Back-End Loads

Back-end loads are a sales commission levied by some load funds when an investor sells mutual fund shares. These back-end loads typically are structured as a contingent deferred sales charge (CDSC), which often start at 5% or 6% of money withdrawn within a year of buying the fund and then decline by a percentage point or so each year until they disappear. Back-end loads usually are set to compensate the distributor for marketing and selling the fund, especially to protect anticipated annual flows of 12b-1 fees. However, back-end loads may also be used to dissuade short-term traders; funds may set a high back-end load for money withdrawn within a very short time frame and then revert to the more general schedule of yearly declining load amounts referenced above.

Like most other mutual fund complexes, Global grants investors the privilege to exchange in and out of funds within the complex and also allows credit for any load paid when purchasing or redeeming one of the funds. For the purpose of calculating an applicable CDSC of Fund X, some complexes also give credit to investors for the holding period of shares purchased in other funds of the same complex if those shares are exchanged into Fund X.

Funds

Redemption Fees

Redemption fees are defined as fees paid to the fund (as opposed to loads, which are paid to the distributor). They may be imposed on all redemptions or on shares redeemed within a certain time period (e.g., 90 days) and are sometimes used to dissuade short-term trading and/or to compensate the remaining shareholders for the adverse effects of such trading. Redemption fees typically are charged on exchanges into other funds within the complex as well as account liquidations (i.e., leaving the complex). Some funds are introduced with redemption fees initially, while others have redemption fees added only after experiencing heavy cash flow volatility.

Global previously has determined that the level of a redemption fee should be based on the trading costs associated with the type of portfolio and has used estimates of turnover costs, including such factors as commissions, taxes and bid-offer spreads. The company feels that redemption fees based on a holding period are clear-cut and precise, but such fees may affect people who sell after a short period even though they did not buy the fund as a short-term or market-timing investment.

General Mutual Fund Pricing

Most mutual funds sold in the United States are priced daily as of 4 P.M. ET to correspond to the closing of the NYSE, although the time of pricing is left to the board of directors of the fund. Since there is no secondary market in fund shares, a daily price means that investors can be assured of having their orders executed within 24 hours (during normal business days). Although more frequent valuations are allowed, they may be prohibitively expensive for a fund manager from both an administrative and an operational perspective.

SEC rule 22c-1 links the time of the NAV calculation to shareholder trades by requiring that investor orders be executed at the next available share price after receipt of the order. For example, an investor who places an order at 11 A.M. to redeem 200 shares in the Japan Fund must be able to redeem those shares at the fund NAV calculated as of 4 P.M. ET that afternoon. However, an investor who places an order at 4:59 P.M. the same day to purchase $2,500 worth of shares in the Japan Fund will buy the shares at the NAV calculated as of 4 P.M. ET on the next day.

Pricing of the Japan Fund

The Japan Fund is open for business each day the NYSE is open. Its NAV normally is calculated as of the close of business of the NYSE, which is usually 4 P.M. Eastern Time. The fund’s NAV is the U.S. dollar value of a single share and is computed by adding up the value of the fund’s investments, cash and other assets; subtracting its liabilities; and dividing the result by the number of shares outstanding. Foreign securities are translated to U.S. dollar values using the applicable foreign exchange rate.

At 4 P.M. ET, the last price offered for most securities held by the fund is 14 hours old, since the Japan exchanges close at 2 A.. ET (earlier in the same day). Nevertheless, on most trading days, there is little change in Japanese stock market levels after Tokyo markets close at 2 A.M. ET and little activity in Japanese equity trading outside Japan. As a result, there typically is little change in the yen-denominated prices of Japanese equities from the market’s close in Japan to the market’s close in the United States. To the extent that the fund owns Japanese securities that trade with significant volume in the U.S. markets (including American Depository Receipts for Japanese stocks, which are usually listed on the NYSE), they will be valued at their last trading price in the U.S. market at 4 P.M. ET.

Occasionally, however, significant events that occur after Japan’s business day is over can change Japanese equity values dramatically. When these unusual market events occur, the Japan Fund may value its Japanese investments at a level reflecting their value at the U.S. market close, which may be more or less than their value at the end of Japanese trading hours. The ability to make this kind of adjustment is recognized in the prospectus for the Japan Fund, which states that the fund’s board of trustees may use valuations other than closing local market quotations if prices have been materially affected by events occurring after the closing of a local market.

Portfolio manager David Smith has called to check on the status of his request, and the board of directors‘ meeting is coming up in a few weeks. Your staff members have gathered relevant statistics, documents and articles, and are busy conducting analyses of the topics to be discussed.

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