate environment. Non-U.S. positions added value as economic growth was generally slower and interest rate increases milder outside the U.S. Modest exposure to emerging market bonds, specifically Mexico, was positive, as these bonds continued to benefit from improving country credit fundamentals.
Balanced Fund
The Balanced Fund invests in publicly-traded common stocks, other equity securities, long-term debt securities and money market instruments. The Balanced Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to an appropriate combination of broad measures of the domestic stock and bond markets.
For the year ended December 31, 2005, the Balanced Fund experienced a total return, net of expenses, of 4.99%. By comparison, a combination of the Russell 1000 Index and the Lehman Brothers Aggregate Bond Index, weighted 60%/40%, respectively, produced an investment record of 4.81% for the same period. The Russell 1000 Index and the Lehman Brothers Aggregate Bond Index do not include an allowance for the fees that an investor would pay for investing in the securities that comprise the indices or for fund expenses.
For the year ended December 31, 2005, the equity segment of the Balanced Fund, which is advised with the assistance of Capital Guardian Trust Company, outperformed the Russell 1000 Index.
Stock selection in Health Care, especially pharmaceuticals, was the top contributor to performance for the year. An overweight in the equity segment in Energy early in 2005 and an underweight later in 2005 also helped performance. The portfolio also benefited from being underweight in Consumer Discretionary stocks. Stock selection in Financials was the biggest detractor, primarily the segment’s holding in Fannie Mae.
For the year ended December 31, 2005, the debt segment of the Balanced Fund, which is advised with the assistance of Pacific Investment Management Company LLC, underperformed the Lehman Brothers Aggregate Bond Index.
Bonds gained ground in 2005, leaning against the headwinds of Federal Reserve tightening and concern that higher energy prices would fuel inflation pressure. Initially, in the first quarter of 2005, bonds lost ground as volatile interest rates and weakness in credit markets stemming from concerns about the auto industry weighed on fixed income securities. Short-term interest rates continued to rise during the quarter as the Fed tightened, while strong demand from speculative investors and Asian central banks supported longer maturity bonds. However, in the second quarter bonds rallied worldwide as interest rates fell as signs of an economic slowdown emerged and risk appetites for credit-sensitive assets revived.
The third quarter was essentially a reversal of the previous three months, as most bond sectors lost ground in a rising rate environment. Rates were volatile intra-quarter, as investor sentiment shifted about the direction of Federal Reserve policy, the impact of Gulf Coast hurricanes, and the potential for a pullback in the U.S. housing market. The Federal Reserve continued to increase the Federal Funds rate during the last quarter of the year, raising the rate twice in 25 basis point increments to a level of 4.25%. As the year drew to a close, some optimism arose that the Federal Reserve might be near the end of its rate increases, as a fall in energy prices calmed fears about inflation. Signs that higher mortgage rates and lofty valuations could finally be affecting affordability in surging property markets also helped placate bond markets. The Lehman Brothers Aggregate Bond Index returned 2.43% for the year, despite the tightening cycle by the Federal Reserve that began in 2004.
Interest rate strategies were negative for performance during the year. An above benchmark duration for most of the year was slightly negative for performance as interest rates rose. An emphasis on short and intermediate maturities was negative as the yield curve flattened. Mortgage security and coupon selection added to returns. An underweight to corporates was also positive for returns as this sector underperformed due to auto sector concerns and a potential slowdown among consumers. A tactical allocation to real return (inflation protected) and municipal bonds added value, as these less volatile asset classes typically outperform in a rising rate environment. Non-U.S. positions added value as economic growth was generally slower and interest rate increases milder outside the U.S. Modest exposure to emerging market bonds, specifically Mexico, was positive, as these bonds continued to benefit from improving country credit fundamentals.
Large-Cap Value Equity Fund
The Large-Cap Value Equity Fund seeks to outperform, over extended periods of time, broad measures of the domestic stock market. The Fund invests primarily in common stocks and other equity-type securities of companies with market capitalizations, at the time of purchase, of greater than $1 billion that are believed to be undervalued in the marketplace. A segment of the Fund (approximately 25%) is invested to replicate the Russell 1000 Value Index, which is comprised of those Russell 1000 stocks with a greater than average value orientation. The remainder of the Large-Cap Value Equity Fund is actively managed.
For the year ended December 31, 2005, the Large-Cap Value Equity Fund experienced a total return, net of expenses, of 6.50%. By comparison, the Russell 1000 Value Index produced an investment record of 7.05% for the same period. The Russell 1000 Value Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the Index or for fund expenses.
For the year ended December 31, 2005, the actively managed portion of the Fund, which is advised with the assistance of Alliance Capital Management L.P., underperformed the Russell 1000 Value Index. Global equity markets continued to rally in 2005. Emerging markets delivered the highest returns, followed by Japan and Europe. The S&P 500 Index of large-capitalization U.S. equities lagged, but, having had a long stretch of outperformance in the 1990s, the U.S. market had fewer prospects for further appreciation. In effect, the valuations of Europe, Japan and the emerging markets played “catch-up” with the U.S. in 2005.
Returns in local currencies were generally higher, reflecting the unexpected appreciation of the U.S. dollar. The dollar staged a modest broad-based rally despite widespread fears that the growing size of the U.S. current account deficit would undermine the currency.
Energy and metals and mining stocks led the market globally last year thanks to booming world demand, while media and telecommunications companies trailed. Energy stocks also dominated U.S.
market returns, but leadership was broad-based, reflecting the widespread strength of U.S. corporate profits. The worst performers were troubled companies in the healthcare, media and auto and related industries.
Relative returns of the actively managed segment of the Fund were driven by stock selection within the transportation sector, especially positions in Burlington Northern Santa Fe and Norfolk Southern. Both of these railroad companies benefited from strong revenue improvement during the year driven by increased cargo rates and shipments of consumer goods and commodities. Another key contributor was Office Depot. This company’s stock price rose after management announced strong earnings in the third quarter due to cost-cutting measures.
Stock selection within the financial sector detracted from the relative returns of the actively managed segment of the Fund in 2005 as government sponsored housing agencies Freddie Mac and Fannie Mae fell on concerns about accounting issues and political efforts to control the size of their mortgage portfolios. Another chief detractor was U.S. Steel. The company declined due to weak steel prices and the announcement that the company would buy back outstanding shares.
The performance of the indexed segment of the Large-Cap Value Equity Fund for the year ended December 31, 2005 was consistent with the Russell 1000 Value Index after taking into account expenses.
Large-Cap Growth Equity Fund
The Large-Cap Growth Equity Fund invests primarily in common stocks and other equity-type securities of companies with market capitalizations greater than $1 billion at the time of purchase. The Large-Cap Growth Equity Fund seeks to achieve long-term growth of capital through increases in the value of the securities its holds and to realize income principally from dividends on such securities. A segment of the Large-Cap Growth Equity Fund (approximately 33 1/3%) is invested to replicate the Russell 1000 Growth Index, which is comprised of those Russell 1000 securities with a greater than average growth orientation. The remainder of the Large-Cap Growth Equity Fund is actively managed. The Large-Cap Growth Equity Fund seeks to achieve, over an extended period of time, total returns that are comparable to or superior to those attained by broad measures of the domestic stock market.
For the year ended December 31, 2005, the Large-Cap Growth Equity Fund experienced a total return, net of expenses, of 6.82%. By comparison, the Russell 1000 Growth Index produced an investment record of 5.26% for the same period. The Russell 1000 Growth Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index or for fund expenses.
The portion of the Large-Cap Growth Equity Fund advised with the assistance of Capital Guardian Trust Company outperformed the Russell 1000 Index for the year ended December 31, 2005. Stock selection in Health Care, especially pharmaceuticals, was the top contributor to performance for the year. An overweight in the Energy segment early in 2005 and an underweight later in 2005 also helped performance. The portfolio also benefited from being underweight in Consumer Discretionary stocks. Stock selection in Financials was the biggest detractor, primarily the segment’s holding in Fannie Mae.
For the year ended December 31, 2005, the segment of the Large-Cap Growth Equity Fund that was then actively managed with the assistance of RCM Capital Management LLC outperformed the Russell 1000 Growth Index. Outperformance for the year was due to positive stock selection.
Positive stock selection added to performance within the segment. Stock selection within Internet Software & Services, Semiconductors and Computers & Peripherals helped performance for the year.
Top performing stocks in 2005 were Google Inc., an Internet Software & Services company, Apple Computer Inc., a company in the Computers & Peripherals industry, and Marvell Technology Group, a Semiconductor stock.
Stock selection within Biotechnology, Communications Equipment and Energy detracted from returns during 2005. The largest detractors from performance for the year were Biogen Idec and Elan Corp., two stocks within the Biotechnology industry. An overweight in Energy and Biotechnology and underweight in Media and Software aided performance. An overweight in Internet Software & Services and Banks and an underweight in Transportation and Semiconductors detracted from performance.
The performance of the indexed segment of the Large-Cap Growth Equity Fund for the year ended December 31, 2005 was consistent with the Russell 1000 Growth Index after taking into account expenses.
Index Equity Fund
The Index Equity Fund invests in common stocks of U.S. companies which are included in the Russell 3000 Index, with the overall objective of achieving long-term growth of capital. The Russell 3000 Index represents approximately 98% of the U.S. equity market based on market capitalization of the companies in the Russell 3000 Index.
For the year ended December 31, 2005, the Index Equity Fund experienced a total return, net of expenses, of 5.66%. By comparison, the Russell 3000 Index produced an investment record of 6.12% for the same period. The Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the Index or for fund expenses.
The performance of the Index Equity Fund for the year ended December 31, 2005 was consistent with the Russell 3000 Index after taking into account expenses.
Mid-Cap Value Equity Fund
The Mid-Cap Value Equity Fund invests primarily in equity securities of companies with market capitalizations between $1 billion and $12 billion at the time of investment. The Fund seeks to be broadly diversified and emphasizes sectors and securities that State Street and the Fund’s Investment Advisor consider undervalued. The Mid-Cap Value Equity Fund seeks to achieve, over extended periods of time, total returns comparable to or superior to those of broad measures of the domestic stock market.
For the year ended December 31, 2005, the Mid-Cap Value Equity Fund, which is advised with the assistance of Ariel Capital Management LLC, experienced a total return, net of expenses, of 3.18%. By comparison, the Russell Mid-Cap Value Index produced an investment record of 12.65% for the same period. The Russell Mid-Cap Value Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the Index or for fund expenses.
The consumer sectors along with some of their key underlying industries struggled during the year. More specifically, newspaper and advertising industry-related stocks declined due to lower advertising spending and fears of a permanent shift to web-based channels. The Fund has been a long-term investor in these industries due to their predictable earnings and strong brands and franchises. Additionally, the Fund’s performance lagged as the Russell Mid-Cap Value Index’s energy holdings finished the year up 29.1%, even after giving back 7.0% in the fourth quarter.
In the Consumer Discretionary & Services sector, Interpublic Group was down 28.0% due to lower earnings resulting from account losses and costs connected with Sarbanes-Oxley compliance. Additionally, Tribune (-26.8%) continued to struggle under the general malaise of the industry due to fears of declining circulation and decreasing advertising revenue.
On a positive note, the Fund had strong performance in key holdings: Franklin Resources (+39.7%) and Omnicare (+65.6%). Franklin Resources’ shares rose as its international presence, with operations in over 100 countries, drove strong asset growth from non-U.S. investors. Omnicare’s stock increased as the result of its acquisition of NeighborCare, a leading institutional pharmacy provider, and strong earnings reports, which included record sales and increased operating margins.
Mid-Cap Growth Equity Fund
The Mid-Cap Growth Equity Fund invests primarily in common stocks and other equity-type securities of companies with market capitalizations between $1 billion and $12 billion at the time of investment. The Fund emphasizes sectors and securities that State Street and the Investment Advisor believe have strong earnings growth potential. The Mid-Cap Growth Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market.
For the year ended December 31, 2005, the Mid-Cap Growth Equity Fund, which is advised by Turner Investment Partners, experienced a total return, net of expenses, of 11.63%. By comparison, the Russell Mid-Cap Growth Index produced an investment record of 12.10% for the same period. The Russell Mid-Cap Growth Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index or for fund expenses.
In 2005, earnings were strong but the stock market was not. Corporate America increased earnings by an estimated 13.6%, but the stock market, as represented by the S&P 500 Index, gained just 4.91%. Indeed, companies continued to go on a profit tear the likes of which has not been seen in modern times. Investor sentiment throughout the year was soured by a double dose of rising interest rates and high energy prices. From a 45-year low of 1.00% in 2004, the Federal Reserve hiked short-term rates to 4.25% as of December 2005. Oil prices in August 2005 climbed to a record of more than $68 per barrel before ending the year at about $63. The worry among investors was that higher rates and oil prices would crimp consumer spending, the engine that drives the U.S. economy.
Among capitalization segments, mid-cap stocks were the clear winners for the second straight year. The Russell Mid-Cap Growth Index gained 12.10% in 2005. Lagging were the large-cap Russell 1000 Index, which was up 6.27%, and the small-cap Russell 2000 Index, which rose 4.55%. Meanwhile, eight of the ten Russell 3000 Index sectors recorded positive returns for the year. Leading the performance parade by a wide margin for the second straight year was the energy sector, which rose 56.69%-a 48.82-percentage-point edge over the second-best performing sector, producer durables. The biggest loss was recorded by the autos/transportation sector, which fell 6.45%.
When analyzing the portfolio’s performance and attribution, the consumer discretionary, utility and energy sectors contributed the most to performance versus the benchmark while the majority of the relative underperformance was attributable to the healthcare sector (-1.8% versus the benchmark). Within consumer discretionary, a retail theme that was in place throughout the year was the portfolio’s bias toward high-end retailers, including Chico’s FAS Inc. (+93%), Urban Outfitters Inc. (+14%), Coach Inc. (+18%) and American Eagle Outfitters Inc. (+20%). These companies have experienced solid square footage growth due to niche-oriented businesses. Additionally, casinos & gaming companies (e.g., Station Casinos, Scientific Games) have continued to benefit from increased gambling venues and products.
For 2005, the utility sector produced the greatest return in the portfolio, yielding 77%. Although one of the smaller sectors throughout the year with an average weight of 3.0%, it contributed approximately 1.8% to the portfolio’s total return and 1.0% to the relative return. Wireless telecom securities, including NII Holdings (+84%), Alamosa Holdings (+37%) and Western Wireless (+28%), all benefited from a general increase in wireless usage as well as subscriber retention. Another boost to performance was the portfolio’s holdings in the energy sector, which as a group advanced 74% during
the year versus 54% for the benchmark. Leading the way were oil and gas production companies Ultra Petroleum (+132%) and Range Resources (+94%) as well as Peabody Energy (+105%), the world’s largest private-sector coal company.
Weighing on performance for 2005 was security selection within the healthcare sector (return of 8.0% for the portfolio vs. 17.9% for the benchmark), which represented 18% of the portfolio on average. Company specific events in the biotech industry led to substantial declines in securities which the portfolio held in the early part of the year. These included Eyetech Pharmaceuticals (-28%), MGI Pharma (-29%) and Elan (-71%).
Small-Cap Equity Fund
The Small-Cap Equity Fund invests primarily in equity securities of companies with market capitalizations of $2.5 billion or less at the time of investment. These companies may include new companies and companies that may benefit from new technologies, new product or service development or management changes. The Small-Cap Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. A segment of the Fund is invested to replicate the Russell 2000 Index, which is comprised of the 2,000 companies in the Russell 3000 Index with the smallest market capitalization. The remainder of the Fund is actively managed.
For the year ended December 31, 2005, the Small-Cap Equity Fund experienced a total return, net of expenses, of 6.26%. By comparison, the Russell 2000 Index produced an investment record of 4.55% for the same period. The Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the Index or for fund expenses.
The segment of the Small-Cap Equity Fund advised with the assistance of Smith Asset Management Group, L.P. outperformed the Russell 2000 Index for the year ended December 31, 2005. 2005 was a year of continued good economic growth and double digit earnings growth. In this environment, a focus on companies with attractive valuations, high quality earnings and corporate governance, and earnings growth that was better than expected produced positive results. Stock selection was particularly good in the health care and information technology sectors. Returns in the energy sector lagged those of the benchmark. Sectors that were overweighted during the year versus the benchmark sector weights were information technology (23% vs. 17%) and industrials (21% vs. 15%). Financials were underweighted (14% vs. 22%).
The three best performing stocks for the year were Quality Systems (+167%), Diodes (+106%) and LCA-Vision (+105%). Quality Systems sells healthcare information systems designed to automate medical and dental group practices and other health related organizations. Earnings for each quarter reported in 2005 exceeded expectations by 8% to 16%. Diodes manufactures semiconductor, diodes, and transistor devices. It also consistently grew faster than expected by analysts. LCA-Vision operates laser vision correction centers. Earnings exceeded expectations by at least 20% for each quarter reported in 2005. The three worst performing stocks during the year, all of which were sold because of negative earnings results, were R & G Financial Corp. (-61%), Deckers Outdoor Corp. (-54%) and Cash America Investments (-51%).
The segment of the Small-Cap Equity Fund advised with the assistance of Wellington Asset Management, LLP outperformed the Russell 2000 Index for the year ended December 31, 2005. As a “best ideas” portfolio, bottom-up stock selection is the primary source of excess returns, and in turn, aggregate risk. Stock selection was solid across most sectors for the year, with weakness contained primarily to the Consumer Discretionary sector.
The top-performing sectors relative to the Russell 2000 Index in 2005 were Financials, Information Technology and Telecommunication Services. The Financials sector contributed to index relative
returns as a result of strong security selection, most notably from a strong move in shares of Nasdaq Stock Market. The stock of Nasdaq was among the top performers for the year as it continues to challenge the New York Stock Exchange for market share following regulatory changes that bolster its competitive position. Although the Information Technology sector was weak as a whole, the portfolio’s strong security selection produced positive relative returns. Software was a particularly strong area of performance, with Salesforce.com and Red Hat the top contributors in the sector for the year. Also in 2005, the Telecommunication Services sector aided relative results, particularly a holding in Dobson Communication, which was up over 300%.
On the negative side, poor stock selection in the Consumer Discretionary sector detracted from relative performance. Specialty retailer AC Moore Arts & Crafts was the largest detractor as investors continued to worry about the impact of high energy costs and rising interest rates.
The segment of the Small-Cap Equity Fund advised with the assistance of Capital Guardian Trust Company through June 30, 2005 underperformed the Russell 2000 Index for the six-month period then ended. Stock selection in Financials was the top contributor to performance for the six-month period. Stock selection in Health Care and Utilities also helped performance. Poor stock selection and an overweight in Information Technology was the largest detractor and poor stock selection in Industrials was the second-largest detractor. The portfolio’s largest overweight position was in the Consumer Discretionary sector while its largest underweight position was in Financials. Sector weightings, however, had minimal influence on relative results for the six months June 30, 2005.
The performance of the indexed segment of the Small-Cap Equity Fund for the six months ended December 31, 2005 was consistent with the Russell 2000 Index after taking into account expenses.
International Equity Fund
The International Equity Fund’s investment objective is to seek long-term growth of capital through investment primarily in common stocks of established non-U.S. companies. The Fund intends to diversify investments broadly among countries of the Far East and Europe, as well as in South Africa, Australia, Canada and other areas. The International Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to broad measures of the international (non-U.S.) stock market.
For the year ended December 31, 2005, the International Equity Fund experienced a total return, net of expenses, of 13.62%. By comparison, the Morgan Stanley Capital International All-Country World Ex-U.S. Free Index (the “MSCI AC World Ex-U.S. Index”) produced an investment record of 16.62% for the same period. The Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the Index or for fund expenses.
The segment of the International Equity Fund advised by Philadelphia International Advisors, LP underperformed the MSCI AC World Ex-U.S. Index for the year ended December 31, 2005. International equity markets shook off an October correction and posted strong gains in November and December 2005, ending the year just 5% below EAFE’s March 2000 record close. Most sectors participated in the rally, except for energy, which softened as oil prices declined post-Hurricane Katrina, and telecommunication services, which suffered all year from low pricing power and intense competition. For all of 2005, the MSCI AC World Ex-U.S. Index generated a 16.6% total return. Largely on the back of second half performance, emerging markets stocks set the pace with a 34.0% return followed by Japan at 25.5%. The smaller European markets of Norway, Austria and Denmark were close behind with returns over 24%. Overall, European market returns were a more modest 9.4%. The best performing global sectors were energy and materials, which rose 30.1% and 27.6%, respectively. The
poorest performing sector was telecommunications, which declined 5.2%, making it the only sector in negative territory. Stock selection was positive on a country basis; however, the portfolio’s underweight in emerging markets stocks added to the negative variance versus the benchmark. In addition, results were poor in the portfolio’s consumer stocks.
The segment of the International Equity Fund advised with the assistance of JPMorgan Asset Management (London) Limited underperformed the MSCI AC World Ex-U.S. Index for the year ended December 31, 2005. Underweight positions in Japan and emerging markets combined with disappointing performances from a number of the Fund’s U.K. holdings were the primary reason for the shortfall.
Concerns about a slump in U.K. consumer spending negatively impacted consumer and financial holdings in that country.
In contrast, stock selection in Japan and emerging markets was strong but not holding enough of either market segment offset those gains. Emerging markets have had a strong run in recent years on the back of investors’ increased appetite for risk but the asset class is, as of the end of 2005, trading at parity with its less risky, developed counterparts.
Structured Portfolio Service
The portfolios of the Structured Portfolio Service invest in the Funds described above according to conservative, moderate and aggressive allocations. Funds in the Conservative Portfolio are allocated as follows: Stable Asset Return Fund, 30%; Intermediate Bond Fund, 35%; Large-Cap Value Equity Fund, 7%; Large-Cap Growth Equity Fund, 7%; Index Equity Fund, 14%; and International Equity Fund, 7%. Funds in the Moderate Portfolio are allocated as follows: Stable Asset Return Fund 10%; Intermediate Bond Fund, 30%; Large-Cap Value Equity Fund, 9%; Large-Cap Growth Equity Fund, 9%; Index Equity Fund, 23%; Mid-Cap Value Equity Fund, 2%; Mid-Cap Growth Equity Fund, 2%; and International Equity Fund, 15%. Funds in the Aggressive Portfolio are allocated as follows: Intermediate Bond Fund, 15%; Large-Cap Value Equity Fund, 13%; Large-Cap Growth Equity Fund, 13%; Index Equity Fund, 30%; Mid-Cap Value Equity Fund, 3%; Mid-Cap Growth Equity Fund, 3%; Small-Cap Equity Fund, 3%; and International Equity Fund, 20%.
For the year ended December 31, 2005, the Structured Portfolio Service experienced a total return, net of expenses, of 4.49% for the Conservative Portfolio, 5.86% for the Moderate Portfolio, and 7.15% for the Aggressive Portfolio.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The Funds do not engage in investments in derivative instruments except as described under Item 1, “Business-Description of Investment Options-Derivative Instruments.” For additional information, see Note 2 to the Financial Statements included in Item 8, “Financial Statements and Supplementary Data.”
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
See p..
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
ITEM 9A.
ITEM 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures: Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, the Collective Trust conducted an evaluation of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based on such evaluation, the Collective Trust’s Chief Executive Officer and Chief Financial Officer have concluded that its disclosure controls and procedures are effective as of December 31, 2005.
Management’s Report on Internal Control Over Financial Reporting: The Collective Trust’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) for each of the Funds and the three portfolios of the Structured Portfolio Service. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Collective Trust’s management conducted evaluations of the effectiveness of the internal control over financial reporting of each of the Funds and the three portfolios of the Structured Portfolio Service based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such evaluations, the Collective Trust’s management concluded that internal control over financial reporting was effective as of December 31, 2005.
The Collective Trust’s management assessments of the effectiveness of the internal control over financial reporting of each of the Funds and the three portfolios of the Structured Portfolio Service as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant.
State Street, as trustee, has primary responsibility for investment management with respect to each of the Investment Options. As part of its responsibility, it appoints the officers of the Collective Trust, who have responsibility for administering all the Investment Options. The following is a biographical summary of the experience of each of the officers of the Collective Trust:
Philip J. Lussier. Mr. Lussier, age 52, is the President and Chief Executive Officer of the Collective Trust and the Chief Executive Officer and Chairman of the Board of CitiStreet LLC. Prior to assuming his current position at CitiStreet LLC in March 2005, Mr. Lussier served as President of CitiStreet’s Retirement Services Division from December 2000 to March 2005. From April 1, 2000 until December 2000, Mr. Lussier served as Division President, Institutional Sales & Marketing, of CitiStreet. From January 1995 until the inception of CitiStreet in April 2000, he was a Senior Vice President of the Retirement Investment Services Division of State Street Global Advisors.
Beth M. Halberstadt. Ms. Halberstadt, age 40, is the Vice President and Chief Financial Officer of the Collective Trust, an Executive Vice President and member of the Board of Directors of State Street, a Vice President of State Street Bank and program director of the ABA Retirement Funds program. From September 1996 to January 1999, Ms. Halberstadt was Vice President and Client Service Manager in Retirement Investment Services, a part of State Street Bank Global
Advisors, a division of State Street Bank. From 1988 to 1996, Ms. Halberstadt was employed by Watson Wyatt as a defined contribution consultant advising on 401(k), ESOP, non-qualified and stock purchase plan issues.
Robert E. Fullam. Mr. Fullam, age 44, is the Treasurer and Chief Accounting Officer of the Collective Trust, a Vice President of State Street and Assistant Vice President of CitiStreet LLC, an affiliate of State Street Bank. Prior to joining CitiStreet in 2001, Mr. Fullam worked at State Street Bank in various capacities during the period of 1987 through 2001, including Account Controller, Client Representative, Compliance Analyst and Investment Officer.
The officers of the Collective Trust receive no direct remuneration from the Collective Trust, but do receive remuneration from State Street Bank or its affiliates.
The Collective Trust does not have a board of directors. The Collective Trust is a trust with a corporate trustee, which is State Street, a wholly owned subsidiary of State Street Bank. For purposes of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the Securities and Exchange Commission adopted under that Act, the board of directors of State Street has responsibility for the functions with respect to audit matters relating to the Collective Trust. Each member of the board of directors of State Street is an employee of State Street Bank or its affiliates.
For purposes of complying with the audit committee requirements of the Sarbanes-Oxley Act, the board of directors of State Street has assigned to its Audit Committee responsibility for overseeing the accounting and financial reporting processes and audits of the financial statements of the Collective Trust. State Street’s board has determined that one member of the Audit Committee, William F. Weihs, is an “audit committee financial expert” as defined under applicable United States federal securities laws.
State Street Bank has adopted, and State Street has ratified the adoption of, a Code of Ethics for Financial Officers which applies to State Street Bank’s Chief Executive Officer, Chief Financial Officer, Controller and other financial officers, including all of the officers of the Collective Trust. A copy of the Code of Ethics is available at www.statestreet.com. The Collective Trust will provide a free copy of the Code of Ethics upon written request to State Street Bank and Trust Company, ARF Program Services, One Heritage Drive, North Quincy, Massachusetts 02171. The Collective Trust intends to post on the web site, www.statestreet.com, any amendments to, or waivers from, the Code of Ethics applicable to the officers referred to above.
State Street Bank and Citigroup, Inc. jointly own a Delaware limited liability company called CitiStreet LLC. CitiStreet provides recordkeeping and other administrative services to clients of State Street, State Street Bank and Citigroup, Inc. Insofar as State Street Bank provides recordkeeping and other administrative services to the Program, these services may be provided by CitiStreet on behalf of State Street Bank pursuant to a service agreement entered into between State Street Bank and CitiStreet.
State Street Bank directly distributes marketing materials on behalf of the Collective Trust. No third party distributors or broker-dealers who are unaffiliated with State Street Bank or its affiliates are utilized. The Program is marketed through advertising in legal periodicals, exhibiting at legal conventions and direct mail and phone solicitations to law firms. Firms that indicate an interest in the services made available through the Program are assigned a marketing representative who facilitates participation in the Program through phone or on-site discussions.
ITEM 11.
ITEM 11. Executive Compensation.
The executive officers of the Collective Trust receive no direct remuneration from the Collective Trust, but do receive remuneration from State Street Bank or its affiliates. For a description of fees received by State Street and others, see Item 1, “Business-Deductions and Fees.”
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
State Street Bank, as sole trustee of each of the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans, is the holder of record of all units of beneficial interests of each of the Funds. None of State Street, State Street Bank or any officer of the Collective Trust beneficially owns any securities of the Collective Trust.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions.
See Item 1, “Business-The Program” and “-Deductions and Fees” for information regarding certain relationships and transactions.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services.
Audit Fees
The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP (“PwC”), the principal accountant for the Collective Trust, for the audit of the Collective Trust’s annual financial statements and for the review of financial statements included in the Collective Trust’s quarterly reports filed on Form 10-Q and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements (such as comfort letters, statutory audits, attest services, consents and services to comply with generally accepted auditing standards) were $500,000 and $372,300 for the fiscal years ended December 31, 2005 and 2004, respectively.
Audit Fees consist of fees for professional services rendered for the audit of the Collective Trust’s annual financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by PwC in connection with statutory and regulatory filings or engagements. In 2005, audit fees also include fees for professional services rendered for the audits of (i) management’s assessment of the effectiveness of internal control over financial reporting and (ii) the effectiveness of internal control over financial reporting.
Audit-Related Fees
The aggregate fees billed for assurance and related services provided to the Collective Trust by PwC that are reasonably related to the performance of the audit or review of the Collective Trust’s financial statements and not reported under “-Audit Fees” were $0 and $0 for the fiscal years ended December 31, 2005 and 2004, respectively.
Tax Fees
The aggregate fees billed for professional services rendered by PwC to the Collective Trust for tax compliance, tax advice and tax planning were $0 and $0 for the fiscal years ended December 31, 2005 and 2004, respectively.
All Other Fees
The aggregate fees billed by PwC to the Collective Trust for any products and services not disclosed above were $0 and $0 for the fiscal years ended December 31, 2005 and 2004, respectively.
The Examining and Audit Committee of State Street’s Board of Directors has established pre-approval policies and procedures applicable to all services provided by PwC, pursuant to which the Examining and Audit Committee will annually review for pre-approval each particular service expected
to be provided by the outside auditor of the annual financial statements of the Collective Trust. Such services may include audit services (including consultation to support such audits), audit-related services (items reasonably related to the performance of the audit or review of the financial statements), tax services (tax compliance, tax planning, tax advice), and other services (services permissible under the auditor independence rules of the Securities and Exchange Commission). In connection with its pre-approval process the Examining and Audit Committee will be provided with sufficient detailed information so that it can make well-reasoned assessments of the impact of the services on the independence of PwC.
Any proposed service that was not known or expected at the time of the annual pre-approval process, but which would exceed pre-approved cost levels or budgeted amounts, would also require pre-approval by the Examining and Audit Committee. Substantive changes in terms, conditions, and fees resulting from changes in the scope, structure, or other items regarding pre-approved services would be subject to pre-approval if necessary.
PART IV
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules.
ITEM 15(a). The following documents are filed as part of this report:
1. Financial Statements.
See page for an index to the Financial Statements included in this report.
2. Financial Statement Schedules.
A Schedule of Investments for each of the Balanced Fund, the Large-Cap Growth Equity Fund, the Large-Cap Value Equity Fund, the Mid-Cap Growth Equity Fund, the Mid-Cap Value Equity Fund, the Small-Cap Equity Fund and the Stable Asset Return Fund is included in Item 8 of this report.
3. Exhibits are listed under Item 15(b) below.
ITEM 15(b). Exhibits, including those incorporated by reference:
*
Filed herewith.
ITEM 15(c). Financial statement schedules and financial statements.
See page for an index to the Financial Statements included in this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN BAR ASSOCIATION MEMBERS/
STATE STREET COLLECTIVE TRUST
Date: March 16, 2006
By:
/S/ PHILIP J. LUSSIER
Name:
Title:
Philip J. Lussier
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2006.
Signature
Title
/S/ PHILIP J. LUSSIER
Philip J. Lussier
President and Chief Executive Officer of the American Bar Association Members/State Street Collective Trust (Principal Executive Officer)
/S/ BETH M. HALBERSTADT
Beth M. Halberstadt
Vice President and Chief Financial Officer of the American Bar Association Members/ State Street Collective Trust (Principal Financial Officer)
/S/ ROBERT E. FULLAM
Robert E. Fullam
Treasurer and Chief Accounting Officer of the American Bar Association Members/State Street Collective Trust (Principal Accounting Officer)
/S/ DANIEL J. BOUCHARD*
Daniel J. Bouchard
Director of State Street Bank and Trust Company of New Hampshire
/S/ NANCY E. GRADY*
Nancy E. Grady
Director of State Street Bank and Trust Company of New Hampshire
/S/ BETH M. HALBERSTADT
Beth M. Halberstadt
Executive Vice President and Director of State Street Bank and Trust Company of New Hampshire
/S/ GARY E. JENKINS*
Gary E. Jenkins
Clerk, General Counsel and Director of State Street Bank and Trust Company of New Hampshire
/S/ THOMAS P. KELLY*
Thomas P. Kelly
Director of State Street Bank and Trust Company of New Hampshire
/S/ KAREN E. KRUCK*
Karen E. Kruck
Director of State Street Bank and Trust Company of New Hampshire
Signature
Title
/S/ NANCY H. LOUCKS*
Nancy H. Loucks
Director of State Street Bank and Trust Company of New Hampshire
/S/ SCOTT W. OLSON*
Scott W. Olson
Executive Vice President and Director of State Street Bank and Trust Company of New Hampshire
/S/ JAMES S. PHALEN*
James S. Phalen
President, Chairman and Director of State Street Bank and Trust Company of New Hampshire
/S/ WILLIAM F. WEIHS*
William F. Weihs
Treasurer and Director of State Street Bank and Trust Company of New Hampshire
*By
/S/ SHAWN P. CURRIER
Name:
Shawn P. Currier
Attorney-in-Fact
American Bar Association Members/State Street Collective Trust
Report of Independent Registered Public Accounting Firm
To the Trustee and Unitholders of the
American Bar Association Members/
State Street Collective Trust:
We have completed integrated audits of the December 31, 2005 and 2004 financial statements and of the internal control over financial reporting as of December 31, 2005 for each of the Balanced Fund, Index Equity Fund, Intermediate Bond Fund, International Equity Fund, Large-Cap Growth Equity Fund, Large-Cap Value Equity Fund, Mid-Cap Growth Equity Fund, Mid-Cap Value Equity Fund, Small-Cap Equity Fund and Stable Asset Return Fund (each hereafter referred to as a “Fund”), Conservative Structured Portfolio Service, Moderate Structured Portfolio Service and Aggressive Structured Portfolio Service (each hereafter referred to as a “Portfolio”) constituting the American Bar Association Members/State Street Collective Trust (hereafter referred to as the “Trust”) in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Financial statements and financial statement schedules
In our opinion, the financial statements listed in the index referenced under Item 15(a)(1) present fairly, in all material respects, the financial position of each of the Funds and each of the Portfolios at December 31, 2005, and the results of each of their operations, the changes in each of their net assets, and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index referenced under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedules are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Trust maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the COSO. The Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Trust’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 10, 2006
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $21,860,657.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets and, with respect to periods commencing on July 1, 2004, does not include expenses relating to the Intermediate Bond Fund in which the Fund invests a portion of its assets.
*
With respect to the portion of the Fund’s assets invested in a collective investment fund commencing July 1, 2004, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests a portion of its assets, rather than portfolio turnover of the underlying portfolio of such collective investment fund.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(c)
Represents security purchased with cash collateral received for securities on loan.
ADR-American
Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Financial Highlights
(For a unit outstanding throughout the year)
*
Amounts less than $0.005 per unit are rounded to zero.
**
With respect to the portion of the Fund’s assets invested in a collective investment fund, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests, rather than turnover of the underlying portfolio of such collective investment fund.

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Assets and Liabilities
(a) Includes securities on loan with a value of $77,522,133.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Changes in Net Assets
*
Includes for 2004 Balanced Fund transaction of $173,984,004 and 9,614,275 units issued reflecting the transfer of the debt portion of the Balanced Fund, including interest receivable, into the Fund in exchange for units of the Fund as of June 30, 2004.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund. For periods commencing on or after July 1, 2002, net expenses does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets and for periods prior to July 1, 2002, net expenses does not include expenses relating to the registered investment company in which the Fund then invested a portion of its assets.
*
Prior to July 1, 2002, portfolio turnover reflected purchases and sales by the Fund of shares of the registered investment company in which the Fund was then invested rather than portfolio turnover of the underlying portfolios of such registered investment company.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond
Schedule of Investments
December 31, 2005
(a)
Indicates a variable rate security. The rate shown reflects the current rate in effect at year end.
(b)
Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. The total cost and market value of Rule 144A securities owned at year end were $1,114,198 and $932,072, respectively.
(c)
Represents a Treasury Inflation-Protected Security (TIPS). The interest and redemption payments for TIPS are tied to inflation as measured by the Consumer Price Index (CPI).
(d)
All or a portion of security is on loan.
(e)
These securities have been segregated as collateral for outstanding interest rate swaps and futures contracts.
(f)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(g)
Represents security purchased with cash collateral received for securities on loan.
EUR-Eurodollar denominated bond
FSA-Financial Security Assurance Co.
G.O.-General Obligation
JPY-Japanese Yen denominated bond
MBIA-Municipal Bond Insurance Association
TBA-To Be Announced-See Note 2(F)
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $23,426,711.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund. For periods commencing April 1, 2003, net expenses does not include expenses relating to the collective investment fund in which the Fund invests a portion of its assets and for periods ended on or before March 31, 2003, net expenses does not include expenses relating to the registered investment company in which the Fund then invested a portion of its assets.
*
Through March 31, 2003, portfolio turnover reflects purchases and sales of shares of the registered investment company in which a portion of the Fund was then invested rather than the portfolio turnover of the underlying portfolio of the registered investment company.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31,
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Listed on the Toronto Stock Exchange.
(c)
Listed on the New York Stock Exchange.
(d)
Listed on the London Stock Exchange.
(e)
Listed on the Dublin Stock Exchange.
(f)
Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. The total cost and market value of Rule 144A securities owned at year end were $851,580 and $1,749,205, respectively.
(g)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(h)
Represents security purchased with cash collateral received for securities on loan.
ADR-American
Depositary Receipt
GDR-Global Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $23,468,053.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
*
With respect to the portion of the Fund’s assets invested in a collective investment fund after December 15, 2002, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests, rather than portfolio turnover of the underlying portfolio of such collective investment fund.
**
The units of the Fund were split 10-for-1, effective February 2, 2001.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(c)
Represents security purchased with cash collateral received for securities on loan.
ADR-American
Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $13,633,355.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
*
With respect to the portion of the Fund’s assets invested in a collective investment fund, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests, rather than portfolio turnover of the underlying portfolio of such collective investment fund.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Large-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(c)
Represents security purchased with cash collateral received for securities on loan.
ADR-American Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $19,496,766.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Financial Highlights
(For a unit outstanding throughout the period)
*
From commencement of operations, July 15, 2002.

Calculations prepared using the daily average number of units outstanding during the period.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Schedule of Investments
December 31,
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Growth Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(c)
Represents security purchased with cash collateral received for securities on loan.
ADR-American
Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $4,885,823.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Financial Highlights
(For a unit outstanding throughout the period)
*
From commencement of operations, July 15, 2002.

Calculations prepared using the daily average number of units outstanding during the period.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Mid-Cap Value Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(c)
Represents security purchased with cash collateral received for securities on loan.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Statement of Assets and Liabilities
(a)
Includes securities on loan with a value of $90,413,558.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
*
With respect to the portion of the Fund’s assets invested in a collective investment fund commencing July 1, 2005, portfolio turnover reflects purchases and sales of the collective investment fund in which the Fund invests a portion of its assets, rather than portfolio turnover of the underlying portfolio of such collective investment fund. The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31,
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Small-Cap Equity Fund
Schedule of Investments
December 31, 2005
*
Non-income producing security.
(a)
All or a portion of security is on loan.
(b)
Fair valued security
(c)
Collective investment fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(d)
Represents security purchased with cash collateral received for securities on loan.
ADR-American
Depositary Receipt
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Financial Highlights
(For a unit outstanding throughout the year)

Calculations prepared using the daily average number of units outstanding during the year.

Net expenses includes only those expenses charged directly to the Fund and does not include expenses relating to the collective investment funds in which the Fund invests a portion of its assets.
*
Effective July 25, 2002, the Fund ceased maintaining a net asset value of $1.00 per unit and the Fund commenced retaining net income and realized gains, if any. The units of the Stable Asset Return Fund were subject to a reverse split (27.4 to 1) effective July 15, 2002. The per unit data for the period prior to July 15, 2002 has been restated to reflect the reverse split.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2005
*
Synthetic investment contracts represent indivdual assets placed in a trust with ownership by the Fund. A third party issues a wrapper contract that guarantees owners can and must execute transactions at contract value. Individual assets of the synthetic contracts are valued at representative quoted market prices. The wrapper is valued as the difference between the fair value of the assets and contract value of the investment contract.
**
Collective Investment Fund advised by State Street Global Advisors, a division of State Street Bank and Trust Company.
(a)
Global wrap contract-holds multiple underlying securities with various maturity dates.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Conservative Portfolio
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Conservative Portfolio
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Conservative Portfolio
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Conservative Portfolio
Financial Highlights
(For a unit outstanding throughout the year)

Portfolio turnover reflects purchases and sales by the Portfolio of units of the Funds in which the Portfolio invests rather than portfolio turnover of such underlying Funds.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Moderate Portfolio
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Moderate Portfolio
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Moderate Portfolio
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Moderate Portfolio
Financial Highlights
(For a unit outstanding throughout the year)

Portfolio turnover reflects purchases and sales by the Portfolio of units of the Funds in which the Portfolio invests rather than portfolio turnover of such underlying Funds.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Aggressive Portfolio
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Aggressive Portfolio
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Aggressive Portfolio
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Structured Portfolio Service-Aggressive Portfolio
Financial Highlights
(For a unit outstanding throughout the year)

Portfolio turnover reflects purchases and sales by the Portfolio of units of the Funds in which the Portfolio invests rather than portfolio turnover of such underlying Funds.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements
1. Description of the Trust
American Bar Association Members/State Street Collective Trust (the “Trust” or the “Collective Trust”) was organized on August 8, 1991 under the American Bar Association Members/State Street Collective Trust Declaration of Trust as amended and restated on December 5, 1991 and as amended thereafter. Since December 1, 2004, State Street Bank and Trust Company of New Hampshire (“State Street” or the “Trustee”) has acted as trustee of the Collective Trust. State Street Bank and Trust Company (“State Street Bank”) acted as trustee for the Trust until December 1, 2004. The Trust is maintained exclusively for the collective investment of monies administered on behalf of participants in the ABA Retirement Funds program (the “Program”). Ten separate collective investment funds (the “Funds”) and three portfolios comprising the Structured Portfolio Service (the “Portfolios”) are established under the Trust. The Structured Portfolio Service offers three approaches to diversifying investments by stipulating various allocations among the Funds. The Funds and Portfolios are investment options under the Program, which is sponsored by ABA Retirement Funds (“ARF”) (formerly called the American Bar Retirement Association). The objectives and principal strategies of the Funds and Portfolios are as follows:
Balanced Fund-current income and long-term capital appreciation through investment in common stocks, other equity-type securities and debt securities. Since July 1, 2004, the debt portion of the Balanced Fund has been invested through the American Bar Association Members/State Street Collective Trust Intermediate Bond Fund. Prior to July 1, 2004, the debt portion had been invested in separately owned securities. As of December 31, 2005, 36.9% of the Fund’s net assets were invested in the American Bar Association Members/State Street Collective Trust Intermediate Bond Fund.
Index Equity Fund-replication of the total return of the Russell 3000 Index. Currently invests 100% of the Fund’s assets in the State Street Bank and Trust Company Russell 3000 Index Securities Lending Fund, a separate State Street Bank collective investment fund which invests in securities contained in the Russell 3000 Index. This underlying fund’s financial statements are available from State Street Bank upon request.
Intermediate Bond Fund-invests primarily in debt securities of varying maturities, with an average portfolio duration of three to six years, with the objective of achieving a competitive total return from current income and capital appreciation.
International Equity Fund-long term growth of capital through investment in common stocks and other equity securities of established non-U.S. companies.
Large-Cap Growth Equity Fund-long term growth of capital and some dividend income through investment in common stocks and equity-type securities of large, well established companies. Currently invests in common stocks and the State Street Bank and Trust Company Russell 1000 Growth Index Securities Lending Fund, a separate State Street Bank collective investment fund which invests in securities contained in the Russell 1000 Growth Index. As of December 31, 2005, 31.6% of the Fund’s net assets were invested in the State Street Bank and Trust Company Russell 1000 Growth Index Securities Lending Fund. This underlying fund’s financial statements are available from State Street Bank upon request.
Large-Cap Value Equity Fund-long term growth of capital and dividend income through investment in common stocks, primarily of large capitalization companies believed to be undervalued. Currently invests in common stocks and the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund, a separate State Street Bank collective investment fund which invests in securities contained in the Russell 1000 Value Index. As of
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
December 31, 2005, 24.5% of the Fund’s net assets were invested in the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund. This underlying fund’s financial statements are available from State Street Bank upon request.
Mid-Cap Growth Equity Fund-long term growth of capital through investment in common stocks, primarily of medium sized companies believed to have strong earnings growth potential.
Mid-Cap Value Equity Fund-long term growth of capital through investment in common stocks, primarily of medium sized companies believed to be undervalued.
Small-Cap Equity Fund-long term growth of capital through investment in common stocks of small companies believed to have strong appreciation potential. Currently invests in common stocks and the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund, a separate State Street Bank collective investment fund which invests in securities contained in the Russell 2000 Index. As of December 31, 2005, 12.9% of the Fund’s net assets were invested in the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund. This underlying fund’s financial statements are available from State Street Bank upon request.
Stable Asset Return Fund (“SARF”)-current income consistent with preserving principal and maintaining liquidity through investment in high quality short-term instruments and investment contracts of insurance companies, banks and financial institutions. Currently, SARF invests in the State Street Bank ABA Members/Pooled Stable Asset Fund Trust (“SAFT”), a separate State Street Bank collective investment fund which invests in investment contracts of insurance companies, banks and financial institutions, and in the State Street Bank and Trust Company Yield Enhanced Short-Term Investment Fund (“YES”), a separate State Street Bank collective investment fund. The financial statements of SAFT and YES are available from State Street Bank upon request.
Structured Portfolio Service
Conservative-higher current investment income and some capital appreciation.
Moderate-high current investment income and greater capital appreciation.
Aggressive-long-term growth of capital and lower current investment income.
In seeking its objective, each Structured Portfolio Service conducts a monthly pre-determined investment rebalancing in the Funds.
All the Funds may invest in YES, a collective investment fund advised by State Street Global Advisors, a division of State Street Bank. The financial statements of YES are available from State Street Bank upon request.
The Trust may offer and sell an unlimited number of units representing interests in separate Funds and Portfolios of the Trust, each unit to be offered and sold at the per unit net asset value of the corresponding Fund or Portfolio.
State Street offers and administers the investment options for the Program available under the Collective Trust.
State Street is a nondepository trust company established under the laws of the State of New Hampshire and is a wholly-owned subsidiary of State Street Bank. State Street has assumed responsibility
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
for administering and providing investment options for the Program under the Collective Trust and the Structured Portfolio Service. State Street Bank is a trust company established under the laws of The Commonwealth of Massachusetts and is a wholly-owned subsidiary of State Street Corporation, a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956, as amended.
State Street Bank is responsible for certain recordkeeping and administrative services required by the Program. State Street has delegated to State Street Bank the responsibility to provide services to the Collective Trust on behalf of State Street. In addition, State Street Bank is the primary custodian, provides account and investment information to employers and participants, receives all plan contributions, effects investment and transfer transactions and distributes all benefits provided by the plans to the participants or, in the case of some individually designed plans, to the trustees of such plans.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The policies are in accordance with accounting principles generally accepted in the United States of America and provisions of the Trust agreement:
A. Security Valuation
All Funds and Portfolios (Other than SARF): State Street has delegated to State Street Bank the responsibility to determine the value of each Fund based on the market value of each Fund’s portfolio of securities. State Street Bank generally values each Fund’s portfolio of securities based on closing market prices or readily available market quotations. When closing market prices or market quotations are not readily available or are considered by State Street Bank to be unreliable, the fair value of the particular securities or assets is determined in good faith by State Street pursuant to fair value procedures adopted by State Street. For market prices and quotations, as well as some fair value methods of pricing, State Street Bank and State Street may rely upon securities prices provided by pricing services, the Investment Advisor(s) or independent dealers.
State Street, acting through a valuation committee, uses the fair value of a security, including a non-U.S. security, when State Street Bank determines that the closing market price on the primary exchange where the security is traded is not readily available or no longer accurately reflects the value of the security at the time of calculation of its net asset value. In making the fair value determination, State Street endeavors to value the security at the amount the owner might reasonably expect to receive upon the security’s current sale. In so doing, the valuation committee considers all factors it deems appropriate, including, if relevant, external factors such as general market developments and news events.
With respect to non-U.S. securities, if a significant event has occurred between the closing of the foreign exchange or market on which such securities trade and the calculation of net asset value, fair valuation may be appropriate. Specifically, under appropriate circumstances, State Street will utilize a fair value model for the International Equity Fund to make fair value adjustments to the prices of non-U.S. securities based on movements in the U.S. markets after the close of foreign markets. If a significant event occurs other than general movements in the U.S. markets, State Street Bank will determine whether that event might affect the value of the non-U.S. securities and whether, if so, the securities should be valued in accordance with State Street’s fair value procedures.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
Certain other types of securities, including those discussed below in this paragraph, may be priced using fair value rather than market prices. For instance, State Street Bank may use a pricing matrix to determine the value of fixed income securities that do not trade daily. A pricing matrix is a means of valuing a debt security on the basis of current market prices for other debt securities and historical trading patterns in the market for fixed income securities. To the extent that a Fund invests in the shares of bank collective trust funds or of other registered open-end investment companies that are not traded on an exchange (mutual funds), such shares are valued at their net asset values per share as reported by the funds. Each of these funds may, under certain circumstances, use fair value pricing in determining their net asset values.
Unless believed no longer to accurately reflect value or to be reliable, foreign securities not traded directly or in the form of American Depositary Receipts (ADRs) in the United States are valued in the local currency at the last sale price on the applicable exchange on which such securities trade and such values are converted into the U.S. dollar equivalent at current exchange rates.
United States Treasury securities and other obligations issued or guaranteed by the United States Government, its agencies or instrumentalities are valued at representative quoted prices.
Futures contracts are valued at the last settlement price at the end of each day on the board of trade or exchange upon which they are traded.
Stable Asset Return Fund: SARF invests in SAFT, whose investments include insurance company, bank and financial institution investment contracts and investments in YES. The short-term portfolio instruments of YES are valued on the basis of amortized cost, which approximates fair value. Amortized cost involves valuing an instrument initially at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. As the contracts are benefit-responsive and the Fund’s investors are participants in qualified benefits plans, the insurance company, bank and financial institution investment contracts are maintained by SAFT at contract value (cost plus accrued interest). The values of SARF’s investments in collective investment funds are based on the net asset values of such respective collective investment funds.
The rate at which SARF credits returns to participant accounts (“crediting rate”) can change as the difference between market value and book value of the covered assets changes. As a result, the crediting rate will generally reflect, over time, movements in prevailing interest rates. However, at times it may be less (e.g., when the fair value of the “wrapped” assets is less than contract value) or more (e.g., when the fair value of the “wrapped” assets exceeds contract value) than the prevailing interest rate or the actual income earned on the covered assets. The degree of any increase or decrease in the crediting rate will depend on the amount of the difference and the duration of SARF’s portfolio. The crediting rate may also be affected by increases or decreases in the amount of covered assets under the wrapper agreement as a result of contributions to or withdrawals from the Fund resulting from participant transactions. Thus, to the extent the crediting rate remains below prevailing interest rates, participants contributing to SARF will share in that lower crediting rate; similarly, to the extent the crediting rate exceeds current market rates, withdrawing participants will cede any benefit related to that higher crediting rate to the remaining participants.
In December 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position Nos. AAG INV-1 and SOP 94-4-1, “Reporting of Fully Benefit-Responsive Investment Contracts Held by
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans” (“FSP”) that gave guidance in the use of contract value accounting for benefit-responsive investment contracts owned by certain investment companies utilized exclusively by defined-contribution and health and welfare benefit plans. The FSP requires several changes in financial statement presentation and disclosure, including presentation of both the fair value and contract value of benefit-responsive investment contracts. SARF currently provides for transactions to be made on a contract value basis and the new reporting requirements are not intended to alter how participants transact with the Fund. The Trust does not expect the adoption of the provisions of the FSP to impact the use of contract value accounting by SAFT, and therefore, by SARF. The FSP is effective for financial statements for annual periods ending after December 15, 2006.
B. Security Transactions and Related Investment Income
Security transactions are accounted for on the trade date (the date on which the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Interest income is increased by accretion of discount and reduced by amortization of premium. Realized gains and losses are reported on the basis of the identified cost of securities delivered. Distributions received from collective investment funds, if any, retain the character as earned by the underlying funds.
A Fund’s portfolio of investments may include securities purchased on a when-issued basis, which may be settled in the month after the issue date. Interest income is not accrued until the settlement date.
Certain collective investment funds and registered investment companies in which the Funds invest may retain investment income and net realized gains. Accordingly, realized and unrealized gains and losses reported by a Fund may include a component attributable to investment income of the underlying funds.
C. Foreign Currency Transactions
The accounting records of the Funds and Portfolios are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period-end. Purchases and sales of securities, income and expenses are translated into U.S. dollars at the prevailing exchange rates on the respective dates of the transactions.
Reported net realized gains and losses on foreign currency transactions represent net gains and losses from disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities and derivatives (other than foreign currency contracts) are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investments in securities.
Net unrealized foreign exchange gains and losses arising from changes in the value of other assets and liabilities as a result of changes in foreign exchange rates are included as increases and decreases in unrealized appreciation/depreciation on foreign currency related transactions.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
D. Income Taxes
The Trust has received a favorable determination letter dated March 9, 1992 from the Internal Revenue Service, which concluded that the Trust is a trust arrangement described in Rev. Rul. 81-100, 1981, C.B. 326, as modified by Rev. Rul. 2004-67, 2004-28 I.R.B. 28, and exempt from Federal income tax pursuant to Section 501(a) of the Internal Revenue Code. Accordingly, no provision for Federal income taxes is required.
E. Sales and Redemptions of Units of Participation and Distributions
The units offered represent interests in the Funds and Portfolios established under the Trust. The Trust may offer and sell an unlimited number of units. Each unit will be offered and sold daily at the offering Fund’s or Portfolio’s ending net asset value.
Pursuant to the Declaration of Trust, the Funds and Portfolios are not required to distribute their net investment income or gains from the sale of portfolio investments.
F. TBA Commitments and Roll Transactions
The Balanced Fund and Intermediate Bond Fund may enter into TBA (to be announced) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price for a TBA has been established at the time of commitment, the principal amount has not been finalized. However, the amount of the TBA commitment will not fluctuate more than 1.0% from the principal amount. These Funds hold, and maintain until the settlement date, cash or liquid securities in an amount sufficient to meet the purchase price. TBA commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, and such risk is in addition to the risk of decline in the value of these Funds’ other assets. These contracts also present a risk from the potential inability of counterparties to meet their contractual obligations. During the period prior to settlement, these Funds will not be entitled to accrue interest and/or receive principal payments. Unsettled TBA commitments are valued at the current market value of the underlying securities, generally according to the procedures described under “Security Valuation” above. These Funds may dispose of a commitment prior to settlement if the Fund’s advisor deems it appropriate to do so. Upon settlement date, these Funds may take delivery of the securities or defer (roll) the delivery to the next month.
G. Futures Contracts
The Intermediate Bond Fund may use, on a limited basis, futures contracts to manage exposure to the bond market, and as a substitute for acquiring market positions in securities comparable to those held by the Fund (with respect to the portion of its portfolio that is held in cash items). Buying futures tends to increase a fund’s exposure to the underlying instrument. Selling futures tends to decrease a fund’s exposure to the underlying instrument, or hedge other investments. Futures contracts involve, to varying degrees, credit and market risks.
The Fund enters into futures contracts only on exchanges or boards of trade where the exchange or board of trade acts as the counterparty to the transaction. Thus, credit risk on such transactions is limited to the failure of the exchange or board of trade. Losses in value may arise from changes in the value of the underlying instruments or from illiquidity in the secondary market for the contracts. In addition, there is a risk that there may not be an exact correlation between a futures contract and the underlying index.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
Upon entering into a futures contract, the Fund is required to deposit either in cash or securities an amount (“initial margin”) equal to a certain percentage of the nominal value of the contract. Subsequent payments are made or received by the Fund periodically, depending on the daily fluctuation in the value of the underlying securities, and are recorded as unrealized gains or losses by the Fund. A gain or loss is realized when the contract is closed or expires.
At December 31, 2005, the Intermediate Bond Fund held the following futures contracts:
H. Forward Foreign Currency Contracts
The Intermediate Bond Fund and the International Equity Fund may use forward foreign currency contracts to facilitate transactions in foreign securities or as a hedge against the foreign currency exposure of either specific transactions or portfolio positions. When entering into a forward foreign currency contract, the Fund agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Such contracts are valued based upon the difference in the forward exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, and any resulting unrealized gains or losses are recorded in the Fund’s financial statements. The Fund records realized gains or losses at the time the forward contract is extinguished by entry into a closing transaction or by delivery of the currency. Risks in foreign currency contracts arise from the possible inability of counterparties to meet the contracts’ terms and from movements in currency values. As of December 31, 2005, the International Equity Fund held no foreign currency contracts and the Intermediate Bond Fund held the following forward foreign currency contracts:
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
I. Interest Rate Swap Contracts
The Intermediate Bond Fund may invest in swap contracts. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund uses interest rate swap contracts to manage its exposure to interest rates. Interest rate swap contracts typically represent the exchange of commitments to make variable rate and fixed rate payments with respect to a notional amount of principal. Swap contracts may have a term of one to ten years, but typically require periodic interim settlement in cash, at which time the specified variable interest rate is reset for the next settlement period. During the period that the swap contract is open, the contract is marked-to-market as the net amount due to or from the Fund in accordance with the terms of the contract based on the closing level of the interest accrual through valuation date. Changes in the value of swap contracts are recorded as unrealized gains or losses. Periodic cash settlements on interest rate swaps are recorded as adjustments to realized gains or losses.
Entering into a swap contract involves, to varying degrees, elements of credit, market and interest rate risk in excess of the amounts reported in the Statement of Assets and Liabilities. Notional principal amounts are used to express the extent of involvement in the transactions, but are not delivered under the contracts. Accordingly, credit risk is limited to any amounts receivable from the counterparty. To reduce credit risk from potential counterparty default, the Fund enters into swap contracts with counterparties whose creditworthiness has been approved by the Advisor to the Fund. The Fund bears the market risk arising from any change in interest rates.
At December 31, 2005, the Intermediate Bond Fund held the following interest rate swap contracts:
(a)
Fund receives the fixed rate and pays the floating rate.
(b)
Fund receives the floating rate and pays the fixed rate.
J. Option and Swaption Contracts
The Intermediate Bond Fund may purchase or write option contracts to manage exposure to fluctuations in interest rates or hedge the fair value of other Fund investments. The premium paid by a Fund for the purchase of a call or put option is included in the Fund’s Statement of Assets and Liabilities as an investment and subsequently marked-to-market to reflect the current market value of the option purchased. If an option which the Fund has purchased expires on its stipulated expiration date, the Fund realizes a loss in the amount of the cost of the option. If the Fund enters into a closing transaction, it realizes a gain or loss, depending on whether the proceeds from the sale are greater or
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
less than the cost of the option. If the Fund exercises a put option, it realizes a gain or loss from the sale of the underlying security and the proceeds from such sale will be decreased by the premium originally paid. If the Fund exercises a call option, the cost of the security which the Fund purchases upon exercise will be increased by the premium originally paid.
The premium received by a Fund for a written option is recorded as a liability. The liability is marked-to-market based on the option’s quoted daily settlement price. When an option expires or the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of the closing purchase transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security and the liability related to such option is eliminated. When a written call option is exercised, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a written put option is exercised, the amount of the premium originally received will reduce the cost of the security which the Fund is obligated to purchase.
The Intermediate Bond Fund may also purchase or write swaption contracts to manage exposure to fluctuations in interest rates or hedge the fair value of other Fund investments. Swaption contracts entered into by the Fund typically represent an option that gives the purchaser the right, but not the obligation, to enter into a swap contract on a future date. If a call swaption is exercised, the purchaser will enter a swap to receive the fixed rate and pay a floating rate in exchange. Exercising a put would entitle the purchaser to pay a fixed rate and receive a floating rate.
Swaption contracts are marked-to-market at the net amount due to or from the Fund in accordance with the terms of the contract based on the closing level of the relevant market rate of interest. Changes in the value of the swaption are reported as unrealized gains or losses. Gain or loss is recognized when the swaption contract expires or is closed. When the Fund writes a swaption, the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the swaption written. Premiums received from writing swaptions that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss.
Entering into option and swaption contracts involves, to varying degrees, elements of credit, market and interest rate risk in excess of the amounts reported in the Statement of Assets and Liabilities. To reduce credit risk from potential counterparty default, the Fund enters into these contracts with counterparties whose creditworthiness has been approved by the Advisor. The Fund bears the market risk arising from any change in index values or interest rates.
A summary of the written put options and swaptions for the year ended December 31, 2005 is as follows:
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
A summary of the written call options and swaptions for the year ended December 31, 2005 is as follows:
At December 31, 2005, the Intermediate Bond Fund held the following written call option contracts:
K. Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
L. Indemnifications
In the normal course of business, the Trust enters into contracts that contain a variety of representations and that may contain general indemnifications. The Trust’s maximum exposure under these provisions is unknown, as this would involve future claims that may be made against the Trust. The Trust believes the risk of loss to be remote.
3. Investment Advisory, Investment Management and Related Party Transactions
State Street has retained the services of the sub-advisors listed below to advise it with respect to its investment responsibility and has allocated the assets of certain of the Funds among the investment advisors. Each investment advisor recommends to State Street investments and reinvestments of the assets allocated to it in accordance with the investment policies of the applicable Fund as described above. State Street exercises discretion with respect to the selection and retention of the investment advisors and may remove, upon consultation with ARF, an investment advisor at any time.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
A fee is paid to each investment advisor for certain of the Funds based on the value of the assets allocated to that investment advisor and the respective breakpoints agreed to in the advisor’s contract. These fees are accrued on a daily basis and paid monthly or quarterly from the assets. Actual fees paid to each investment advisor during the twelve-month period are listed below.
*
Subject to a 5% reduction based on aggregate fees.
**
Effective July 1, 2005, Capital Guardian Trust Company ceased serving as an Investment Advisor to Small-Cap Equity Fund (See Note 7).
A separate program fee (“Program fee”) is paid to each of State Street Bank and ARF. These fees are allocated to each Fund based on net asset value and are accrued daily and paid monthly from the assets of the Funds. (State Street does not receive any fees or payments in respect of expenses from the Collective Trust. Rather, State Street is entitled to payment for services from State Street Bank.)
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
The ARF Program fee is based on the value of Program assets and the following annual fee rates in effect during the year ended December 31, 2005:
ARF received Program fees of $1,663,209 for the year ended December 31, 2005.
Through September 30, 2005, the State Street Bank Program fee was calculated monthly as one-twelfth of the sum of (i) $800,000 plus (ii) $194 multiplied by the number of participants in the Program, other than active participants without account balances, as of the last Business Day of the preceding month, plus (iii) $194 multiplied by the excess, if any, of the number of active participants of the Program without account balances as of the last Business Day of the preceding month over the number of such participants as of December 31, 2002. This fee was accrued daily and paid monthly.
Effective October 1, 2005, ARF and State Street Bank agreed to adjust the State Street Bank Program fee based upon the following schedule:
All participant-based charges were eliminated in connection with implementation of the above annual asset-based charges, although the Program fee payable to State Street Bank for 2005 did include a one-time base charge of $506,000.
A portion of the State Street Bank Program fee is reimbursed or reduced each year based on the amount of retirement plan assets held by State Street Bank on behalf of law firm and law-related clients identified by State Street Bank and ARF that do not participate in the Program. The amount of the reimbursement is equal to .02% of the first $50 million of assets in such plans during the preceding year and .01% of any such assets in excess of $50 million. The accrued reduction for the year ended December 31, 2005 totaled $33,339 and is allocated to each Fund based on net asset value.
Benefit payments under the Program generally are made by check. Before such a check becomes payable, funds for its payment are transferred from the Collective Trust to a non-interest bearing account with State Street Bank. No separate fee is charged for processing benefit payments. Rather, State Street Bank retains any earnings attributable to outstanding benefit checks, and these earnings have been taken into account in setting State Street Bank’s fees under the Program. The Program fee paid to State Street Bank reflects a $300,000 annual reduction for earnings estimated to be attributable to outstanding benefit checks.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
A fee is paid to State Street Bank for its management, administration and custody of the assets in the investment options (other than Self-Managed Brokerage Accounts). This fee is accrued on a daily basis and paid monthly from the net assets of the Funds. The trustee, management and administrative fees attributable to the Funds held in the Structured Portfolio Service are also accrued and paid from the Funds at the following rates:
Effective October 1, 2005, ARF and State Street Bank agreed that the schedule of annual trustee, management and administrative fees be increased as follows:
State Street Bank received Program fees of $11,410,316 and trustee, management and administration fees of $3,189,209 for the year ended December 31, 2005.
The Portfolios of the Structured Portfolio Service are not charged a separate trustee, management, administration or program fee.
4. Purchases and Sales of Securities
The aggregate cost of purchases and proceeds from sales of securities excluding U.S. Government securities and short-term investments were as follows:
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
The aggregate cost of purchases and proceeds from sales of U.S. Government securities were as follows:
5. Risks Associated with Investments of the Trust
American Depositary Receipts (“ADRs”) represent ownership of foreign securities on deposit with a domestic custodian bank. Certain Funds maintain investments in ADRs, as well as direct investments in foreign securities, which involve special risks. These securities may be subject to foreign government taxes that reduce their attractiveness. Other risks of investing in such securities include political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. Foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers. There is generally less regulation of stock exchanges, brokers, banks and companies abroad than in the United States. With respect to certain foreign countries, there is a possibility of expropriation or diplomatic developments, which could adversely affect investment in these countries. ADRs do not lessen the risk of investing in foreign issuers; however, by investing in ADRs rather than directly in foreign issuers’ stock, the Funds will avoid currency risks during the settlement period for purchases or sales. In addition, the domestic market for ADRs may be more liquid than the foreign market for the underlying securities.
Substantially all of the Small-Cap Equity Fund’s investments are in securities of small companies, which typically have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sector.
SARF invests in a collective investment fund that maintains investments in contracts issued by insurance companies, banks and financial institutions. The issuing institution’s ability to meet its contractual obligations under the respective contracts may be affected by future economic and regulatory developments.
6. Securities Lending Income
The Funds in the Trust are authorized to participate in the Securities Lending Program administered by State Street Bank, under which securities held by the Funds are loaned by State Street Bank, as the Funds’ lending agent, to certain brokers and other financial institutions (“Borrowers”). Borrowers provide cash, securities or letters of credit as collateral against loans in an amount at least equal to 100% of the market value of the loaned securities. Borrowers are required to maintain the collateral at not less than 100% of the market value of the loaned securities. Cash collateral is invested in State Street Quality D Short-Term Investment Fund.
Certain Funds in the Trust also invest in collective investment funds which loan a portion of their securities to qualified Borrowers under collateral requirements identical to those described above.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements-(Continued)
A portion of the income generated upon investment of cash collateral is remitted to the Borrowers, and the remainder is allocated between the Fund lending the securities and State Street Bank in its capacity as lending agent.
At December 31, 2005, the market value of the Funds’ securities on loan and collateral received for securities loaned were as follows:
*
Collateral value includes non-cash collateral State Street Bank received in lieu of cash for securities on loan. All non-cash collateral held at December 31, 2005 was in the form of U.S. Treasury Obligations in amounts as follows:
Non-cash collateral received for securities on loan is held in a segregated account by the lending agent. The Funds are not entitled to any income from the securities. Should Borrowers fail to meet their obligations under the lending agreement, the Funds would take possession of the securities.
7. Changes to Small-Cap Equity Fund
Effective July 1, 2005, the assets of the Small-Cap Equity Fund were allocated into three segments, two of which are actively managed with the advice of, respectively, Wellington Management and Smith Group. The third segment consists of the remainder of the Fund’s assets and is invested to replicate the Russell 2000 Index. Capital Guardian ceased serving as an Investment Advisor to the Fund.
State Street Bank serves as Investment Advisor to the indexed portion of the assets of the Small-Cap Equity Fund. The assets of this portion of the Fund are invested through the State Street Bank and Trust Company Russell 2000 Index Securities Lending Fund, a collective investment fund maintained by State Street Bank.
8. Subsequent Event
Effective March 1, 2006, State Street, after consultation with ARF, replaced RCM Capital Management LLC (“RCM”) as investment advisor of a portion of the actively managed assets of Large-Cap Growth Equity Fund. RCM has been replaced by T. Rowe Price Associates, Inc.